Q1.

What new problems and factors are encountered in international as opposed

to domestic financial management?
International financial management faces different kind of problems and factors as
opposed to the domestic financial management. Some of them are as follows:
1. Valuation of business operations and assets in different currencies:
As multinational companies do its business in different countries, their manufacturing
units, sales units, R & D units or distribution units are located in overseas or otherwise
at least they import the goods from foreign countries. These business activities involve
transactions in other denominated currencies. At the prevailing exchange rates, foreign
receipts and payments are valued in domestic currency and thus they are made. The
fluctuations in exchange rates make the task difficult to determine the value of business
in future course. For example, the Dollar/Pound exchange rate is currently 1.68 and
company has receivable of 1,000,000 after 3 months. On receipt date the exchange
rate goes down to 1.54, then business will suffer loss to the tune of 14,000. So it makes
the company difficult to make further planning or budget in accordance with current
situation.
2. Delay in retrieval of relevant information
The world wide scale of operations makes the business related information large in size.
Thus maintaining all business related relevant information in sequential manner and
make it easily accessible and quickly retrievable becomes a great challenge for the
business. Quick and correct information plays a vital role in making decision for further
actions. In its absence, company may reach at the verge of dilution.
3. Communication gap
Due to large diversity and multi level work, it is always a pressure of synchronizing all
the relevant information for decision making process and smooth functioning of
business. Thus incident of communication gap always occurred.
4. Difficulty in planning, control and coordination
Again due to cross border business activities, difficulties arise in proper planning,
control over different activities and coordinate with the key people. The different
working environment, working culture and different way of approaching to a solution
by the key people makes difficult to coordinate and control over the business.
5. Cultural and social diversity
The culture, society and political environment vary from country to country. Thus the
perception about the company and its product, their taste and behavior towards the
companys working policy would be different and in result it affect the overall
performance of the business. Thus company should adopt different policies and rules
for different countries.
6. Government policies and economical condition
Since company works in different economy, it faces the different economical up and
downs and government policies. In some countries government may be liberal for a
particular policy or economical condition may get favorable but it may reverse for other
countries. The availability of production facilities, raw material or worker has direct
bearing on the profitability of the firm. Any changes may result creating complexity or
barrier for the business operation.
7. Uncertainty with resources:
The different terms and conditions of availability of financial resources may create both
opportunity and risk for the company involved in overseas business.
8. Balancing Gap
To achieve the proper balance between the centralization and decentralization of work,
strategies and planning becomes more difficult to perform international business and
thus company do more focus on it for proper execution and bridging the gap.
9. Transportation
Transportation problem would be obviously raised due to large distances.

Q2. What does the term arbitrage profit mean?
Arbitrageur can make riskless profits called arbitrage profit by borrowing in the
cheaper currency and investing in the costlier, using the forward market to lock-in his
profits. The arbitrageur would borrow in the foreign currency, convert the receipts to
the domestic currency at the on-going spot rate, and invest in the domestic currency at
the on-going spot rate, and invest in the domestic currency denominated securities,
while covering the principal and interest from this investment at the forward rate. At
maturity, he would convert the proceeds of the domestic investment at the prefixed
forward rate and pay-off the foreign liability, with the difference between the receipts
and payments serving as his arbitrage profit.

Q3. What does interest rate parity refer to?
The purchasing power parity (PPP) gives the equilibrium conditions in the commodity
market. Its equivalent in the financial markets is a theory called the Interest rate parity
(IRP) or the covered interest parity condition. According to this theory, the cost of
money (i.e., the cost of borrowing money or the rate of return on financial investments),
when adjusted for the cost of covering foreign exchange risk, is equal across different
currencies. This is so, because in the absence of any transaction costs, taxes and capital
controls, investors and borrowers will tend to transact in those currencies which
provide them the most attractive prices.

Q4. Use the following data in your response to the remaining questions:
An American business needs to pay a) 15,000 Canadian dollars b) 1.5 million yen c)
55,000 Swiss francs to businesses abroad. What are the dollar payments to the
respective countries?
Solution: Dollar payment to Canada = 15,000*0.8450 = $12,675
Dollar payment to Japan = 1,500,000*0.0047 $7050
Dollar payment to Switz = 55,000*0.5150 = $28,325

Q5. An American business pays $20,000 $5,000 and $15,000 to suppliers in Japan,
Switzerland, and Canada, respectively. How much, in local currencies, do the
suppliers receive?
Solution: Payment in Japanese yen = $20,000/0.0047 = 4255319.15
Payment in Swis franc = $5,000/0.5150 = 9708.73
Payment in Canada Dollar = $15,000/0.8450 = 17751.38
Q.6 Compute the indirect quote for the spot and forward Canadian dollar
contract.
Solution: Indirect Canadian Quote:
For Japanese Yen,
Spot = 1/0.0047*0.8450 = 179.7872
30-Day = 1/0.004750*0.8415 = 177.1579
90-Day = 1/0.00482*0.8390 = 174.0664
For Switzerland franc,
Spot = 1/0.5150*0.8450 = 1.6408
30-Day = 1/0.5182*0.8415 = 1.6239
90-Day = 1/0.5328*0.8390 = 1.5747
Q7. Exchange rate in Tokyo is 216.6752. The yen rate in New York is given in the
preceding table are arbitrage profits possible? Set up an arbitrage scheme with
your capital. What is the gain in dollars?
Solution: Purchase Japanese yen = 10,000*216.6752 = Yen 2166752
Purchase spot Swis franc = 2166752*0.0047/0.5150 = 19774.24
Convert into US Dollar = 19774.24*0.5150 = $10183.73
Gain = $10183.73 - $10,000 = $183.73

Q9. Compute the Canadian dollar/yen spot rate from the data in the preceding
table.
Canadian dollar/Yen spot rate = 0.0047/0.8450 = 0.00562