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ASSIGNMENT SOLUTIONS GUIDE (2014-2015)

I.B.O-6
International Business Finance
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the
Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Auhtors for the help and Guidance
of the student to get an idea of how he/she can answer the Questions of the Assignments. We do not claim 100% Accuracy
of these sample Answers as these are based on the knowledge and cabability of Private Teacher/Tutor. Sample answers
may be seen as the Guide/Help Book for the reference to prepare the answers of the Question given in the assignment. As
these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied.
Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/
Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer & for up-to-date and exact
information, data and solution. Student should must read and refer the official study material provided by the university.
Q. 1. (a) What are different money market instruments? Explain their purpose and features.
Ans. As money became a commodity, the money market became a component of the financial markets for assets
involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the
money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and
short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money
markets and capital marketsare parts of financial markets. The instruments bear differing maturities, currencies, credit risks,
and structure. Therefore they may be used to distribute the exposure. Treasury bills, federal agency notes, Certificates of
Deposit (CDs), eurodollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of
instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the
highest liquidity and the lowest risk. The money market is important for businesses because it allows companies with a
temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell
securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds. Large
corporations generally handle their own short-term financial transactions; they participate in the market through dealers.
Small businesses, on the other hand, often choose to invest in money-market funds, which are professionally managed
mutual funds consisting only of short-term securities. Although securities purchased on the money market carry less risk
than long-term debt, they are still not entirely risk free. After all, banks do sometimes fail, and the fortunes of companies can
change rather rapidly. The low risk is associated with lender selectivity. The lender who offers funds with almost instant
maturities (tomorrow) cannot spend too much time qualifying borrowers and thus selects only blue-chip borrowers. Repayment therefore is assured (unless you caught Enron just before it suddenly nose-dived). Borrowers with fewer credentials, of course, have difficult getting money from this market unless it is through well-established funds.
Types of money market instruments
Treasury Bills: Treasury bills (T-bills) are short-term notes issued by the U.S. government. They come in three
different lengths to maturity: 90, 180, and 360 days. The two shorter types are auctioned on a weekly basis, while the
annual types are auctioned monthly. T-bills can be purchased directly through the auctions or indirectly through the
secondary market. Purchasers of T-bills at auction can enter a competitive bid (although this method entails a risk that the
bills may not be made available at the bid price) or a noncompetitive bid. T-bills for noncompetitive bids are supplied at
the average price of all successful competitive bids.
Federal Agency Notes: Some agencies of the federal government issue both short-term and long-term obligations,
including the loan agencies Fannie Mae and Sallie Mae. These obligations are not generally backed by the government, so
they offer a slightly higher yield than T-bills, but the risk of default is still very small. Agency securities are actively traded,
but are not quite as marketable as T-bills. Corporations are major purchasers of this type of money market instrument.
Short-Term Tax Exempts: These instruments are short-term notes issued by state and municipal governments.
Although they carry somewhat more risk than T-bills and tend to be less negotiable, they feature the added benefit that the

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interest is not subject to federal income tax. For this reason, corporations find that the lower yield is worthwhile on this
type of short-term investment.
Certificates of Deposit: Certificates of Deposit (CDs) are certificates issued by a federally chartered bank against
deposited funds that earn a specified return for a definite period of time. They are one of several types of interest-bearing
time deposits offered by banks. An individual or company lends the bank a certain amount of money for a fixed period
of time, and in exchange the bank agrees to repay the money with specified interest at the end of the time period. The
certificate constitutes the banks agreement to repay the loan. The maturity rates on CDs range from 30 days to six months
or longer, and the amount of the face value can vary greatly as well. There is usually a penalty for early withdrawal of
funds, but some types of CDs can be sold to another investor if the original purchaser needs access to the money before
the maturity date.
Large denomination (jumbo) CDs of $100,000 or more are generally negotiable and pay higher interest rates than
smaller denominations. However, such certificates are only insured by the FDIC up to $100,000. There are also eurodollar
CDs; they are negotiable certificates issued against U.S. dollar obligations in a foreign branch of a domestic bank.
Brokerage firms have a nationwide pool of bank CDs and receive a fee for selling them. Since brokers deal in large sums,
brokered CDs generally pay higher interest rates and offer greater liquidity than CDs purchased directly from a bank.
