S.Y. M.B.A.

(Semester - III)
305 - FIN : INTERNATIONAL FINANCE
(2019 Pattern)
Time : 2½ Hours] [Max. Marks : 50
Instructions to the candidates:
1) All questions are compulsory.
2) Figures to the right indicate full marks.
3) Questions are based on all 5 units.
4) Every question has an internal option.

Q1) Answer Any 5 out of 8 :

a) Define foreign exchange market.

b) What is Gold standard system.

c) Define Forward contract.

d) What is money laundering?

e) Define International Receivables.

f) Define deep discount bonds.

g) Define ADR.

h) List the different types of bonds.

a) Foreign exchange market (Forex) is a global decentralized market

where participants can exchange currencies. It is the largest financial
market in the world, with a daily trading volume of over $5 trillion.
The foreign exchange market is used by a variety of participants,
including banks, hedge funds, central banks, and retail investors.

b) Gold standard system is a monetary system in which the value of a

currency is directly linked to the price of gold. This means that a
country's central bank must hold gold reserves equal to the amount of
currency in circulation. The gold standard system was in place for most
of the 19th and early 20th centuries, but it was abandoned after World
War II.

c) Forward contract is a contract to buy or sell an asset at a predetermined

price on a future date. Forward contracts are often used to hedge
 against currency risk or to speculate on future price movements.

d) Money laundering is the process of concealing the origins of illegally

obtained money. This is often done by transferring money through a
series of bank accounts in different countries, or by investing in assets
that are difficult to trace. Money laundering is a crime, and it is often
used to fund terrorism and other illegal activities.

e) International receivables are payments that are owed to a company by

customers in other countries. International receivables can be a source
of significant revenue for companies that do business internationally.
However, they can also be a source of risk, as the payments may be
delayed or even defaulted on.

f) Deep discount bonds are bonds that are sold at a significant discount to
their face value. This means that investors who buy deep discount
bonds will only receive a small amount of interest payments over the
life of the bond. However, deep discount bonds can offer high returns
if they are held to maturity.

g) ADR stands for American Depositary Receipt. ADRs are securities

that represent shares of a foreign company that are traded on U.S. stock
exchanges. ADRs make it easier for U.S. investors to invest in foreign
companies, as they do not have to worry about the currency exchange
risk or the paperwork associated with buying foreign shares directly.

h) There are many different types of bonds, but some of the most common
include:
• Government bonds: Government bonds are issued by governments to
finance their spending. They are considered to be very safe
investments, as the government is legally obligated to repay the
bondholders.
• Corporate bonds: Corporate bonds are issued by companies to finance
their operations. They are considered to be riskier than government
bonds, but they also offer the potential for higher returns.
• Municipal bonds: Municipal bonds are issued by local governments to
finance public projects. They are considered to be very safe
investments, as the interest payments on municipal bonds are exempt
from federal income tax.
• High-yield bonds: High-yield bonds, also known as junk bonds, are
issued by companies with a high risk of default. They offer the
potential for high returns, but they are also very risky investments.
 Q2) Answer Any Two :

a) Discuss Bretton woods conference & its significance in brief.

The Bretton Woods Conference was a meeting of 44 Allied nations held at the
Mount Washington Hotel in Bretton Woods, New Hampshire, United States in
July 1944. The purpose of the conference was to establish a new international
monetary system to stabilize the global economy after World War II.

The Bretton Woods system established the following:

• An international organization called the International Monetary Fund (IMF)

to oversee the system.

• A fixed exchange rate system, in which the value of each currency was
pegged to the U.S. dollar.

• The U.S. dollar was the only currency that was convertible to gold.

The Bretton Woods system worked well for the first few years after the war, but it
began to break down in the early 1970s. This was due to a number of factors,
including the Vietnam War, the oil crisis, and the growing economic power of
Europe and Japan.

The Bretton Woods system was officially abandoned in 1971, and the world has
since moved to a system of floating exchange rates. However, the Bretton Woods
conference is still considered to be a landmark event in the history of international
finance. It established the basic framework for the global monetary system for
over two decades, and its principles continue to influence the way that the world
economy operates today.

