SIKKIM MANIPAL UNIVERSITY - DDE

Master of Business Administration MBA Semester IV

MF0015 International Financial Management 4 Credits
Book ID: B1759
Model Question Paper
Time: 3 hours

Max.Marks:140

Section A
ESSAY TYPE QUESTIONS (10 Marks each)
[Please answer Any Four essay type questions in a separate page answer sheet especially
provided for the purpose]
1. State the advantages and disadvantages of globalization.(Refer unit 1)
2. State the various factors affecting currency trading. (Refer unit 5)
3. Give an introduction on capital account with its sub-categories. Discuss about capital
account convertibility.(Refer unit 2)
4. Explain the concept of Swap. Write down its features and various types of interest rate
swap.(Refer unit 4)

Case Study
(Refer unit 9)

Read the following case study thoroughly and answer the following questions:
Foreign Exchange Risk Management Strategy: BMW Group A Case Study
BMW, the renowned auto and motorcycle manufacturer, was established in Munich in 1916 as
BayerischeFlugzeugwerke AG (Bavarian Aircraft Works). The company focused originally
on the growth and manufacturing of aero engines. The blue and white BMW logo represents the
rotating propeller, suggesting the early era of the BMW Group
Following the end of World War-I in 1918, BMW was compelled to close down aircraft engine
manufacturing by the stipulations of the Versailles Armistice Treaty. The company consequently
shifted to motorcycle and automobile production. Five years later, BMW acquired the Eisenach
automobile plant and commenced producing automobiles. In 1933, BMW announced the 303
saloon, the first car equipped with inline six-cylinder engine and twin-kidney shaped radiator

grilles. From that time onwards, BMW introduced a series of definitive automobiles and
progressively established into a world-famous luxury carmaker.
Tenacity on premium branding approach has been the basis for BMW's achievements. Currently,
the BMW Group owns the BMW, MINI and Rolls-Royce trademarks. The BMW Group is the
only automobile and motorcycle manufacturer worldwide to operate with all its brands entirely
in the premium segments, from small cars to the absolute top segment
In the Forbes list of World Top Platinum Luxury Brands published in 2010, BMW was placed
first with a brand value of $19.9 billion. Its main rivals, Mercedes-Benz ($18.8 billion) and
Porsche ($4.8 billion), ranked third and tenth correspondingly.
In recent years, China has become BMWs fastest-growing market, accounting for 14 per cent
of BMWs total sales volume in 2011. India, Russia and Eastern Europe have also become
strategic markets.
BMW manufactures the vast majority of its cars in Germany and exports a large quantity of
them to the rest of the world. More than two thirds of BMWs sales income comes from outside
Germany. BMW cannot entirely hedge itself against currency variations around the world.
In spite of growing sales income, BMW was aware that its profits were often relentlessly eroded
by fluctuations in exchange rates. The companys own estimates in its annual reports suggested
that the undesirable effects of exchange rates totalled 2.4bn between 2005 and 2009.
BMW did not want to transfer its exchange rate costs to consumers through price escalations.
Its rival Porsche had done this at the end of the 1980s in the US and the sales had plunged.
BMW took a two-pronged tactic to dealing with its foreign exchange exposure.
One strategy was to use a natural hedgemeaning it would develop ways to spend money in
the same currency as where sales were taking place, meaning revenues would also be in the local
currency.
Though, not all exposure could be offset in this way, so BMW resolved that it would also use
formal financial hedges. To attain this, BMW set up local treasury centres in the US, the UK
and Singapore.
The natural hedge approach was applied in two ways. The first involved instituting factories in
the markets where it sold its vehicles; the second involved making more procurements
denominated in the currencies of its main markets.
BMW now has manufacturing facilities for automobiles and components in 13 countries. In
2000, its production volume abroad accounted for 20 per cent of the total. By 2011, it had risen
to 44 per cent.
In the 1990s, BMW had become one of the first premium carmakers from overseas to set up a
plant in the US in Spartanburg, South Carolina. In 2008, BMW declared it was investing

$750m to enlarge its Spartanburg plant. This would create 5,000 jobs in the US while cutting
8,100 jobs in Germany.
This also had an influence in shortening the supply chain between Germany and the US market.
The company boosted its purchasing in US dollars generally, particularly in the North American
Free Trade Agreement (NAFTA) region. Its office in Mexico City made $615m of procurements
of Mexican auto parts in 2009, expected to rise considerably in the subsequent years.
A joint venture with Brilliance China Automotive was set up in Shenyang, China, where half
the BMW cars for sale in the country are now produced. The carmaker also set up a regional
office to help its group procurement department to select competitive suppliers in China. By the
end of 2009, RMB 6bn worth of procurements were from local suppliers. Once more, this had
the effect of shortening supply chains and improving customer service.
At the end of 2010, BMW declared that it would invest 1.8bn rupees in its production plant in
Chennai, India, and augment manufacturing capacity in India from 6,000 to 10,000 units. It also
announced plans to increase production in Kaliningrad, Russia.
In the meanwhile, the external regional treasury centres were told to review the exchange rate
exposure in their regions on a weekly basis and report it to a group treasurer, part of the group
finance operation, in Munich. The group treasurer team then amalgamates risk figures globally
and proposes actions to alleviate foreign exchange risk.

(a)
(b)

Discuss the natural hedge strategies adapted by BMW to manage the

exchange rate exposure?
Discuss the financial hedge strategies adapted by BMW to manage the
exchange rate exposure?

a) Explain why BMW chose not to bear exchange rate risks by itself or to pass the
risks to consumers?
b) Explain the benefits of moving production to foreign markets?

Section B
Multiple Choice Questions (MCQ)
[Please answer all the following questions]
1. Globalization can be defined as the process of international integration that arises due to
____________ human connectivity.
a. Increasing
b. Decreasing
c. Stable
d. No change
2. Foreign exchange transactions, depending on the time gap between the settlement and the
transaction date, are classified into ______________ and _________________.
a. Spot transactions, Forward transactions
b. Spot transactions, Foreign transactions
c. Export proceeds, Forward transactions
d. Forward transactions, Foreign transactions

3. The trade-off between risk of investing in global markets and return from these
investments is focused to achieve __________________ of the stake holders.
a. Wealth maximization
b. Financial institutions
c. Global investment
d. Big fund houses
4.
a.
b.
c.
d.

BOP measures the _____________ that flow between a country and other countries
Economics
Payments
Time Period
Transactions

5.
a.
b.
c.
d.

The balance of payments is based on the principles of ______________book keeping.

Multiple Entry
Credit and Debit
Double Entry
Transfer based

6. Free inflows and outflows allowed abroad except for capital purposes is referred to as
_______________.
a. Capital Account Convertibility
b. Trade related payments
c. Sundry remittances
d. Current Account Convertibility
7. The ____________ saw the start of depositing of coins and bullion with money changers,
goldsmiths, etc.
a. 16th century
b. 17th century
c. 18th century
d. 19th century
8. The source of profit for a ____________ lies in the difference between the forward rate and the
future spot rate.
a. Hedger
b. Speculator
c. Arbitrageur
d. Exporter

9. In ___________ the rate of exchange for the transaction is agreed upon on the very day
the deal is finalized.
a. Forward markets
b. Future delivery
c. Forward rates
d. Maturity
10. Both the parties have to abide by the exchange rate mentioned in the contract irrespective
of the __________ on the maturity date.
a. Forward rate
b. Value date
c. Spot rate
d. Contract
11. If there is a high level of ________ in the country, typically a currency will lose value
because it brings down the purchasing power.
a. Inflation
b. Hot money

c. Foreign loans
d. Economic growth
12. Changes in one nations economy are rapidly transmitted to that nations
_______________partners.
a. Foreign
b. Financial
c. Trading
d. Marketing
13. The foreign exchange market is unlike any other ___________market.
a. Physical
b. Stock
c. Electronic
d. Over-the-counter
14. Foreign exchange market is an across-the-world network of __________ traders
connected by different communication tools and techniques.
a. Foreign exchange
b. Currency
c. Inter-bank
d. Stock exchange
15. Import finance can also be tailored to meet the ___________ needs of different
businesses.
a. Funding
b. Working
c. Importing
d. Investment
16. Beneficiary is the __________in favour of whom the letter of credit is opened.
a. Importer
b. Exporter
c. Applicant
d. Advising bank