Bankers Acceptances: A banker's acceptance is an instruments produced by a nonfinancial corporation but in the
name of a bank. It is document indicating that such-and-such bank shall pay the face amount of the instrument at some
future time. The bank accepts this instrument, in effect acting as a guarantor. To be sure the bank does so because it
considers the writer to be credit-worthy. Bankers acceptances are generally used to finance foreign trade, although they
also arise when companies purchase goods on credit or need to finance inventory. The maturity of acceptances ranges
from one to six months.
Repurchase Agreements: Repurchase agreements-also known as repos or buybacks-are Treasury securities that are
purchased from a dealer with the agreement that they will be sold back at a future date for a higher price. These agreements are the most liquid of all money market investments, ranging from 24 hours to several months. In fact, they are very
similar to bank deposit accounts, and many corporations arrange for their banks to transfer excess cash to such funds
automatically.
Commercial Paper: Commercial paper refers to unsecured short-term promissory notes issued by financial and
nonfinancial corporations. Commercial paper has maturities of up to 270 days (the maximum allowed without SEC
registration requirement). Dollar volume for commercial paper exceeds the amount of any money market instrument
other than T-bills. It is typically issued by large, credit-worthy corporations with unused lines of bank credit and therefore
carries low default risk.
(b) How is exchange rate determined under the gold standard? What are the limitations of gold standard?
Ans.Towards the end of the 19th century, some silver standard countries began to peg their silver coin units to the
gold standards of the United Kingdom or the US. In 1898, British India pegged the silver rupee to the pound sterling at a
fixed rate of 1s 4d, while in 1906, the Straits Settlements adopted a gold exchange standard against sterling, fixing the
silver Straits dollar at 2s 4d.
Around the start of the 20th century, the Philippines pegged the silver peso/dollar to the U.S. dollar at 50 cents. This
move was assisted by the passage of the Philippines Coinage Act by the United States Congress on March 3, 1903.
Around the same time Mexico and Japan pegged their currencies to the dollar. When Siam adopted a gold exchange
standard in 1908, only China and Hong Kong remained on the silver standard.
When adopting the gold standard, many European nations changed the name of their currency from Daler (Sweden
and Denmark) or Gulden (Austria-Hungary) to Crown, since the former names were traditionally associated with silver
coins and the latter with gold coins.
A monetary system in which a countrys government allows its currency unit to be freely converted into fixed amounts
of gold and vice versa. The exchange rate under the gold standard monetary system is determined by the economic
difference for an ounce of gold between two currencies. The gold standard was mainly used from 1875 to 1914 and also
during the interwar years. The use of the gold standard would mark the first use of formalized exchange rates in history.
However, the system was flawed because countries needed to hold large gold reserves in order to keep up with the volatile
nature of supply and demand for currency. After World War II, a modified version of the gold standard monetary system,
the Bretton Woods monetary system created as its successor. This successor system was initially successful, but because
it also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon closed the gold window.

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The gold standard is the controversial practice of backing a national currency with the value of gold. Currency on the
gold standard could be redeemed for an equal amount of gold at any time since the currency is essentially a promissory
note for the precious metal. Advocates of the gold standard say it gives real value to currency instead of the imaginary
value of currency today. Detractors say the gold standard is too rigid and restricts economic policy in times of financial
turmoil.
A disadvantage of the gold standard is that there is a limited supply of gold. If nations can only print as much currency
as they can back with gold, there could be a shortage of money.
Q. 2. (a) Why do Central Banks intervene in the foreign exchange market? What are the consequences of
intervention?
Ans. The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange
markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and
retail forex brokers and investors. The forex market is considered to be the largest financial market in the world. Hence
central banks keep on changing their policies and actions regarding increasing and decreasing its foreign reserves to
strengthen its economy. Intervention of central banks in foreign exchange markets allow the economy to control inflation,
interest rates, valuation of their own currency, management of their foreign assets, investment and hence directly impact
the monetary policy of a country.
There are various motives of different central banks behind intervening in the currency market. For example, RBI has
by and large stayed away from the currency market in the recent years and has allowed the rupee to find its own value in
the marketplace depending on the host of market forces. However, it does intervene in the market to curb excess volatility.
