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a. Explain how a swap arrangement can be used to lower the cost of borrowing for Saturn.

This paper deals with the International Financial Management overlapping different aspects in detail such as financial arguments, swap arrangement, the special position of the dollar, non-market methods, financial strategies, contingency table, financial effect, etc.


International Financial Management

1. Jupiter, a U.K. company, purchases goods mainly from the United States. The company currently has surplus funds that it wishes to invest. Interest rates offered to Jupiter for investment in bonds are Eurozone 5%, the United States 3%. Investing in the Eurozone appears to be offering the better return. Nevertheless, evaluate the financial arguments that justify investing in the United States instead of the Eurozone. (7 marks)

Saturn exports to the U.S. and is paid in U.S. dollars. 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. (7 marks)

b. To what extent is the swap arrangement contradicting market judgements? Discuss (7 marks)

c. Evaluate the advantages and disadvantages for Saturn of borrowing in dollars. (7 marks)

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. (7 marks)

b. Evaluate non market methods of protecting a business from a devaluation in the dollar. (8 marks)

4. Calculate the profit (if any) that can be made from arbitrage given the following exchange rates: 16R:£1, $1.25:£1 and 12.0R: $1 and explain why there should be no profit in practice. (7 marks) Part B Answer 2 questions only from this section

5. Evaluate the different methods by which an importer can assure payment without having to prepay for goods. (25 marks)

6. Evaluate the financial strategies that a Multinational Company can use in a foreign country so as to avoid being perceived as a threat. (25 marks)

7. The following are call option quotes for currency X, the current price is 31pence for October 2013 (all prices are in pence): Call Strike Price (in pence) of 1 unit of currency X Premium 23 16.0 26 12.0 31 8.5 36 5.0 41 2.5 46 0.8

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. (15 marks)

b. The investment advisor suggests that if you want to buy an option, you might consider writing a put option at 28 pence (premium 4.0 pence). Evaluate this hedging strategy from a multinational viewpoint. (5 marks)

c. Evaluate the business benefits of options in general – are they unnecessary? (5 marks)

8. Abraxa ltd 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: Day1 Day2 Day3 Day 4 Price of 1 bag of coffee $114 $90 $60 $75 (10 marks)

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. (10 marks)

c) The Finance director suggests that Abraxa should borrow in dollars. Evaluate the financial effect of such a strategy (5 marks)

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