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Posted Date: 20 Mar 2009 Posted By: E Mangala Member Level: Gold
|
2008 ICFAI University M.B.A Business Administration International Management I (MB341IB) Question paper
Question Paper
International Management I (MB341IB) : April 2008
Section A : Basic Concepts (30 Marks)
i
.
e
x
e
• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.
1. Sterling denominated foreign bonds issued in the U.K. are called
(a) Bulldog bonds
(b) Yankee bonds
(c) Geisha bonds
(d) Samurai bonds
(e) Matador bonds.
2. If the outright forward rate of US$ for 3 months is Rs.39.85/93 and the relevant swap points are 22/18, then the
spot rate is
(a) Rs.39.63/39.80
(b) Rs.39.63/40.06
(c) Rs.40.07/40.11
(d) Rs.39.63/40.11
(e) Rs.40.06/40.07.
3. A transaction in which the goods supplied do not leave the country and the payment for the goods is received by
the supplier in India under International Institutions aided projects is called
(a) Deemed exports
(b) Merchant trade
(c) Counter trade
(d) Barter trade
(e) Project exports.
4. Which of the following would most likely cause a nation‘s currency to depreciate?
(a) An increase in the nation‘s domestic inflation rate
(b) A decrease in domestic real interest rates
(c) A decrease in the nation‘s domestic inflation rate
(d) An increase in inflation rate of the nation‘s trading partners
(e) A decrease in money supply in the domestic economy.
5. As per Uniform Customs and Practice for Documentary Credits ICC Publication No. 500, the L/C issuing bank
while issuing L/C, should clearly indicate whether it is revocable or irrevocable. In the absence of such
indication œ
(a) The credit shall be deemed to be revocable
(b) The credit shall be deemed to be irrevocable
(c) The credit shall be deemed to be revocable or irrevocable at the option of applicant
(d) The credit shall be amended at the option of applicant
(e) The credit shall be amended at the option of beneficiary.
6. If a foreign country subsidizes its exports in order to avoid balance of payments problem, the importing country
may impose
(a) Anti-dumping duty
(b) Countervailing duty
(c) Transit duty
(d) Specific duty
(e) Compound duty.
7. Which of the following statements is not true with respect to Special Drawing Rights(SDRs)?
(a) Interest is paid to those who hold SDRs and by those who draw down their SDRs
1
(b) The interest rate of SDRs is based on average money market rates in major countries
(c) SDRs are only used to cover current account deficit
(d) The value of SDR represents the weighted average value of dollar, pounds, euro, and yen
(e) SDRs are reserves created by IMF and allocated to member countries.
8. Consider the following:
One year pound interest rate is 6% (compounded quarterly)
One year dollar interest rate is 5.5% (compounded quarterly)
The forward six months exchange rate is $2.0446/£
According to Interest Rate Parity, the spot exchange rate is
(a) 2.0471
(b) 2.0496
(c) 2.0396
(d) 2.0420
(e) 2.0596.
9. Which theory on international trade states that innovations are generally concentrated in the richer and more
developed countries and that in the early stage of a new product, it is produced and exported by the country
which introduced the innovation?
(a) Imitation Gap Theory
(b) International Product Life Cycle
(c) Heckscher-Ohlin Model
(d) Theory of Comparative Advantage
(e) Theory of Absolute Advantage.
10. The rate given by an authorized dealer for an export transaction is
(a) Forward T.T. buying rate
(b) Forward T.T. selling rate
(c) Bill buying rate
(d) Bill selling rate
(e) Spot T.T buying rate.
11. Which of the following may lead to a deficit in the Current Account of Balance of Payment (BoP) of a country?
(a) Increased exports
(b) Increased imports
(c) Increased liabilities of foreigners
(d) Decreased claims on foreigners
(e) Decreased investment.
12. The spot Rs./ £ rate is Rs.82.05. If the inflation in India and U.K are 5% and 2.5% respectively and the spot rate
1year ago was Rs.81.90, the real appreciation/depreciation of rupee is
(a) 2.25% appreciation
(b) 2.25% depreciation
(c) 4.27% appreciation
(d) 4.27% depreciation
(e) 2.45 % appreciation.
13. The exchange rate system, where a central bank intervenes to smoothen out exchange rate fluctuations is known
as
(a) Fixed exchange rate system
(b) Floating exchange rate system
(c) Free float
(d) Dirty float
(e) Currency board system.
14. Devaluation of a currency means
I. Government lowering the value of the local currency under fixed exchange rate system.
II. Market forces lowering the value of the local currency under fixed exchange rate system.
III. Market forces lowering the value of a local currency under flexible exchange rate system.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
2
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
15. Compensating financing facility is
(a) A form of overdraft in foreign exchange given by RBI to authorized dealers
(b) A form of electronic funds transfer
(c) An IMF program to assist countries facing temporary shortfall in reserves
(d) A form of transaction that involves asset transfer as a condition for purchase of goods
(e) A form of counter trade.
16. The following are the exchange rates quoted in Hong Kong :
HK$/£ : 15.7150/59
HK$/US$ : 7.7539/46
The synthetic rate of US$/£ is
(a) 0.4933/0.4934
(b) 4.9333/4.9344
(c) 2.0265/2.0268
(d) 1.2185/1.2187
(e) 2.0026/2.0027.
17. Which of the following facilities extended by EXIM bank to Indian promoters under Overseas Investment
Finance?
(a) Rupee term loans for financing equity contribution
(b) Advance payment guarantee
(c) Refinance for deferred payment exports
(d) Forfaiting
(e) Buyer‘s credit.
18. While appraising International Project using APV method, if there is a strong probability of positive cash flows
being generated, the discount rate used for calculating depreciation would be
(a) Nominal discount rate for contractual cash flows
(b) Domestic nominal discount rate
(c) Domestic nominal risk free rate
(d) Nominal risk free rate in host country
(e) All equity discount rate.
19. Under exchange control regulations, which of the following documents an importer has to submit to an
Authorized Dealer as evidence that the goods have actually been imported into India for the remittance sent in
foreign currency?
(a) Air Way Bill
(b) Bill of Entry
(c) Copy of Bill of lading
(d) Combined Transport bill of lading
(e) House airway bill.
20. Which of the following forms the basis for creation of European Monetary Union?
(a) Brady Plan
(b) Plaza Agreement
(c) Lourve Accord
(d) Maastricht Treaty
(e) Act of State Doctrine.
21. Which of the following is false towards Forward Exchange Contracts (FEC) as per FEDAI Rules?
(a) FEC can be booked for genuine transactions and where there is exposure to exchange risk, not for
speculative purposes
(b) Cannot be booked for anticipated transactions, only for firm exposures
(c) Value of the forward cover should not exceed the value of the goods contracted for
(d) Non-trade transactions, contracts once cancelled can be rebooked
(e) In case of merchanting trade transactions forward contracts will have to be booked simultaneously for
both legs of the transactions or for the net amount of expected profits.
3
22. Trade in differentiated products is called
(a) Trade based on economies of scale
(b) Inter-Industry trade
(c) Intra-Industry trade
(d) Trade based on imitation gaps
(e) Trade based on product cycles.
23. Which of the following is false under currency board system?
(a) The market mechanism determines the interest rates
(b) The board is having power to print the domestic currency to the extent of requirement under fiscal
policy
(c) The increase in domestic interest rates may increase the supply of anchor currency
(d) The stable exchange rates encourages international trade and investment
(e) The currency in circulation is backed by anchor currency reserves.
24. A quote is called as American quote, if the exchange rate is expressed
(a) In terms of number of units of any other currency per unit of US dollar
(b) In terms of US dollars per unit of any other currency
(c) In terms of number of units of any other currency per unit of British pound
(d) In terms of number of units of any other currency per unit of any other currency excluding British pound
(e) In terms of number of units of any other currency per unit of euro.
25. In Mumbai inter-bank the market rates are as under:
Rs./Can$ : 38.71 / 73
1 month : 03 / 05
2 months : 05 / 07
3 months : 13 / 15
If a bank requires an exchange margin of 0.10%, what should be the rate to be quoted to an exporter who wants
to have an option delivery in the third month?
(a) Rs.38.74 / Can$
(b) Rs.38.76 / Can$
(c) Rs.38.78 / Can$
(d) Rs.38.80 / Can$
(e) Rs.38.84 / Can$.
26. Which of the following import licenses is exempted from payment of basic custom duty, surcharge, additional
customs duty, anti dumping duty and safeguard duty?
(a) Regular license
(b) Advance license
(c) Open general license
(d) Special import license
(e) Canalized items.
27. Which of the following international organizations is often endeavors to finance those projects which may not be
financially profitable and referred to as the soft loan window of the World Bank?
(a) International Bank for Reconstruction and Development(IBRD)
(b) International Finance Corporation (IFC)
(c) International Development Association (IDA)
(d) International Monetary Fund (IMF)
(e) International Labour Organization (ILO).
28. Dendanske Bank, Copenhagen maintains a rupee account with State Bank of India, New Delhi. This account is
referred by SBI, New Delhi to Dendanske Bank as
(a) Vostro account
(b) Nostro account
(c) Loro account
(d) Mirror account
(e) Shadow account.
29. In which of the following cases of INCOTERMS (International Commercial Terms), the seller has to bear the
obligation, like risk costs including duties and charges of delivering the goods thereto, up to the port of
4
destination?
(a) CIP ( Carriage and Insurance Paid To)
(b) DDP(Delivered Duty Paid)
(c) DES (Delivered Ex Ship)
(d) EXW (Ex works)
(e) CIF (Cost Insurance and Freight).
30. Consider the following information obtained from New Delhi inter-bank market:
Rs.//
Spot 55.07/55.09
3 months interest rates Rs. : 6.00% - 6.50% p.a.
/ : 4.10% - 4.50% p.a.
What should be the 3-month forward bid rate of euro to prevent arbitrage?
(a) = Rs.57.21
(b) = Rs.55.42
(c) = Rs.55.35
(d) = Rs.57.13
(e) = Rs.56.81.
END OF SECTION A
Section B : Problems/Caselets (50 Marks)
• This section consists of questions with serial number 1 œ 6.
• Answer all questions.
• Marks are indicated against each question.
• Detailed workings/explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.
1. Shrishti Leather Exports (P) Ltd., Mumbai has imported machinery worth US$
500,000 under letter of credit (L.C) for manufacturing of leather items. As per terms
of L.C, bills were drawn on the buyers with a usance period of 180 days from Bill
of Lading. Mr. Vivek Desai, the Vice-President (Finance) of Shrishti Leather
Exports (P) Ltd., has collected the following market quotes:
Exchange rates:
Spot Rs./$ 39.70/72
Forward 6 month 39.80/82
Interest rates (p.a.):
Dollar (6 months) 5.20% / 5.50%
Rupee (6 months) 8.00% / 11.00%
The supplier of the machinery has offered a discount of US$ 2,500 if the bill is
settled immediately. Mr. Vivek Desai is reviewing the following alternatives to
minimize the payables:
i. Cover through forward market.
ii. Cover through money market.
iii. Avail the cash discount of $5,000 by taking a bridge loan at 13.5% p.a. from a
lending institution.
You are required to suggest Mr. Vivek Desai the best alternative to settle the
payable.
( 10 marks)
2. Arrowhead Exploration Company, Quebec, a Multinational oil exploration
company in Canada proposes to invest its surplus funds of Can$10 million for a
period of six months. The Treasury Manager (Finance) has collected the following
information from his banker to invest in currencies including that of home currency
to earn more interest on the funds without exposing the investment to exchange risk
by covering the amounts in forward market. ( 10 marks)
5
Spot Can$/$ 0.9982/86
$/£ 2.0336/38
6 months Forward Can$/$ 0.9965/69
$/£ 2.0246/48
6 month interest rates
Can$ 5.00% œ 5.50% p.a.
$ 5.25% œ 5.75% p.a.
£ 6.25% œ 6.75% p.a.
You are required to determine the currency in which the company should invest to
have more returns.
Caselet 1
Read the caselet carefully and answer the following questions:
3. —The current inflow of foreign funds in the form of FII is both an opportunity and a
threat to our economy.“ Elucidate.
( 8 marks)
4. Elucidate the insidious effects of huge forex inflows caused to monetary authority
of India and steps taken by RBI to maintain the stability of the rupee. ( 7 marks)
There is a lack of consensus about the reasons behind the huge forex inflows into
the country in recent times. Some experts claim that the India growth story, driven
by strong fundamentals, is behind the huge influx. Yet some attribute this to the fact
that the Indian market is decoupled from developments elsewhere in the world-after
all, our economy has remained mostly unaffected by the contagion effect
engendered by the subprime crisis. The surge started after the Federal Reserve cut
the interest rate (Fed rate) by 50 bps, which boosted market confidence in the US.
The question that arises is with the so-called fourth sector of the economy, viz., the
'stock market' touching a new high everyday, do we rejoice or do we get cautious?
Our forex reserves have crossed the $257 bn mark and are still rising. It is perhaps
too early to ask ourselves why foreign investors would like to park their money in
our bourses.
India has been flushed with huge portfolio investment, majority of which were
through the route of Participatory Notes. The most obvious positive of this inflow is
the impact on the stock prices. Market capitalization of many stocks has reached
historic levels. Huge market capitalization boosts the image of Indian companies
abroad. Their ratings may be upgraded worldwide. Due to huge forex inflow
(mainly USD), demand for rupees increases leading to strengthening of Rs. vs.
USD.
Accumulation of huge inflows proves the confidence the global investors have
reposed in the country. An improved sovereign rating will result in more of Foreign
Direct Investment (FDI) flowing into the country from the developed economies.
While raising India's sovereign rating from 'BB+/B' to 'BBB-/A-3' with a stable
outlook in January 2007, credit rating agency S&P has quoted that "India's external
balance sheet is strong due to reserves accumulation and prudent debt management.
'For a country like India which depends heavily on imports for its energy
requirements, the huge forex inflows will lead to cheaper imports. The strong rupee
that the huge forex inflows give rises to, will bring down the petroleum imports bill
of the country and improve the country's balance of payments position. Of course,
the appreciating rupee will perhaps going to reduce realization on our exports,
occasion some trade-off. Strengthening of the rupee will lessen the impact of
skyrocketing oil prices.
Sudden influx of foreign exchange in large volumes will make the position
uncomfortable for the government of any country. The level of discomfort is higher
when the country is not able to justify the reason behind such huge inflows. Huge
forex inflows create a demand for the local currency as a result of which it
appreciates. An appreciating currency erodes the export-competitiveness of the
country in the world market. An estimate puts the loss (arising from the rupee
6
appreciating by 11 % vis-à-vis the USD) at Rs.30,000 cr.
If we ignore the fact that FII can ultimately lead to FDI in the country, the foreign
portfolio investment does not lead to capital formation in any economy in the short
term. It is necessary that our regulators and government help the companies to
exploit the situation.
END OF
CASELET
1
Caselet 2
Read the caselet carefully and answer the following questions:
5. Discuss the impact of the WTO agreements on the foreign trade of agricultural
products of India.
( 7 marks)
6. What are the reasons for declining farm sector exports despite international
demand? What are the measures you suggest to increase the exports of farm
products?
( 8 marks)
Indian economy in the current fiscal is full of excitement and enthusiasm. The
excitement was visible when it achieved an overall GDP growth of 9.4% during
2006-07 as against 9.0% during 2005-06. The Indian success story is becoming
more illustrious with rising foreign exchange reserves, record-breaking Sensex,
increased inflow of FDI and FIIs, and growing private sector participation.
The reformative polices paid well and the economy witnessed a whopping 9% plus
growth. In tandem with the initiation of reforms, India also became a founder
member of the World Trade Organization (WTO). The organization was designed to
promote free and fair trade among its member nations. The WTO talks about
multilateral trade instead of bilateral trade and is working for the promotion of
foreign trade unfolding prolific opportunities in the same. The WTO has proposed
to liberate the farm sector from the government support and open up the market for
foreign competition. WTO is ushering a new era of farm trade among its member
nations.
But the Indian farm sector at this juncture is suffering from some bottlenecks
visualized in terms of low production and productivity. Though our farm production
is increasing in absolute terms but per capita availability of food grains is declining.
The productivity or yield is less in terms of world standards and in all major crops,
Indian yield is lower than the world average.
WTO's Agreement on Agriculture (AOA) stresses on the areas of farm trade viz.,
domestic subsidies, export subsidies and market access commitments. It promotes
to reduce the role of government support. On the other hand, it also seeks to open
the national market for international competition by replacing non-tariff barriers
into customs duties and reduce it progressively. In comparative terms, India's
obligation under AOA is limited due to the low-level of subsidies against EU and
US. The expansion of market will not only be helpful for the economy for earning
foreign exchange, but will also enhance the profitability of the sector which will
serve as an incentive for the farm sector to improve the efficiency and effectiveness
levels. Production and productivity holds the key to this endeavor. The basic
objective behind the above measure is to reduce government support which could
affect the farm products price and hence the objective of free and fair trade.
The concern is the declining export percentage of agricultural products in the total
national exports. The decline in the trend is visible from 1990 to 2005. The problem
is more internal than external. Indian farm sector lacks pre and post-harvesting
management techniques. The corrections required are regarding the production,
productivity, infrastructure and research and development. To tap the potentiality of
foreign trade of farm products, the concerning issues of declining production and
productivity is to be addressed properly. The essence of opportune for foreign trade
in farming is that farmers should target global markets with their quality products.
The optimistic speculation is based on few corrections in our farm sector.
7
END OF
CASELET
2
END OF SECTION B
Section C : Applied Theory ( 20 Marks)
• This section consists of questions with serial number 7 - 8 .
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on Section C.
7. Integration of world markets led to the growth of Multinational Companies
(MNCs) and by virtue of their presence in different countries are exposed to
different cash positions, receivables and payables in different currencies. What
is the technique used by the MNCs for a better cash management? Discuss its
advantages and disadvantages in brief. ( 10 marks)
8. Write Short Notes on:
i. EXIM Bank.
ii. Law of One Price.
( 10 marks)
END OF SECTION C
END OF QUESTION PAPER
8
Suggested Answers
International Management œ I (MB341IB) : April 2008
Section A : Basic Concepts
Answer Reason
1. A Sterling denominated foreign bonds issued in the U. K. are called ”Bull dog bonds‘.
< TOP
>
2. C Outright forward rate for Rs./$
< TOP
>
Spot rate - discount = Forward rate
Spot rate = Forward rate + discount
Forward rate 39.85 / 39.93
Add discount 0.22 / 0.18
Spot rate 40.07/ 40.11
3. A A transaction in which the goods supplied do not leave the country and the payment for
< TOP
the goods is received by the supplier in India, under International Institutions aided
>
project is called deemed exports.
4. A Option in (a) would most likely cause a nation‘s currency to depreciate.
< TOP
>
5. B If the L/C issuing bank fails to indicate, whether the documentary credit is revocable or
< TOP
irrevocable, then the credit shall be deemed to be irrevocable.
>
6. B When some foreign country subsidizes its exports in order to avoid balance of
< TOP
payments problem, the importing country may impose countervailing duty
>
7. C It is not correct to say that SDRs are only used to cover current account deficit.
< TOP
>
8. B
< TOP
2
2
0.055
1 0.06
1 4
+
1 2.0446
+ ×
>
S 4
=
= 2.0496
9. B The International product life cycle theory states that innovations are generally
< TOP
concentrated in the richer and more developed countries and that in the early stage of a
>
new product, it is produced and exported by the country which introduced the
innovation.
10. C Bill buying rate is applied while buying /discounting an export bill or for converting
< TOP
the proceeds of export bills sent on collection.
>
11. B Increased imports may lead to a deficit in the current account. On the other hand export
< TOP
may cause surplus in current account. Increased liabilities of foreigners, decreased
>
claims on foreigners and decreased investment affect the capital account.
12. A Current spot rate = 82.05
< TOP
>
(1,025)
82.05 (1.05)
×
Real exchange rate (inflation adjusted) =
= 80.10
Spot rate last year = 81.90
100
80.10 = 2.25%
Real appreciation of rupee = 81.90-80.10 þ
13. D The intervention of central bank to smoothen out exchange rate fluctuations is called as
< TOP
”dirty float‘.
>
14. A In devaluation the government lowers the value of domestic currency when fixed
< TOP
exchange rate system prevails.
>
15. C Compensatory financing is an IMF programme to assist countries facing temporary
< TOP
shortfall in reserves. Options in (a), (b), (d) and (e) are not correct.
>
16. C The synthetic rates of US $/£ are
< TOP
>
9
(US $/£)
= (US$/HK$)
× (HK$/£)
bi d
bi d
bi d
1 (HK$/ GBP)
b id
=
(HK$ / US$) ×
ask
1 15.7150
7.7546 ×
=
= 2.0265.
1 15.7159
Similarly (US$/£)
=
= 2.0268.
7.7539 ×
a sk
US$/ £ = 2.0265/2.0268.
17. A • Rupee term loans for financing equity contribution: EXIM bank provides export
< TOP
credits to Indian promoters for their equity contribution to overseas joint ventures.
>
The funds are in the form of long-term credit not exceeding ten years. EXIM
bank‘s finance will be made available to Indian promoters by way of
i. Rupee term loans for financing equity contribution.
ii, Foreign currency loans/guarantees, where equity contribution is allowed by
Govt. of India out of foreign currency loan to be raised by the Indian
promoter.
• Advance payment guarantee: EXIM bank issues guarantees on behalf of exports
of turnkey projects and construction contracts. Example. Bid bond guarantee,
Advance payment guarantee, Performance guarantee etc.,
• Refinance for deferred payment exports: Deferred payment exports arise when
export proceeds are to be received after six months from the date of shipment.
EXIM bank offers hundred percent refinance facility to banks, which enables a
bank to extend deferred credit to an Indian exporter against supplier‘s credit
offered by the exporter to the overseas buyer. Capital goods, consumer durables
and industrial manufacturers can be considered for deferred credit.
• Forfaiting is a common form of financing export related receivables. It is similar
to Bill Rediscounting Scheme.
• Buyers‘ credit is given to buyers abroad to enable them to import engineering
goods from India on deferred payment terms.
18. C If there is a strong probability of positive cash flows being generated, and hence of the
< TOP
depreciation tax shield being availed, then the risk premium may be negligible, and the
>
domestic nominal risk-free rate may be used.
19. B Bill of Entry serves as evidence that the goods have actually been imported into India
< TOP
for the remittance sent in foreign currency by the ADs. Options in (a), (c), (d) and (e)
>
are documents of title to the goods and these documents are issued by carrier agents.
20. D Maastricht Treaty forms the basis for creation of European monetary union.
< TOP
>
21. D Non-trade transaction, contracts once cancelled cannot be rebooked.
< TOP
>
22. C Trade in differentiated products is called Intra-Industry trade.
< TOP
>
23. B Currency board does not have any discretionary powers over the monetary policy. The
< TOP
interest rates are automatically set by the market mechanism. Any increase in domestic
>
interest rate increases the demand for domestic currency which increases the supply of
anchor currency. The system offers stable exchange rates, which act as an incentive for
international trade and investment. A currency board does not have power to print
unlimited amounts of money due to requirement of domestic currency being backed by
reserves of anchor currency. Hence, (b) is wrong
24. B A quote in terms of U.S. dollars per unit of any other currency is called an American
< TOP
quote.