Here are some of the significances of the Bretton Woods Conference:

• It established the International Monetary Fund (IMF), which is still one of

the most important international organizations today.

• It created the World Bank, which provides loans to developing countries.

• It established the General Agreement on Tariffs and Trade (GATT), which

was the predecessor to the World Trade Organization (WTO).

• It helped to stabilize the global economy after World War II.

• It set the stage for the European Union and other regional economic blocs.

The Bretton Woods Conference was a major turning point in the history of the
world economy. It helped to create a more stable and prosperous global economy,
and its principles continue to influence the way that the world economy operates
today.
 b) Explain Interest Rate Parity.

Interest rate parity (IRP) is a theory in finance that states that the interest rate
differential between two countries is equal to the expected change in the exchange
rate between their currencies. This means that investors should not be able to earn
a risk-free profit by borrowing money in one country and investing it in another
country.

The IRP equation is:

Forward Rate = Spot Rate + (Interest Rate Differential)

where:

• Forward rate is the exchange rate between two currencies that is agreed
upon today for a future date.

• Spot rate is the current exchange rate between two currencies.

• Interest rate differential is the difference between the interest rates in two
countries.

For example, if the interest rate in the United States is 5% and the interest rate in
Japan is 2%, then the IRP equation would predict that the forward rate of the
Japanese yen against the U.S. dollar would be 3% higher than the spot rate. This is
because investors would be able to borrow money in the United States at 5%,
invest it in Japan at 2%, and earn a risk-free profit of 3%.

In reality, IRP does not always hold perfectly. This is because there are factors
such as transaction costs and risk premiums that can cause the forward rate to
deviate from the IRP equation. However, IRP is a useful tool for understanding
how interest rates and exchange rates interact.

Here are some of the factors that can cause IRP to break down:

• Transaction costs: There are costs associated with buying and selling
currencies, such as commissions and fees. These costs can make it
impossible to earn a risk-free profit even if the IRP equation holds true.

• Risk premiums: Investors may demand a risk premium for investing in a

foreign currency. This is because there is always some risk associated with
investing in a foreign currency, such as the risk that the currency will
depreciate.

• Currency controls: Governments may impose currency controls that prevent

investors from freely exchanging currencies. This can also cause IRP to
break down.
Despite these factors, IRP is a useful tool for understanding how interest rates and
exchange rates interact. It can be used to assess whether an investment opportunity
is truly risk-free, and it can help investors to manage their currency risk.

c) Explain the foreign exchange trade settlement in India.

Foreign exchange (Forex) trade settlement in India is the process of exchanging
currencies between two parties. The settlement process can be complex, and it
involves a number of different participants, including banks, brokers, and
clearinghouses.
The settlement process for Forex trades in India typically follows these steps:
1. The two parties to the trade agree on an exchange rate and the amount of
currency to be exchanged.
2. The banks involved in the trade execute the trade and send the currencies to
each other.
3. The clearinghouse confirms the trade and settles the payments between the
two banks.
4. The two parties to the trade receive the exchanged currencies in their
respective bank accounts.
The settlement process for Forex trades in India can take a few days to complete.
This is because the banks involved in the trade need to make sure that the
currencies are actually available and that the payments are cleared.
There are a number of different types of Forex trade settlement in India, including:
• Spot settlement: Spot settlement is the most common type of Forex trade
settlement. In spot settlement, the currencies are exchanged on the same day
as the trade is agreed upon.
• Forward settlement: Forward settlement is a type of Forex trade settlement
in which the currencies are exchanged on a future date. Forward settlement
is often used to hedge against currency risk.
• Swap settlement: Swap settlement is a type of Forex trade settlement in
which two parties exchange currencies for a specified period of time. Swap
settlement is often used to manage liquidity or to speculate on future
currency movements.
The type of Forex trade settlement that is used will depend on the specific needs of
the parties involved in the trade.

