To examine the impact of such factors as exchange rates, inflation rates and interest rates on the performance of firms and to assess their significance in decision making in an international...

Module Title International Financial Management Level 7
Title of Assignment RKC Assignment 2 Delivery 2 2016_17
Programmes
undertaking the
assignment

Various Business and MScs
Hand-out date Week 1 Delivery 2 2016_17
Hand-in date Week 3
Feedback date Week 5
Weighting within the
module
50%
Word limit/presentation
criteria
3,000
Learning Outcomes to
e assessed
(from module spec.)



1. To examine the impact of such factors as exchange rates,
inflation rates and interest rates on the performance of firms
and to assess their significance in decision making in an
international market/global context
2. To critically evaluate principles and practices guiding financial
management of the multinational enterprise
3. To explore factors that differentiate multinational from
domestic financial management
4. To devise a risk management strategy to measure and hedge
against variation in global financial market prices including
financial crises
5. To prepare students for the high risk high return environment
of international finance
Details of the task


As specified
Assessment criteria



Level 7
Outstanding 90-100%
Excellent 80-89%
Very good 70-79%
Good 60-69%
Satisfactory 50-59%
Unsatisfactory 40-49%
Inadequate 30-39%
Poor 20-29%
Very poor 10-19%
Extremely poor 0-9%




RKC Assignment 2 Delivery 2 2016_17
International Financial Management

Notes:
 Your answers are marked in accordance with the University’s grade descriptors as
distributed during the course taking into account that your answers are under
assignment conditions.

 Pay particular attention to the regulations on plagiarism. We are assessing your
ability to develop your own explanations and evaluations. Referencing should at most
play a minor part in your answers.
 The word limit is 3000, marks awarded for each section are an approximate
indication of the number of words appropriate for the requirement (e.g. 10 marks 300
words or 30 words per mark).

 Make sure that you provide FULL ANSWERS to the question that CLEARLY
EXPLAIN your answer to the question. Answers without an adequate explanation will
eceive a fail mark.

 When evaluating or discussing you are expected to consider all aspects and
conclude with a reasoned judgement.




Please answer ALL questions

1. “The central bank of Argentina decided to leave its LEBAC (Argentine Central Bank's
Bills of Exchange and Securities) … reference interest rate unchanged at 30.25 percent
on July 12th 2016.” www.tradingeconomics.com. The comparable risk free (in monetary
terms) interest rates in the UK was 1%. The exchange rate was GBPARS 19.23

a. Explain why investment in Argentina is not necessarily going to yield higher
eturns than investment in the UK. Your explanation should make reference to
the relevant theory.
(6 marks)


. What are the risks and benefits from undertaking a ca
y trade between the
UK and Argentina?
(6 marks)

c. How might derivatives protect the interests of a company that imports beef
from Argentina given the news about the interest rate.
(6 marks)

Solutions:

a. Yield on investment in a foreign country doesn’t depend on interest rates only
as when you analyse yield based on interest rates only, you miss on one very
important factor that is inflation in that country. So, it is important to
incorporate inflation rate of the foreign country to determine the real yield.

When you invest in a foreign country, you convert your cu
ency into foreign
cu
ency. Since you convert your cu
ency, cu
ency exchange rates are also
involved and you need to analyse the rates as well. As per purchasing power
parity, exchange rate between two cu
encies depends upon interest rate &
inflation rate of the countries. The theory states that, if interest rate in one
country is higher than the other country, the first country’s cu
ency will
appreciate. Similarly, if interest rate in the first country is higher than the other
country, cu
ency of the first country will depreciate against the other
country’s cu
ency.

In the given scenario, nominal Interest rate in Argentina is 30.25% and
Nominal Interest rate in Britain is 1%. According to fisher effect, it is said that
eal interest rate is always same in all countries but because of inflation the
nominal interest in countries differ. If interest rate in Argentina is higher than
Britain then inflation rate in Argentina would also higher than Britain.

Cu
ent exchange rate between GBP and ARS is 19.50 ARS per GBP, which
means that to purchase 1GBP, an Argentinian investor has to spend 19.50
ARS. Since real interest rate is similar in both countries, investment in
Argentina is not necessarily going to yield higher returns than investment in
the UK.

. A ca
y trade is a trading strategy in which a trader bo
ows funds in a country
that has relatively lower interest rates and the funds received are used to
invest in a country that has higher interest rates. Under this strategy, a trader
typically bo
ows cu
ency with lower interest rates and then buys cu
ency
with higher interest rate. In this strategy, a trader tries to gain profits from the
difference between the interest rates.

In this given scenario, to undertake a ca
y trade, a trader would bo
ow
British pounds and convert it into ARS. Then, received ARS will be invested in
Argentina yielding Argentina’s interest rates.


Benefits: There are two kinds of benefits that can be attained under a ca
y
trade. The first and primary benefit is profit from interest rate differential. In
the given scenario, since there...