>
25. D The Canadian dollar currency is in premium against the rupee, the transaction is of
< TOP
buying nature, assuming that the exporter will be submitting the documents at the
>
beginning of the option period third month , only two months premium is given
Spot bid rate 38.71
Add 2 months premium 0.05
10
Add 2 months premium 0.05
38.7600
Add margin @ 0.10% 0.0387
Rate quoted to the customer 38.7987 ˜ 38.80
26. B Advanced Licenses are exempted from payment of basic custom duty, surcharge,
< TOP
additional customs duty anti dumping duty and safeguard duty.
>
27. C While IBRD and IFC were set up to finance profitable projects, IDA endeavors to
< TOP
finance those projects in developing countries which may not be financially profitable,
>
but indirectly may have a positive effect on the concerned economy. Hence, it is
referred to as the soft loan window of the World Bank.
28. A Vostro account means ”your account with us‘. SBI New Delhi calls the account
< TOP
maintained by Dendanske Bank, Copenhangen as Vostro account.
>
29. E Under CIF the seller pay the costs and freight necessary to bring the goods to the
< TOP
named port of destination and also procure marine insurance against the buyer‘s risk of
>
loss of or damage to the goods during the carriage.
• Under CIP the seller pays the freight for the carriage of the goods to the named
destination and procures cargo insurance against the buyer‘s risk of loss of or
damage to the goods during the carriage.
• Under DDP the seller fulfills his obligation to deliver when the goods have been
made available at the named place in the country of importation. The seller has to
bear all risks and costs including duties, taxes and other charges of delivering the
goods thereto, cleared for importation
• Under DES the seller fulfills his obligation to deliver when the goods have been
made available to the buyer on board the ship uncleared for import at the named
port of destination
• Under EXW the seller has delivered if he places the goods at the disposal of the
buyer either at the seller‘s premises or any other named place (works, factory,
warehouse etc.,)
30. B Assume we borrow Rs. 100 for 3months
< TOP
>
We should pay after 3 months (100) (1+0.065/4) = Rs.101.625
If we convert Rs. 100 into euro for investment we obtain 100/55.09 = /1.8152
If we invest £1.8152 for 3months @ 4.10%, the investment would yield
(/1.8152)(1+0.0410/4)
£1.8338 after 3 months
To prevent arbitrage,
Rs.101.625 = /1.8338 F
b
F
= Rs.55.4177˜ =55.42
b
11
Section B : Problems/Caselets
1. Spot Rs/$ 39.70 / 39.72
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>
6m forward 39.80 / 39.82
Forward market cover:
Rupee outflow after 6 month = $500,000 × 39.82
= Rs.1 99,10,000
Money market cover:
As the company has to pay dollar 6 months hence, so it will borrow in rupees, convert into
$500, 000
0.052
1
+
dollar at spot and invest in dollar.
2
Dollar amount to be invested today = $ 487,329
Rupee amount to be borrowed today = $ 487,329 × 39.72 = Rs1,93,56,708
0.11
1 2
+
Rupee outflow after 6 months = Rs1,93,56,708
= Rs.2,04,21,327
Availing cash discount
Amount to be paid if cash discount is availed = $4,95,000
Rupee equivalent of $4,95,000 at the spot rate = $4,95,000 × 39.72 = Rs.1,96,61,400
0.135
1
+
2
Rupee outflow after 6 months = Rs.1,96,61,400
= Rs.2,09,88,545
Rupee outflow under different methods:
(i) Forward market cover
œ Rs.1 99,10,000
(ii) Money market cover œ Rs.2,04,21,327
(iii) Availing cash discount œ Rs.2,09,88,545
So it is better to avail forward market, as the outflow is minimum in this case.
2. The company can invest in home currency (Can $) at 5.00% p.a., US $ at 5.25% p.a. and £ at
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6.25% p.a. for 6 months.
>
0.0500
1 2
+
I. Investment in Can$ 10,000,000 ×
= Can$10,250,000
Return after 6 months = Can$10,250,000 œ 10,000,000
= Can $250,000
II. Investment in US $
Surplus of Can$5 million is to be converted into US dollars and is invested in US dollars at
5.25%. The amount in US $ is converted into Can$ by covering at 6 month forward rate.
Can $ 10,000,000 converted into US$ at the Can $/$
10, 000, 000
0.9986
Spot selling rate =
= 10,014,020
Amount received in US$ = 10,014,020
0.0525
1
+
2
Invest at 5.25% for 6 months = 10,014,020 ×
= $10,276,888
Convert $10,276,888 into Can$ at 6 months forward buying rate of 0.9965
= $10,276,888 × 0.9965 = Can$ 10,240,919
Return after 6 months = 10,240,919 œ 10,000,000 = Can$ 240,919
12
III. Investment in £
Can $/£ spot bid rate = 0.9982 × 2.0336 = 2.0299
Can$/£ spot ask rate = 0.9986 × 2.0338 = 2.0310
Can $/£ 6 months forward bid rate = 0.9965 × 2.0246 = 2.0175
Can $/£ 6 months forward ask rate = 0.9969 × 2.0248 = 2.0185
Surplus of Can$ 10.00 million is to be converted into pounds and the amount is invested at
6.25% for 6 months by covering at 6 month forward rate. Can$10,000,000 converted into
pounds at Can$/£ spot selling rate 2.0310
10,000, 000
=
Amount received in pounds = £4,923,682
2.0310
0.0625
1
+
2
Invest at 6.25% for 6 months = £4,923,682 ×
= £5,077,547
Convert £5,077,547 into Can$ at 6 months forward buying rate of 2.0175
= £5,077,547 × 2.0175
= Can$ 10,243,951
Return after 6 months = Can$10,243,951 œ 10,000,000 = Can$ 243,951
Return on investment:
If invested locally in Can$ -- Can$250,000
If invested in US$ -- Can$240,919
If invested £ -- Can$243,951
The company should invest in Can$, since the return on investment is more when
compared to the others.