Q3) Answer any one out of two :

a) Illustrate the Purchasing Power Parity with suitable example.

Purchasing power parity (PPP) is a theory in economics that states that the price of
a basket of goods should be the same in every country, regardless of the currency
used. This means that if you can buy a certain amount of goods for $100 in the
United States, you should be able to buy the same amount of goods for €100 in
Europe or ¥10,000 in Japan.
In reality, PPP does not always hold perfectly. This is because there are factors
such as tariffs, transportation costs, and taxes that can cause the price of goods to
vary from country to country. However, PPP is a useful tool for understanding
how exchange rates work and for making international comparisons.

Here is an example of how PPP can be used to make an international comparison:

Suppose that the price of a Big Mac hamburger is \$5 in the United States.
According to PPP, the price of a Big Mac hamburger should be €5 in Europe and
¥500 in Japan. If the price of a Big Mac hamburger is actually more expensive in
Europe or Japan than it is in the United States, this suggests that the euro or the
yen is undervalued against the dollar.

This is because the euro or the yen would need to be worth more in order to buy
the same amount of goods as the dollar. Conversely, if the price of a Big Mac
hamburger is actually cheaper in Europe or Japan than it is in the United States,
this suggests that the euro or the yen is overvalued against the dollar.

The PPP theory is often used by economists to make predictions about exchange
rates. For example, if the price of a basket of goods is rising faster in one country
than it is in another country, this suggests that the currency of the first country is
likely to depreciate against the currency of the second country.

PPP is also used by businesses to make international comparisons. For example, a

company that wants to open a factory in a foreign country can use PPP to estimate
the cost of living in that country. This information can be used to determine
whether the company can afford to open the factory in that country.

Overall, PPP is a useful tool for understanding how exchange rates work and for
making international comparisons. However, it is important to remember that PPP
does not always hold perfectly, and it should not be used as the sole basis for
making decisions about exchange rates or international investments.

b) Define the Globalisation. Explain the various factors favouring

globalisation and impact of globalisation.

Globalization is the process of international integration arising from the

interchange of world views, products, ideas and other aspects of culture. It has
accelerated since the 19th century due to advances in transportation and
communication technology.
Here are some of the factors that have favored globalization:

• Advances in transportation and communication technology: Advances in

transportation and communication technology have made it easier and
cheaper for people and goods to move around the world. This has made it
possible for businesses to operate in multiple countries and for consumers to
buy products from all over the world.
• Free trade agreements: Free trade agreements have lowered barriers to trade
between countries. This has made it easier for businesses to export their
products to other countries and for consumers to buy products from other
countries.
• Economic growth: Economic growth in developing countries has created
new markets for businesses from developed countries. This has led to
increased investment and trade between developed and developing
countries.
• Political stability: Political stability in many countries has created a more
favorable environment for globalization. This has made it easier for
businesses to operate in multiple countries and for consumers to buy
products from all over the world.

Here are some of the impacts of globalization:

• Economic growth: Globalization has led to increased economic growth in

many countries. This is because it has created new markets for businesses
and has led to increased investment and trade.
• Job creation: Globalization has created jobs in many countries. This is
because it has led to increased investment and trade, which has created
demand for labor.
• Lower prices: Globalization has led to lower prices for many goods and
services. This is because it has made it possible to produce goods and
services more efficiently in countries with lower labor costs.
• Increased competition: Globalization has increased competition in many
industries. This has led to lower prices and better quality products and
services for consumers.
• Cultural diffusion: Globalization has led to the diffusion of cultures around
the world. This has created a more interconnected world and has made
people more aware of different cultures.

However, globalization has also had some negative impacts, such as:

• Income inequality: Globalization has led to increased income inequality in

some countries. This is because it has benefited businesses and wealthy
individuals more than it has benefited workers.
 • Environmental degradation: Globalization has led to environmental
degradation in some countries. This is because it has increased the demand
for resources and has led to pollution.
• Loss of jobs: Globalization has led to the loss of jobs in some countries.
This is because it has led to the relocation of jobs to countries with lower
labor costs.
• Increased cultural homogenization: Globalization has led to increased
cultural homogenization. This means that cultures around the world are
becoming more similar. Some people believe that this is a negative
development, as it could lead to the loss of local cultures.