17. Measure of sensitivity of cash flows to changes in exchange rates is called __________.
a. Market value
b. Floating exchange-rate
c. Foreign exchange exposure

d. Exchange rate fluctuations

18. According to the PPP theory movement in ___________is matched by the movement in
the price.
a. Financial Performance
b. Foreign Rate
c. Primary Currency
d. Exchange Rate
19. Various financial instruments are used by companies in India and abroad in order to hedge
the _________________.
a. Varying costs
b. Exchange risk
c. Risks
d. Buying risks
20. In forward contract _____________ price is the price that has been agreed upon.
a. Delivery
b. Selling
c. Buying
d. Fixed
21. The higher the risk of a project, the higher is the ___________
a. Yield
b. Rate of return
c. Investment
d. Opportunity cost
22. In case the project risk is zero a project still requires compensation for the passage of time.
This is called _________ rate of return.
a. Risk premium
b. Cost of capital
c. Risk free
d. Minimum

23. It is assumed that the _________ratio is unchanged over the life of a project.
a. Cost of capital
b. Debt-equity
c. Operating risk

d. Financial risk

24. Debt has an advantage over equity since the interest paid on debt is almost always
deductible from _________while calculating corporate taxes.
a. Income
b. Dividend
c. Taxes
d. Equity
25. The risk of losing money due to changes that can occur in a government or regulatory
environment is called _________
a. Political stability
b. Country Risk
c. Economic environment
d. Investor Perception
26. ___________can be defined as the risk of losing money due to changes that can occur in a
countrys government or regulatory environment.
a. Country risk
b. Political risk
c. Financial risk
d. Calculation risk
27. The international Tax system is expected to be neutral and ________________.
a. Equitable
b. Economic
c. Efficient
d. Distributive
28. ________________ in taxation means that the tax burden placed on the foreign
subsidiaries of a firm should equal that imposed on foreign-owned competitors operating
in the same country.
a.
b.
c.
d.

Domestic neutrality
Capital Export neutrality
Foreign neutrality
Capital-Import neutrality

29. Management of an acquired asset in a host country by the investor is known as ________.
a. Foreign Direct Investment

b. Long-term commitment
c. Human capital formation
d. International trade
30. FDI increases the ___________ and lowers the cost of production.
a. Economic growth
b. Domestic savings
c. Innovations
d. Externalities
31. No firm or business enterprise is free from the effects of the elements of the
__________________.
a. Global financial environment
b. International financial environment
c. Micro level environment
d. Macro level environment
32. If the sources of funds are diverse and a company has a lot of options to choose from,
then the rate of _________ may be higher, as funds are easily available.
a. taxation
b. risk
c. return on investment
d. financing
33. The set of environmental factors become more complex with the ____________ of
international business operations in more number of countries.
a. Decrease
b. Similar
c. No change
d. Increase
34.The tax system has a major effect on the ____________ of any business belonging to a
foreign company.
a. Procedure
b. Profitability
c. Documentation
d. Payment

35. The filing procedure, documentation and payment mechanism of ____________ taxes
too can be very cumbersome.
a. Corporate
b. National
c. Foreign
d. Venture funding
36. To qualify as a _________, the number of countries in which the firm operates must be at
least six and the firm must generate a sizeable proportion of its revenue from the foreign
operations.
a. Subsidiary
b. Parent company
c. MNC
d. Large enterprise
37. Country's socio-cultural ____________ related to tastes and preferences, consumer
behaviour, fashion and other aspects continuously vary from time to time and also within
countries.
a. Environment
b. Policies
c. Objectives
d. Traditions
38. The _________ account records flow of goods, services and unilateral transfers.
a. Current
b. Capital
c. Reserve
d. BOP
39. The________ account shows the transactions that involve changes in the foreign
financial assets and liabilities of a country.
a. Reserve
b. Current
c. Capital
d. Asset
40. The_________ account records transactions pertaining to reserve assets like monetary
gold, special drawings right (SDRs) and assets denominated in foreign currencies.
a. Capital

b. Reserve
c. Current
d. Country's
41. ______ is a statement of sources and uses of funds that reflects changes in assets,
liabilities and net worth during a specified period of time.
a. Transaction
b. Official reserve
c. Record
d. BOP
42. Credits or sources of funds are represented by _________ in assets and increases in
liabilities or net worth.
a. Increase
b. Decrease
d. Changes
d. Reserves
43.________ in assets and decreases in liabilities or net worth represent debits or uses of
funds
a. Decrease
b. Net worth
c. Increase
d. Funds
44. ______ is a statement of sources and uses of funds that reflects changes in assets,
liabilities and net worth during a specified period of time.
a. BOP
b. Balance sheet
c. Income statement
d. Economic transaction
45. The exchange rates in which the spot transactions are carried out are known as the
___________.
a. Spot rate
b. Short date
c. Interest rate
d. Exchange rate

46. Spot rate transactions can be rolled over at a cost based on the interest rate differential
between the ________ currencies.
a. Three
b. Four
c. Two
d. Five
47. In case of spot transactions, deals that can be settled the very day they are carried out are
known as __________transactions
a. Forward
b. Spot rate
c. Short date
d. Foreign exchange
48. Sale or purchase of a particular amount of a foreign currency at a future date at a
predetermined exchange rate is termed as ___________.
a. Forward transaction
b. Forward contract
c. Spot transaction
d. Spot rate
49. The difference between the 'bid price' and the 'ask price' is called the ____________. It is
also a source of profit for the bank.
a. Inter-bank rates
b. Exchange rate spread
c. Indirect quote
d. Direct quote
50. A foreign exchange rate is quoted as the foreign currency per unit of the __________
currency.
a. Foreign
b. Exchange
c. Domestic
d. Indirect

51. Globalization of investments allows a country to invest its surplus in other countries where
the rate of return is comparatively _____________ and there are better
______________opportunities.
a. Lower, investment
b. Better, investment
c. Higher, investment
d. Zero, investment
52. The downside of globalization is that if the exchange rate is volatile, it can affect the
_________and _____________adversely.
a. Trade, investment
b. Funds, investment
c. Opportunities, investment
d. Border, investments
53. State whether the following statements are True or False:
1. An economy can be called a closed economy if it has no economic transactions with any
other economy.
2. Open economies have access to many countries.
a. 1-True
2-False
b. 1-False
2-False
c. 1-True
2-True
d. 1-False 2-True
54.State whether the following statements are True or False:
1. The term capital account convertibility means relaxing control on capital account
transactions.
2. CAC permits the local currency to be exchanged for foreign currency and no restrictions
are put on the limit.
a. 1-True, 2-True
b. 1-True, 2-False
c. 1-False, 2-True
d. 1- False, 2-False
55. CAC leads to _________ the effects of the balance of payment crisis and _________ of
instability in exchange rates.
a. Increasing, decreasing
b. Lessening, reduction
c. Controlling, maintenance
d. Removing, growing

56.CAC ensures that the requirements of investments are met by the _____________ and also
assists in avoiding ___________ of the domestic factors of production
a. Foreign savings, domestic ownership
b. Taxation, advantages
c. Domestic savings, foreign ownership
d. Financial activities, abilities
57. Floating exchange rates can be broadly classified into two types: ______ and _______.
a. Clean float, Dirty Float
b. Crawling Peg, Adjustable Peg
c. Wider bands, Gliding bands
d. Adjustable Peg, Managed Float
58. State whether the following statements are True or False:
1. The new Bretton Woods monetary system led the US dollar to replace the gold standard as the
new final exchange currency.
2. The new Bretton Woods monetary system led the US dollar to be the only currency to be
backed by gold.
a. 1-True 2-False
b.1-False 2-False
c. 1-False 2-True
d.1-True 2-True
59.State whether the following statements are True or False:
1. During a transaction, value dates can be structures to enable a party to have the freedom
to select a value date within the prescribed period.
2. Value dates can be structured when the party does not know in advance the precise date
on which it would be able to deliver the currency.
a. 1-True, 2-True
b. 1-False, 2-False
c. 1-True, 2-False
d. 2-False, 1-True
60.Contract where the _________ falls on a date between two complete months is known as
__________.
a. maturity period, forward contracts
b. value date, broken-date contracts
c. currency, spot contracts
d. exchange rate, forward rate

