CONFIDENTIAL BA/FEB 2023/FIN542

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE INTERNATIONAL FINANCIAL MANAGEMENT

COURSE CODE FIN542
EXAMINATION FEBRUARY 2023
TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the Faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 5 printed pages
© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL
CONFIDENTIAL 2 BA/FEB 2023/FIN542

QUESTION 1

a) Multinational companies (MNCs) cash flows are subjected to various types of

uncertainties. Define what is meant by MNC and explain THREE (3) sources of uncertainty
for MNCs.
(10 marks)

b) Assume the following information:

Singapore interest rate 7.5% per annum

Malaysia interest rate 9.0% per annum
Spot rate MYR3.3200/3.3250/SGD
One-year forward rate MYR3.3320/3.3400/SGD

Given the above information, identify if covered interest arbitrage exists. Assume a
Malaysian company can either borrow or invest Malaysian ringgit 1 million. Show the
calculation and determine the profit (in MYR) that the company may earn.
(10 marks)

QUESTION 2

a) Explain the interest rate parity concept. Provide the rationale for its existence.
(4 marks)

b) You are given the following quotes:

MYR/USD MYR/NZD
Spot rate MYR4.7200/4.7225/USD MYR2.6817/2.6826/NZD
1-month swap rate 35/55 64/47
3-month interest rate New Zealand 6.2% per annum
Malaysia 7.5% per annum
United States 5.8% per annum

Based on the above information, you are required to:

(i) Compute the bid-ask spread percentage for spot exchange rate MYR/USD and
MYR/NZD.
(2 marks)

(ii) Compute the one-month forward outright rate for MYR/USD and MYR/NZD.
(4 marks)
(iii) Assume that you have USD 5,500 one month later, how much would you have in terms
of MYR?
(2 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 3 BA/FEB 2023/FIN542

(iv) Compute the annualized one-month forward premium/ discount for MYR/NZ$.

(2 marks)
(v) Compute the three-month forward rate for MYR/NZ$.

(4 marks)
(vi) Assume that you need NZ$20,000 for travelling to New Zealand three months later,
how much MYR do you need to pay for the exchange?
(2 marks)

QUESTION 3

a) Tamia Sdn Bhd a Malaysian exporter of rubbers has just received an order from the
United Kingdom worth GBP100,000 with payment to be received in 6 months. There are
several alternatives for Tamia Sdn Bhd to manage the transaction exposure which are
given with several information below:

Spot rate of GBP MYR5.4600/5.4750

6-months forward of GBP GBP is expected to appreciate by 0.6%

Malaysia United Kingdom

Deposit rate 9% per annum 6% per annum
Borrowing rate 11% per annum 8% per annum

Option Exercise Premium

Call Option MYR5.6050 MYR0.2000

Put option MYR5.7000 MYR0.2000

Based on the above information, you are required to determine the preferable hedging
technique of your company by comparing the revenues earned in the forward market,
money market and options contract. Advice Tamia Sdn Bhd on the best hedging
technique that will maximize its profit.
(14 marks)

b) "The Bretton Woods Agreement is an agreement that allows the currency to

fluctuate according to market forces."

Based on the given statement above, debate whether the statement is correctly
explaining the Bretton Woods Agreement.
(6 marks)

© Hak Cipta Universiti Teknoiogi MARA CONFIDENTIAL

CONFIDENTIAL 4 BA/FEB 2023/FIN542

QUESTION 4

a) On December 13th 2022, a trader takes a long position in five (5) British pound futures
contracts at an opening price of USD1.1753. The settlement prices for December 13th,
14th' and 15th are USD1.1700, USD1.1680, and USD1.1740 respectively. On December
16th' 2022, the trader decided to close out the contract at a price of USD1.1747. The margin
account currently has a balance of USD10,000 and a minimum of USD8,000 must be
maintained.

Calculate the daily marked-to-market transactions and the changes in the margin account.
Determine the net profit or loss from the futures contracts (assume one contract size of
the British pound is 62,500 units).
(10 marks)

b) Alberto Inc. exported goods worth USD800,000 to a company in the United States. The
following information is given for your analysis.

Acceptance
Term : 90 days
Acceptance fee per annum : 8.0 percent
Discount rate per annum : 4.5 percent
Flat commission fee : 0.5 percent
Spot rate (USD in MYR) : 4.5300/4.5700

Interest rate per annum

• United States : 8 percent
• Malaysia : 6 percent

i) Compute the amount received (in MYR) if Alberto Inc. holds the draft until
maturity.
(4 marks)

ii) Compute the amount received (in MYR) if Alberto Inc. sells the draft immediately.

(4 marks)

iii) If Alberto Inc. opportunity cost of funds is 10 percent per annum, decide if the firm
should discount the BA or hold it until maturity. Justify your answer.
(2 marks)

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL 5 BA/FEB 2023/FIN542

QUESTION 5

a) Singapore-based Gambel Inc. is operating in the United States and needs working
capital for expansion. Gambel Inc. could borrow from its home country or the country in
which it is operating. The tax rate on corporations is 35%. The exchange rate and interest
rates of Singapore and the United States are shown in the following table:

Singapore United States

Interest rate 8.0% 6.5%
Spot exchange rate SGD1.3700/USD
Future exchange rate SGD1.3850/USD

You are required to determine:

i) The year-end exchange rate that makes borrowing in the United States and Singapore
indifferent.
(4 marks)

ii) The before-tax cost of borrowing from the United States

(4 marks)

iii) The after-tax cost of borrowing from Singapore and the United States.
(4 marks)

iv) The best financing for Gambel Inc's working capital needs based on the after-tax cost
of borrowing.
(2 marks)

b) A currency trader notices the following quotes:

Malaysian Market Japan Market

MYR4.7500/4.7570/USD JPY139.7300/139.7500/USD
MYR3.2600/3.2680/JPY100

The trader wishes to perform currency arbitrage by taking advantage of the exchange
rate of Japanese yen per US dollar. Explain the steps involved and compute profit from
this strategy assuming that the trader has MYR1,000,000 as an initial investment.

(6 marks)

END OF QUESTION PAPER

© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL