International Financial Management Assignment Part RESIT
Learning Outcomes to be assessed -
1. To examine the impact of such factors as exchange rates, inflation rates and interest rates on the performance of firms and to assess their significance in decision making in an international market/global context.
2. To critically evaluate principles and practices guiding financial management of the multinational enterprise.
3. To explore factors that differentiates multinational from domestic financial management.
4. To devise a risk management strategy to measure and hedge against variation in global financial market prices including financial crises.
5. To prepare students for the high risk high return environment of international finance.
Part A: Answer ALL questions in this section
1. Interest rates that can be obtained for investing by Saturn plc a U.K. company are as follows: Eurozone 10%, United States 3%.
Investing in the Eurozone appears to be offering the best return. Nevertheless, evaluate the financial arguments that justify investing in the United States instead of the euro.
2. The borrowing rates for Saturn and Pluto are:
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SaturnSA
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Pluto plc
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South Africa (R)
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9%
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12%
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United States ($)
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20%
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10%
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Saturn wants to borrow in dollars and Pluto plc wants to borrow in South African Rand.
a. Explain how a swap arrangement can be used to lower the cost of borrowing for Saturn.
b. To what extent is the swap arrangement contradicting market judgements. Discuss
c. Evaluate the advantages and disadvantages for Saturn of borrowing in dollars.
3. There is a concern that the dollar will depreciate heavily against the major currencies due to current account deficits on the balance of payments.
a. Explain the special position of the dollar in international finance.
b. Evaluate non market methods of protecting a business from a devaluation in the dollar.
Part B: Answer 2 questions only from this section
4. Evaluate the different methods by which an importer can assure payment without having to prepay for goods.
5. Evaluate the financial strategies that a Multinational Company can use in a foreign country so as to avoid being perceived as a threat.
6. The following are call option quotes for currency X, the current price is 31pence for October 2016 (all prices are in pence):
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Call Strike Price (in pence) of 1 unit of currency X
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Premium
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23
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16.0
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26
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12.0
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31
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8.5
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36
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5.0
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41
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2.5
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46
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0.8
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a. Draw up a contingency table outlining the profit and loss for the following possible maturity prices: 23 pence, 30 pence, 35 pence, 41 pence for an option with a strike price of 31pence. Include a clear explanation of your calculations that could be understood by a non-financial business person.
b. The investment advisor suggests that you might consider writing a put option at 20 pence (premium 4.0 pence). Evaluate this hedging strategy from a multinational viewpoint.
b. Evaluate the business benefits of options in general - are they unnecessary?
7. Abraxaltda a Brazilian company sells coffee in the US. As part of its financial risk management, the company takes out a Futures Contract at $108.00 per 60 kg bag of coffee for three months for a quantity that represents its monthly sales.
a) Outline the payments and receipts that a financial manager would make if the price moved as follows on the days after the Futures Contract has been taken out:
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Day 1
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Day 2
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Day 3
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Day4
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Price of 1 bag of coffee
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$114
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$90
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$60
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$75
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b) The Managing Director of Abraxa comments that there is no point in taking out a futures contract as it only delays the possibility of having to face lower prices. Evaluate this viewpoint.
c) The Finance director suggests that Abraxa should borrow in dollars. Evaluate the financial effect of such a strategy.