Overall, globalization has had both positive and negative impacts. It is important
to weigh the pros and cons of globalization carefully before making a judgment
about whether it is a good or bad thing.

Q4) a) Analyse the role of International monetary Fund in promoting financial

stability and monetary cooperation.

The International Monetary Fund (IMF) is an international organization that was

created in 1944 to promote international monetary cooperation, exchange rate
stability, and sustainable economic growth. The IMF has a number of roles in
promoting financial stability and monetary cooperation, including:

• Lending to countries in financial trouble: The IMF can lend money to

countries that are in financial trouble. This can help to stabilize the financial
system and prevent a crisis from spreading to other countries.
• Providing technical assistance: The IMF can provide technical assistance to
countries on a variety of financial matters, such as monetary policy,
financial regulation, and debt management. This can help countries to
improve their financial systems and make them more resilient to shocks.
• Overseeing the international monetary system: The IMF oversees the
international monetary system and makes recommendations on how to
improve it. This includes working to ensure that exchange rates are stable
and that countries do not engage in competitive devaluations.
• Promoting global economic growth: The IMF promotes global economic
growth by providing loans to countries in need, providing technical
assistance, and overseeing the international monetary system. This helps to
create a more stable and prosperous global economy for all countries.

The IMF has played a significant role in promoting financial stability and
monetary cooperation since its inception. The IMF's lending programs have helped
to stabilize the financial systems of many countries, and its technical assistance
has helped countries to improve their financial systems. The IMF's oversight of the
international monetary system has helped to promote stability and prevent crises.
The IMF's promotion of global economic growth has helped to create a more
prosperous world for all.

However, the IMF has also been criticized for its lending programs, which have
sometimes been seen as bailing out countries that have made poor economic
decisions. The IMF has also been criticized for its focus on austerity measures,
which have sometimes led to economic hardship for ordinary citizens.

Overall, the IMF has played a significant role in promoting financial stability and
monetary cooperation. The IMF's lending programs, technical assistance, and
oversight of the international monetary system have helped to make the world
economy more stable and prosperous. However, the IMF has also been criticized
for its lending programs and its focus on austerity measures.

c) Differentiate Currency Forward and currency Futures.

Here are the key differences between currency forwards and currency futures:

• Contract type: Currency forwards are over-the-counter (OTC) contracts,

while currency futures are exchange-traded contracts. This means that
currency forwards are negotiated directly between two parties, while
currency futures are traded on exchanges.

• Settlement: Currency forwards are settled on the agreed-upon date, while

currency futures are settled on the last trading day of the contract month.

• Margin: Currency forwards do not require margin, while currency futures

require margin to be deposited with the exchange.

• Liquidity: Currency forwards are less liquid than currency futures. This
means that it may be more difficult to find a counterparty to trade with for
a currency forward.

• Cost: Currency forwards are typically less expensive than currency futures.
This is because there are no exchange fees associated with currency
forwards.

Here is a table that summarizes the key differences between currency forwards
and currency futures:

Feature Currency Forward Currency Future

Contract OTC Exchange-traded

type

Settlement Agreed-upon date Last trading day of the contract

month

Margin No margin required Margin required

Liquidity Less liquid More liquid

Cost Typically less Typically more expensive

expensive

Here are some additional details about currency forwards and currency futures:

• Currency forwards: Currency forwards are private contracts between two

parties. They are typically used by businesses and financial institutions to
hedge against currency risk. Currency forwards can be customized to meet
the specific needs of the parties involved.

• Currency futures: Currency futures are standardized contracts that are traded
on exchanges. They are typically used by traders and speculators to profit
from changes in currency prices. Currency futures are more liquid than
currency forwards, but they are also more expensive.

Q5) a) Evaluate the risk in Foreign Direct Investment for home country and
host country.