3. The various opportunities & threats of FII inflows are given below:
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>
• Some experts claim that the India growth story, driven by strong fundamentals, is behind
the huge influx. The Indian economy has remained mostly unaffected by the contagion
effect engendered by the subprime crisis.
• The most obvious positive of this inflow is the impact on the stock prices. Market
capitalization of many stocks have reached historic levels higher valuation of rupee against
$. Huge market capitalization boosts the image of Indian companies abroad. Their ratings
may be upgraded worldwide. This will help the companies in raising cheaper/funds from
the international market. Cheaper funds will ultimately increase the profitability of Indian
'companies.
• Due to huge forex inflow (mainly USD), demand for rupees increases leading to
strengthening of Rs. vs. USD. Sentiments are found against software companies (loss of
market cap from 5-11 % in top three software companies observed, incidentally during the
period the rupee appreciated by 9-10%) which saw more sell pressure due to the fear of
poor performance owing to strengthening of rupees and subprime crisis of the US.
• Such huge forex inflows swell the country's forex reserves. Accumulation of huge inflows
proves the confidence the global investors have reposed in the country. An improved
sovereign rating will result in more of Foreign Direct Investment (FDI) flowing into the
country from the developed economies.
• India's forex reserves touching an all-time high of $257 bn from $5.8 bn in 2006-07, the
confidence of foreign investors in sovereign strength is increasing as a stable and growth
momentum economy. This will have all positive effect when the government will issue
sovereign bonds. The better rating of such bonds will attract better investor and good
subscription.
• The environment created by huge forex inflows usually trigger a chain reaction which
gives rise to a slew of opportunities - ranging from job creation to new investment
opportunities. Once a country is able to minimize the flight of capital (through the portfolio
investment route), it will be able to attract FDI too. FDI leads to capital formation that will
finance new factories and infrastructure and give rise to new opportunities in the country.
• 'For a country like India which depends heavily on imports for its energy requirements, the
huge forex inflows will lead to cheaper imports. More than 70% of our petroleum products
13
are imported. The strong rupee that the huge forex inflows give rise to, will bring down
the petroleum imports bill of the country and improve the country's balance of payments
position. Of course, the appreciating rupee will perhaps going to reduce realization on our
exports, occasion some trade-off.
• UNOP report has put India in the list of moderately vulnerable countries. What has saved
these countries (India and some other Asian countries) from being at the bottom of the
barrel are the capacities of their respective economies to "absorb oil price shocks,
performing better with high or medium gross domestic product and economic growth
rates" states the UNOP report. Strengthening of the rupee will lessen the impact of
skyrocketing oil price
• India is a large transitional economy and the risk and fluctuations that may emerge during
the process of transition are certainly more severe than those of mature economy or
economies of smaller scale. In this sense, India's foreign exchange reserves, at $257 bn,
should not become a cause for concern, but rather they can provide an anchor for the
country's economic transition.
4. Even though there are advantages attached to inflow of foreign exchange but sudden influx of
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foreign exchange in large volumes will make the position uncomfortable for the government of
>
any country. The level of discomfort is higher when the country is not able to justify the reason
behind such huge inflows. Sometimes we may have to look at the other side of the coin.
• The Reserve Bank, of India is finding it difficult to cope with the problem of plenty -
plenty of foreign exchange. RBI,, Securities Exchange Board of India and Government of
India are worried about the inherent, flight-prone nature of portfolio investors. This
characteristic of portfolio investors is good enough to destabilize any economy.
• Huge forex inflows create a demand for the local currency as a result of which it
appreciates. An appreciating currency erodes the export-competitiveness of the country in
the world market. An estimate puts the loss (arising from the rupee appreciating by 11 %
vis-à-vis the USD) at Rs. 30,000 cr.
• A reasonably priced stock generally trades at a PE multiple of 10-15. As a result of huge
forex inflows, the stocks listed on Indian bourses are trading at a PE multiple of 24-28.
This implies that the valuation of stocks is stretched beyond the reasonable level. No stock
can command such a high PE multiple.
• If we ignore the fact that FII can ultimately lead to FDI in the country, then foreign
portfolio investment does not lead to capital formation in any economy in the short term.
Being short-term in nature, these foreign portfolio investments cannot be used for
purposes, which require long-term funds; for example, the country's infrastructure needs
long-term funds.
• The current inflow of foreign funds in the form of FII is both an opportunity and a threat to
our economy. It is necessary that our regulators and government help the companies to
exploit the situation.
• As the central bank of the country, the RBI is against the idea of supporting dollar by
intervening in the forex market. Instead it has taken other steps playing its role in
moderating the inflows of forex into the country. The recent announcement that six hedge
funds can operate from India is a welcome move. Hedge funds are just like mutual funds
but their investment horizon is wider than that of mutual funds. Use of interest rate options,
currency options and other derivatives by these hedge funds will cool down the volatility
associated with forex inflows. These modem derivatives, if used in an appropriate manner
will impart stability and depth to the market.
5. • Farming has a strategic position in Indian economy. The prime reason being the
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dependence of significantly larger portion of the population on it for their livelihood. More
>
than 60% population can play a decisive role in creating a demand-led growth in the
economy. They are significant for creating demand for non-farm products. Hence, it can be
said that growth and development of farming can affect the overall economic growth and
development.
• Farming also plays an important role in foreign trade of the country as an earner of foreign
exchange through exports of farm products. There are possible chances for enhancing the
trade because of the opportunities being created in the post WTO era. The main farm
products exported from India are tea, sugar, jute, oilseeds, tobacco, coffee, spices, etc.
WTO is ushering a new era of farm trade among its member nations. The Agreement on
Agriculture (AOA) clause of WTO specifically asks for creating conditions for improving
14
farm trade internationally, which can benefit India in the times to come.
• The basic objective of WTO is the promotion of free and fair trade among its member
nations. It also promotes multilateral trade in goods and services. To make the trade free
and fair, it further promotes the gradual elimination of tariff and non-tariff barriers.
