Narsee Monjee Assignments April 2022 The changing global e

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International Finance

1. The changing global economic environment and a number of market related factors cause the exchange rates to fluctuate constantly. This poses a challenge to the MNCs operations in multiple countries in terms of foreign exchange risk. Describe what your understanding of forex risk is. How can you classify the different forex risks? Give an example for each classification of the forex risk (10 Marks)

2. Suppose that you are a manufacturer of textiles and you are planning to expand your business by capturing the export markets in Europe and African regions. In terms of operational issues relating to the carriage and delivery of goods, you are ought to be aware of various trade practices followed in different countries. In this regard, explain various INCOTERMS published by International Chamber of Commerce that make it easier for a common interpretation. (10 Marks)

3. A trader collects the below information to devise his forex management strategy during the next year:

Spot Rate of USD: INR 74.40
Interest rates in USA: 2.5%
Interest rates in India: 6.5%

a. What is Interest Rate Parity Theory? What will be the expected exchange rate in the above case, if the interest rate parity theory is assumed to hold good. Also calculate the forward premium or discount. (5 Marks)

b. What is covered interest arbitrage? If there is a one-year forward contract available at INR 75.60, is there a CIA possible, and if yes, write the steps to earn arbitrage profit (use an equivalent amount of INR 1000000) (5 Marks)

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