Foreign direct investment (FDI) is a type of investment made by a company or

individual in one country to acquire or establish a business in another
country. FDI can be risky for both the home country and the host
country.
Here are some of the risks of FDI for the home country:
• Job losses: FDI can lead to job losses in the home country if the company
that is investing in the host country decides to relocate jobs to the host
country.
• Capital outflow: FDI can lead to capital outflow from the home country if
the company that is investing in the host country decides to repatriate its
profits back to the host country.
• Decreased competitiveness: FDI can lead to decreased competitiveness for
companies in the home country if the company that is investing in the host
country is able to produce goods and services more cheaply in the host
country.
• Technology transfer: FDI can lead to technology transfer from the home
country to the host country, which can benefit the host country but can also
 hurt the home country if the technology is used to compete with companies
in the home country.
Here are some of the risks of FDI for the host country:
• Economic disruption: FDI can lead to economic disruption in the host
country if the company that is investing in the host country does not
integrate well with the local economy.
• Increased inequality: FDI can lead to increased inequality in the host
country if the benefits of FDI are not shared equally among the population.
• Environmental damage: FDI can lead to environmental damage in the host
country if the company that is investing in the host country does not take
environmental concerns into account.
• Political instability: FDI can lead to political instability in the host country
if the company that is investing in the host country is seen as a threat to the
local government.
Overall, FDI can be a risky proposition for both the home country and the host
country. However, FDI can also be a great opportunity for both
countries if it is done carefully and responsibly.
Here are some tips for reducing the risks of FDI:
• Do your research: Before investing in a foreign country, it is important to
do your research and understand the risks involved.
• Partner with local companies: Partnering with local companies can help to
mitigate the risks of FDI.
• Build relationships: Building relationships with government officials and
other stakeholders in the host country can help to reduce the risks of FDI.
• Be transparent: Be transparent about your investment plans and be willing
to work with the host country to address any concerns.
• Monitor the investment: Monitor the investment closely to ensure that it is
meeting its objectives and that it is not causing any harm to the host
country.
By following these tips, you can help to reduce the risks of FDI and make sure
that your investment is a success.

b) Evaluate the hedging techniques of Foreign Exchange Risk Management.

Foreign exchange risk management (FXRM) is the practice of minimizing the risk
of losses that can occur due to changes in exchange rates. There are a number of
hedging techniques that can be used for FXRM, each with its own advantages and
disadvantages.

Here are some of the most common hedging techniques:

• Forward contracts: Forward contracts are agreements to buy or sell a

currency at a specified price on a specified date in the future. Forward
contracts are a popular hedging technique because they offer a guaranteed
 price for the currency, regardless of what happens to the exchange rate
between now and the future date. However, forward contracts can be
expensive, and they may not be available for all currencies.
• Futures contracts: Futures contracts are similar to forward contracts, but
they are traded on exchanges. Futures contracts are typically more liquid
than forward contracts, but they can also be more expensive.
• Options contracts: Options contracts give the buyer the right, but not the
obligation, to buy or sell a currency at a specified price on a specified date
in the future. Options contracts are a flexible hedging technique, as they
offer the buyer the ability to hedge against losses without having to commit
to buying or selling the currency. However, options contracts can also be
expensive, and they may not be available for all currencies.
• Money market hedges: Money market hedges involve borrowing or lending
money in the foreign currency. This can help to offset the risk of losses due
to changes in exchange rates. Money market hedges are a relatively
inexpensive hedging technique, but they may not be effective for all types
of FX risk.
• Natural hedges: Natural hedges occur when a company's foreign currency
exposure is offset by its foreign currency revenues or expenses. For
example, a company that exports goods to a foreign country may have
foreign currency receivables that offset its foreign currency payables.
Natural hedges are a free hedging technique, but they may not be available
for all companies.

The best hedging technique for a particular company will depend on a number of
factors, such as the type of FX risk that the company is exposed to, the company's
financial resources, and the availability of hedging instruments. It is important to
consult with a financial advisor to choose the right hedging technique for your
company.

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