These interventions also help check excessive speculation on the either side in the currency market. Though the approach
of the Indian central bank is a classic textbook approach, which allows market forces to determine price, but can be
contested, as the conditions in the financial market are extremely volatile and may warrant an active management in order
to reduce the volatility and the external sector vulnerability. However, a lot of central banks intervene in the market with
the idea of influencing the value of the domestic currency. Ways of intervention There could be different ways by which
central banks may influence the exchange rate. The biggest central bank that makes direct interventions to rig the value of
domestic currency on regular basis is the Chinese central bank, Peoples Bank of China. Over the years it has not allowed
its currency to appreciate and find its market value and has pegged it to the US dollar to remain competitive in the exports
market. As a consequence, it has accumulated foreign exchange reserves in excess of $3.5 trillion. The other way of
indirectly intervening in the currency market is by increasing the supply of the domestic currency.
(b) Explain the terms with examples: Bid rate and Offer rate
Ans. The term bid refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any
given time. The term ask refers to the lowest price at which a seller will sell the stock. The bid price will almost always
be lower than the ask or offer, price. The difference between the bid price and the ask price is called the spread. The
bid is the price at which the market would buy the currency pair (before any commissions or fees), theoffer (or ask) is the
price at which the market would sell the currency pair (before any commissions or fees).
Most market participants have no difficulty in determining the bid from the ask when they are dealing in their
domestic or home currency. However, confusion usually prevails when doing a trade in a currency pair that differs from
your standard foreign exchange requirements or if you happen to execute a trade in a currency that is not your home unit.
For example, with AUDUSD, one would buy AUD from the customer on the bid, thereby selling them USD. Alternatively, one would sell (or offer) the unit currency, AUD, on the offer and buy the second currency; USD.
Q. 3. What is cost of equity capital? Why is it calculated? Explain the two models of calculating cost of equity
capital?
Ans. Cost of equity refers to a shareholders required rate of return on an equity investment. It is the rate of return that
could have been earned by putting the same money into a different investment with equal risk. Cost of equity is a key
component of stock valuation. Because an investor expects his or her equity investment to grow by at least the cost of
equity, cost of equity can be used as the discount rate used to calculate an equity investment's fair value.
Both cost of equity calculation methods have advantages and disadvantages.
The dividend growth model is simple and straightforward, but it does not apply to companies that don't pay dividends, and it assumes that dividends grow at a constant rate over time. The dividend growth model also quite sensitive to
changes in the dividend growth rate, and it does not explicitly consider the risk of the investment.
CAPM is useful because it explicitly accounts for an investments riskiness and can be applied by any company,
regardless of its dividend size or dividend growth rate. However, the components of CAPM are estimates, and they

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generally lead to a less concrete answer than the dividend growth model does. The CAPM method also implicitly relies on
past performance to predict the future.
The basic formula for calculating the cost of equity capital involves a few simple figures that are easily extracted
from the financial data relevant to the period cited. In order to determine the cost of equity capital, it is necessary to know
three specific figures. First, the current market value associated with the shares must be determined. Second, the dividend
growth rate as it relates to the period under consideration must be calculated. Last, the number of dividends per share
should be identified. Once these three pieces of information are in hand, it is possible quickly calculate the current
figure.The basic formula begins with dividing the dividends per share by the current market value. The resulting number
is added to the dividend growth rate. After adding the two figures, the cost of equity capital as it relates to the shares is
revealed, and can be reported to the shareholders.
Companies tend to use this basic formula on an ongoing basis, taking into account any new data that may have come
to light since the previous financial period. Monitoring the cost of equity capital is one of the tools that is used to make
sure that the shareholders are protected, and also that the best interests of the company are served. Because the formula is
so simple, the harder part of the process is to gather the needed data. However, once the figures are in hand, it takes no
time to determine the current cost of equity capital.
Investors who are able to access the three basis figures needed to calculate this number can also make use of this
simple formula as well. The data needed is often included in financial reports to investors, or can be obtained by speaking
with financial analysts. As a quick and easy way to check on the status of the shares, the cost of equity capital does in an
indirect way help to ensure the investor that the shares are being managed properly and the investment remains sound.
The cost of equity is a return percentage a company must offer investors to spark investment in the company. This is
an important measure, because an investor will only invest if he believes he will receive his desired rate of return.
Managers also use this measure to calculate weighted-average cost of captial (WACC). WACC calculates the average
cost the company needs to pay to raise capital through equity and debt.
Q. 4. Explain the most commonly used shipping documents in international trade?
Ans. Shipping documents are the key to international trade, and have been used for thousands of years. Documents
outline the sale, shipment, and responsibilities of each party so that the full transaction is understood and complete
without delay or additional costs. Documents also ensure compliance with applicable regulations.