Elimination of tariff barriers includes removing of import duties and non-tariff barriers
elimination includes quotas, import licensing, quantitative restrictions, etc.
• WTO's AOA talks about the issues relating to farm sector trade. The agreement on
agriculture stresses on the areas of farm trade viz., domestic subsidies, export subsidies and
market access commitments. It promotes to reduce the role of government support. On the
other hand, it also seeks to open the national market for international competition by
replacing non-tariff barriers into customs duties and reduce it progressively. The basic
objective behind the above measure is to reduce government support which could affect
the farm products price and hence the objective of free and fair trade. The opening up of
the market will promote improvement in the foreign trade of member nations.
• The WTO's AOA with its measures is offering challenges and opportunities for Indian farm
sector which is strategically in a better position to grab the emerging trade options due to
the involvement of two-third proportion of population in it. To actually realize the
opportunities, the farm sector needs to pay highest priority in the areas of bottlenecks.
• Globalization has opened up new opportunities for the Indian farm sector by way of
foreign trade. Currently India's share in the world trade is less than one percent. Due to
such a lower share, the inflow of foreign exchange coming to India is also lesser. Farm
sectors scope in foreign trade is huge with the liberalized and globalized environment. The
farm sector has even in the past played a vital role in Indian foreign trade and can also do
the same in the post reform and WTO era, once the bottlenecks are removed.
• India can export its farm products to the member nations without any restrictions. Indian
farm sector employs proportionately large number of population and in this sense is at an
advantageous position than others. It can utilize the manpower available in a prolific way
to garner the benefits of foreign trade. The economy is witnessing a structural change, the
share of the industry and services sectors in the GDP has fast increased, but the share of the
farming share in the GDP is declining, but not its vitality. The total exports value of
agriculture and allied sector is on a continuous rise.
• The WTO's AOA proposes to liberalize the international trade of farm products by
reducing farm subsidies. In comparative terms, India's obligation under AOA is limited due
to the low-level of subsidies against EU and US. It is assumed that with AOA in operation
and with reduction of subsidies by developed nations, India will be benefited in terms of
market access for farm products.
• The exact impact of the agreement is difficult to speculate, keeping in view the
implementation of the commitments by the developed industrialized nations. But at the
same time rationality suggests that due to lower, price of food grains in India, export of the
same will increase. The expansion of market will not only be helpful for the economy for
earning foreign exchange, but will also enhance the profitability of the sector. This
profitability will serve as an incentive for the farm sector to improve the efficiency and
effectiveness levels. The new opportunity can serve as a bonanza for the Indian farm
sector, if we are able to ensure its impacts in terms of positive consequences only.
Production and productivity holds the key to this endeavor.
6. The various reasons for decline of farm sector exports are given below:
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>
• The basic reason for declining farm sector exports is not due to the lack of international
demands but supply side constraints. The problem is more internal than external. The basic
problem is of inadequate production and productivity. The production is not rising at the
desirable rate and productivity (yield) is also less compared to the world standards.
• The other problem which Indian economy is witnessing is whopping population growth.
Due to the rise in population the domestic demand is also raising rapidly and hence fewer
surpluses is available for export. If production and productivity issues are not addressed it
can affect the export surplus in the coming year
• The other issue regarding the supply side constraints is the insufficient research and
development to enhance the productivity of the farm sector, which is a serious issue.
• Due to urbanization, the area under cultivation cannot be enhanced and hence there is a
need to work on to improve productivity to match the international standards. Irrigation is
15
the backbone of farming and concern for water availability has reached a critical level. The
ground water level is declining 2-3 feet every year. These issues deserve urgent attention.
• The other bottleneck is in the field of infrastructure which again is affecting the export
potentiality of the farm sector. These bottlenecks are in the form of power, port handling
facilities, delays in transportation and above all inadequacies of preservation of farm
products after harvesting. Huge amount of farm products gets destroyed in the absence of
cold chains for preservation.
Suggestions to increase the exports of farm products
• The policy makers need to work on the supply side and de-bottleneck it to realize the
potentiality of foreign trade of farm products.
• The contemporary situation needs a policy which must focus on acceleration and an around
development of farming.
• Support, encouragement and incentive schemes must be provided to the farmers for
making the farm economically viable in competitive terms.
• Market orientation policy for farming can make farm products more competitive and can
improve the exports to a great extent.
• Farming should be practiced as per the international standards. In making farming more
contemporary and comprehensive, private sector participation must be encouraged. This
can help the farmers in risk reduction and risk sharing promoting the farm products in the
international markets.
• Indian farm sector lacks pre and post-harvesting management techniques. Poor post-
harvest management can lead to loss of sizable amount of farm products and can affect the
surplus for exports. Hence, post-harvest management with updated technologies should be
encouraged.
• The essence of opportune for foreign trade in farming is that farmers should target global
markets with their quality products.
Section C: Applied Theory
7. MNCs will have multiple divisions/subsidiaries in different countries. Each of the subsidiary or
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division will have cash positions, receivables and payables in the same currencies or different
>
currencies. The composition of receivables and payables and cash can be in any combination.
One division may have huge receivables in the US dollar and hedged with a short position while
another division which has a huge dollar payable, might have hedged with a long position with
the same maturity. Similarly, one division may be having a surplus cash position while another
division in another country may be having a cash deficit and borrowing at a high cost. These
type of situations warrant proper cash management systems. To overcome these type of
problems for cash management, MNCs resort to centralized cash management system.
Advantages
i. Netting: In large MNC‘s, intra-corporate transactions among various subsidiaries of the
parent company or subsidiaries with parent corporate are a common feature. As a
consequence there will be receivables and payables among the group subsidiaries resulting
in cash inflows and outflows in different currencies. At times the inflows and outflows
between two subsidiaries may have matching maturities or may have maturity
In a centralized cash management system all cash transactions of group companies are
settled through a single point.
In such circumstances, netting is possible whereby the receivables are netted out against
payables and net cash flows are settled among the group subsidiaries.