61.Changes in exchange rates expose all those firms having __________ _____________
operations as also multinationals with integrated cross order production and marketing
operations.
a. Export, import
b. Goods, services
c. Grants, gift
d. Foreign loans, Interest payment
62.State whether the following statements are True or False:
1. Most investors like to move their funds from a country having lower interest rates to a
country having higher interest rates.
2. Such funds are usually termed as hot money.
a. 1-True
2-False
b. 1-False
2-False
c. 1-True
2-True
d. 1-False
2-True
63.State whether the following statements are True or False:
1. The foreign exchange market functions virtually 24 hours in respect of the time
differences across the world.
2. The Inter-bank currency trading is handled largely by five major centres of the currency
trade, who handle two-thirds of the foreign currency transactions.
a. 1-False, 2-True
b. 1-True, 2-False
c. 1-False, 2-False
d. 1-True, 2-True
64.The foreign exchange market provides a ________by which participants transfer
___________denominated in one currency into another currency.
a. Foundation, value
b. Structure, investment
c. Method, purchasing power
d. Transaction, credit
65.Two types of anticipatory letter of credit are found, the ________ clause credit and the
___________ clause credit.
a. Red, green
b. Warehousing, insurance
c. Principal, overriding

d. Advance, insurance
66.According to some experts ________ is not relevant in short term as factors other than the
____________ differential that affect the exchange rate.
a.
b.
c.
d.

Financial performance, nominal value

Exchange rate, instability
Exposure, real value
PPP theory, inflation rate

67.State whether the following statements are True or False:

1. In case there is no change in the foreign exchange rate from what had been expected
during a deal then an exporter will face foreign exchange exposure.
2. The value of a currency in a floating exchange-rate regime does not change frequently.
a. 1-False, 2-False
b. 1-True, 2-False
c. 1-False, 2-True
d. 1-True, 2-True
68.State whether the following statements are True or False:
1. In Option contract the buyer of the option has the right but not the obligation to fulfil the
transaction.
2. In Option contract the seller has the responsibility of fulfilling the conditions stated in the
contract through the delivery of the shares to the appropriate party.
a. 1-True
2-True
b. 1-False
2-False
c. 1-True
2-False
d. 1-False
2-True
69. State whether the following statements are True or False:
1. Forward contract is one of the most common means of hedging transactions in foreign
currencies.
2. It offers the ability to the users to lock in a sale price or a purchase without the
involvement of any direct cost.
a. 1-False 2-False
b. 1-True 2-True
c. 1-True 2-False
d.1-False 2-True
70.Cost of capital is the _________ rate of return required by a firm on its___________ in order

to provide the rate of return required by its suppliers of capital.

a. Higher, project risk
b. Combined, equity
c. Risk free, passage of time
d. Minimum, investment
71. State whether the following statements are True or False:
1. In a firm the suppliers of capital are equity shareholders and debt holders.
2. The cost of capital is the combined cost of equity, cost of retained earnings and cost of
debt.
a. 1-False, 2-False
b. 1-True, 2-False
c. 1-False, 2 True
d. 1-True, 2-True
72. State whether the following statements are True or False:
1. The cost of capital measures the risk and also the opportunity cost of the money invested.
2. It is assumed that the debt-equity ratio is unchanged over the life of the project.
a. 1-False
2-False
b. 1-True
2-True
c. 1-True
2-False
d. 1-False 2-True
73.State whether the following statements are True or False:
1. Issue costs that arise due to issue of equity shares and debentures will also add to the cost.
This will increase the project APV.
2. It is difficult to obtain the precise tax shield as the shareholders and creditors are subject
to diverse tax rates and regulations.
a. 1-False
2-False
b. 1-True
2-True
c. 1-True
2-False
d. 1-False 2-True
74.State whether the following statements are True or False:
1. The calculation of country risk scores is easy and it is the most important factor in the
assessment of the country risk of a country.
2. The financial for of country risk occurs when a host government enacts laws to prevent
foreign companies from taking money out of the country or from exchanging the host
countrys currency for any other currency.
a. 1-False, 2-False

b. 1-True, 2-False
c. 1-False, 2-True
d. 1-True, 2-True
75.Horst (1980) has explained tax neutrality in terms of __________________________ and
____________________.
a. Domestic neutrality, capital export neutrality
b. Foreign neutrality, capital import neutrality
c. Capital export neutrality, capital import neutrality.
d. Domestic neutrality, foreign neutrality
********************************