The invoice and bill of lading are the two documents required for every export shipment. As such, you should ensure
that all other documents associated with the shipment match the information on these documents.
Pro-forma Invoice: A pro-forma invoice is an invoice sent to the buyer before the shipment, giving the buyer a
chance to review the sale terms (quantity of goods, value, specifications) and get an import license, if required in their
country. It also allows the buyer to work with their bank to arrange any financial process for payment. For example, to
open a Documentary Credit (Letter of Credit), the buyer's bank will use the pro-forma invoice as a source of information.
The exporter/seller should not send their customer a pro-forma invoice unless they fully understand what they are offering
to the buyer. If no changes are required on the pro-forma invoice after the buyer reviews it, the exporter can simply change
its date and title and turn it into a commercial invoice.
Commercial Invoice: A commercial invoice is prepared by the seller/exporter and addressed to the buyer/importer,
and is one of the first documents prepared when a transaction has been agreed upon. The invoice identifies the buyer and
seller, describes the goods sold and all terms of sale, including IncoTerms, payment terms, relevant bank information,
shipping details, etc. An invoice may be itemized to show cost of goods, freight, and insurance, or other special handling.
The invoice may be numbered and have multiple purchase order numbers. U.S. Customs does not actually need a copy
of the invoice, unless requested, but the information included is used to prepare other documents.
Consular invoice: A consular invoice is the commercial invoice stamped or notarized by the consulate or embassy of
your customer's country, if required. For example, if you are exporting to Egypt and your buyer requires a consular
invoice, the Egyptian embassy in Washington, D.C. will do this for a small fee. Usually a freight forwarder will offer this
service, but an exporter can end the original invoice to the consulate, have it notarized/legalized as required, pay the fee,
and have the documents returned or forwarded on. It is important to understand that consular invoices are required in the
buyer's country, so you need to add the time/costs associated with obtaining one to the price of the goods you are shipping.
Q. 5. (a) Differentiate between project export and service export.
Ans. There are many professional companies undertake contracts for designing, manufacturing, supply, erection,
commissioning, etc. When they earn foreign currency on their sale, they falls under Project exporters and eligible of all
assistance and support as project exports. Contracts for export of goods against payment to be received partly or fully

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beyond the period statutorily prescribed for realization of export proceeds are treated as deferred payment exports. Ordinarily, contracts providing for deferred payment terms will be allowed only for export of engineering goods (capital
goods and consumer durables). Turnkey projects involve rendering of services like designing, civil construction and
erection and commissioning of plant/factory along with supply of machinery, equipment and materials. If an exports
through a merchant exporter or manufacturer export, we can see the Difference between Deemed exporters export
product tangibly. But there are many servicing industry where we cannot see the product physically, but helps to earn
foreign exchange. A best example of service exporter is those who export software. Here while selling software to other
countries, our country earn foreign exchange. Tourism, Software, Health Care, Consultancy, Hotels, etc. are other examples for service exports. Export of services may also involve supply of some associated mechanical wherewithals,
consumables and spares e.g. contractors may generally have to procure tools and instruments for their own personnel for
performing their jobs. They may sometimes be called upon to give performance guarantees but the scope of such guarantees would be limited to their own work.
(b) What are the factors that influence the worldwide capital structure of MNCs?
Ans. The dynamics of the international business environment are driven by complex combinations of these factors.
As such, it is always important to consider the implications of country-specific investment climate when making operational and strategic decisions for a multinational corporation.
Political factors concern government policies, laws and administrative orientations of different countries and regional economic blocks. The political factors form the basis for regulating international trade with respect to tariffs,
quotas and technical standards. For example, the European Union has regulations that guarantee preferential trade treatment for member countries. Political stability is also an important aspect of the international business environment.
Frequent political unrest and military coups could force a multinational cooperation to suspend or close operations. Rates
of economic growth influence the levels of demand for your goods or services in international markets. However, economic growth rates may be high in some countries and low in others.
The availability of technological infrastructure and technical capacities determine the prosperity of a multinational
corporation in host countries. Factors such as broadband connectivity and technical training have become essential ingredients of successful operations in the modern business world. Moreover, the levels of technological developments in a
given country determine the scope of technical understanding among its population. While it may be easier to establish
and maintain technical operations in high-technology countries, the same cannot be said of low-technology countries.

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