When we are considering the transactions between the subsidiaries, leading and lagging of
receivables/ payables is possible to enable matching of maturities. Netting with other
corporate entities is also possible.
ii. Management of currency exposure: Another advantage of centralized cash management
system is exchange risk management. In a centralized cash management system, the parent
can evolve a corporate strategy for exchange risk management keeping overall position of
receivables and payables in different currencies of the various subsidiaries in mind. This
strategy will reduce the transaction cost of the hedging which otherwise would be incurred
by each subsidiary individually.
iii. Pooling of cash: Each of the subsidiary will maintain certain amount of liquid position.
Some of the subsidiaries may have surplus cash whereas some others may have a deficit.
16
In a centralized cash management system, the center may pool up the cash from surplus
subsidiaries for transfer to the deficit units. This will eliminate borrowing cost to the
deficit units. The existence of cash pooling center will reduce the burden of cash
management at the subsidiary level.
Disadvantages:
It is rarely possible to hold all cash in a major international financial centre. This is because
there may be unpredictable delays in moving funds from the financial center to other countries.
If an important payment is due, especially if it is to a foreign government for taxes or to a local
supplier of a crucial input, excess cash balances should be held where they are needed, even if
these mean opportunity costs in terms of higher interest earnings available elsewhere. When the
cash needs in local currencies are known well ahead of time, arrangements can be made in
advance for receiving the needed currency, but substantial allowances for potential delay should
be made.
Complete centralization of management is difficult because local representation is often
necessary for dealing with local clients and banks. Even if a multinational bank is used for
accepting receipts and making payments problems can arise that can only be dealt with on the
spot. Therefore, the question a firm must answer is the degree of centralization of cash
management that is appropriate, and in particular which activities can be centralized and which
should be decentralized.
8. i. EXIM Bank
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>
The EXIM Bank was set-up to finance and promote foreign trade. EXIM Bank extends
finance to exporters of capital and manufactured goods, exporters of software and
consultancy services and to overseas joint ventures and turnkey/construction projects
abroad. Term loans are also extended to projects located in export zones. The functions of
EXIM Bank are lending, guaranteeing, promotional services and advisory services.
EXIM Bank provides funds on deferred payment terms to Indian exporters of plant,
equipment and related services, which enable them to extend deferred credit to the
overseas buyer.
EXIM Bank provides export credits to Indian promoters for their equity contribution to
overseas joint ventures. The funds are in the form of long-term credit not exceeding ten
years. If the requirement of pre-shipment credit by exporters is for periods beyond 180
days, EXIM bank participates in the credit. Deemed exports can avail of EXIM bank‘s
deferred credit facility. EXIM bank may participate with commercial banks extending
rupee loans for bridging cash flow deficits of projects/supply contracts; EXIM bank also
issues guarantees and provides bridge finance in foreign currency.
EXIM bank also extends lines of credit to overseas governments or agencies nominated by
them. To enable the buyers in these countries to import capital/engineering goods from
India on deferred payment terms. Commercial banks can rediscount their short-term
usance export bills with EXIM bank.
ii. Law of one price
According to the Purchasing-Power Parity Principle (PPP). The price levels (and the
changes in these price levels) in different countries determine the exchange rates of these
countries‘ currencies. The basic tenet of this principle is that the exchange rates between
various currencies reflect the purchasing power of these currencies. This tenet is based on
the Law of One Price.
According to the law of one price, in equilibrium conditions, the price of a commodity has
to be the same across the world. If it were not true, arbitrageurs would drive the price
towards equality by buying in the cheaper market and selling in the dearer one, i.e. by two-
way arbitrage. For e.g., if the cost of steel in Germany (in dollar terms) were $300/tonne
and in the US it were $350/tonne, arbitrageurs would start buying steel in Germany to sell
it in the US. This would increase the steel prices in Germany and reduce the US prices.
This process will continue till steel becomes equally priced in both the countries.
There are three forms of PPP that emerges from the law of one price- the absolute form,
the relative form and the expectations form.
The Absolute Form of PPP
If the law of one price were to hold good for each and every commodity, then it will follow
that:
P
= S(A/B) x P
A
B
17
where
P
and P
are the prices of the same basket of goods and services in countries A and B
A
B
respectively.
The above equation can be rewritten as:
P
A
P
S(A/B) =
B
According to this equation, the exchange rate between two countries‘ currencies is
determined by the respective price levels in the two countries. For e.g., if the cost of a
particular basket of goods and services were Rs.2,125 in India and the same cost $50 in the
US, then the exchange rate between the rupee and the dollar would be 2,125/50 =
Rs.42.50/$.
The Relative Form of PPP
On the other hand, the relative form of PPP talks about the link between the changes in
spot rates and in price levels over a period of time. According to this theory, changes in
spot rates over a period of time reflect the changes in the price levels over the same period
in the concerned economies.
The Expectations Form of PPP
According to this form of PPP, the expected percentage change in the spot rate is equal to
the difference in the expected inflation rates in the two countries. This theory assumes that
speculators are risk-neutral and markets are perfect. Let the expected percentage change in
P , and
*
the spot rate be denoted by S
(A/B), the expected inflation rate in country A by
*
A
*
P . If a person buys the underlying basket of
the expected inflation rate in country B by
B
commodities in country A and holds it for one year, he can expect to earn a return equal to
*
P . On the other hand, if he decides to buy
the expected inflation rate in country A, i.e.
A
the same basket of commodities in country B, hold it for one year, and then convert his
returns in currency B into currency A at the spot rate that is expected to rule at that time
{i.e., S*(A/B)}, his expected returns will be equal to the expected inflation rate in country
*
P , plus the expected change in the spot rate. If the speculators are risk-neutral, as
B, i.e.
B
this theory assumes, then these two returns should be equal, i.e.
*
*
P =
P + S*(A/B)
A
B
*
*
P œ
P …………………….. (Eq.3)
S*(A/B) =
A
B
Eq. 3 is called the expectations form or the efficient markets form of PPP.
< TOP OF THE DOCUMENT >
18
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