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December 2021 PT

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8 views3 pages

December 2021 PT

Uploaded by

aronkaruga0987
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY EXAMINATIONS: 2021/2022

ORDINARY EXAMINATION FOR BACHELOR OF COMMERCE


CFM 204F INTERNATIONAL FINANCE(PT)

DATE: DECEMBER 2021 TIME: 2 HOURS

INSTRUCTIONS: Answer Question ONE and Any other TWO questions

QUESTION ONE

(a) Explain the meaning of the following international finance terms giving examples in each
case

(i) Covered interest arbitrage

(ii) Location arbitrage

(iii) Triangular arbitrage

( 6 marks)

(b) (i) James has received two job offers; A job in Milan which pays €55,000 a year and a job
in Boston which pays $64,000 a year. The exchange rates were £1 = $1.42 and £1 = €1.25.

Which job offer has the highest salary? Show working to explain your answer.

( 2 marks)

(ii) Kevin is going on holiday to Japan. He wants to change some money into yen. The bank
only stocks ¥1000 notes. James wants to change up to £300 into yen. He wants as many
¥1000 notes as possible. The exchange rate is £1 = ¥168

Determine the number of ¥1000 notes that Kevin will get.

(2 Marks)

(C) Explain different types of foreign exchange transactions and show how each work in the foreign
exchange market (4 Marks)

(c) ) Explain THREE significances of derivatives in the world of finance? (6 Marks)

QUESTION TWO

(a) Highlight FIVE factors which influence the spread on currency quotations
(5 Marks)

(b) The following information has been obtained from Canadian and United States of
America Securities Exchange Markets.
Sport Rate of Canadian Dollar =$.80
90-day forward rate of Canadian dollar = $.79
90-day Canadian interest rate = 4%
90-day U.S. interest rate = 2.5%

Based on the information above:


(i) Determine the yield (percentage return) to a U.S. investor who used covered interest
arbitrage. (4 Marks)
(ii) Discuss THREE market forces which would occur to eliminate any further possibilities of
covered interest arbitrage in case the investor invests $1 million.
(6 Marks)
QUESTION THREE
(a) Explain the implications of the International Fisher Effect for firms with excess cash that
consistently invest in foreign Treasury bills?
(6 Marks)
(b) Kappa supermarket is considering opening a new branch. The following details are relevant to
the new branch;

SHS MILLION

Estimated cost 12

Present value of net receipts 10

Net present value -2

Though the project has a negative NPV, undertaking the project would provide the firm with the
option of expanding by opening a second store.

The option would have the following details;

Timing (t) 5 years

Estimated cost Shs 20 million

Present value of net receipts 15 million

Volatility of cash flows 28.3%


Risk free rate 6%

Required

Using Black-Scholes pricing model;

(i)Determine the value of a put option on the second store (6 Marks)

(ii) Advise on whether or not to accept the first investment in the store. ( 3 Marks)

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