International Finance SEPT 2021 -

International Finance

September 2021 Examination

The forecasting of exchange rates is a tricky process that requires both subjective as well as analytical inputs. Having said that it is an essential skill for the manager of an internationally operating firm. There are theoretical methods as well as statistical/analytical methods to forecast the same. Describe various techniques of forecasting the exchange rates, as well as, your recommendation on which method would you use in forecasting the forex rate, let’s say forecasting Indian rupee per U.S. dollar. (10 Marks)

Ans 1.

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Spot Rate of £ = $1.39, 90-day forward rate of £ = $1.47

180-day British Interest Rate = 4%, 180-day US Interest Rate = 3%

Explain how an arbitrageur can design a strategy? (10 Marks)

Ans 2.

Fortune Ltd is a U.S. based multinational corporation has its subsidiary in India and David Brothers Ltd is a New Delhi based company has its subsidiary in New York. Both companies have a requirement to raise funds for their subsidiaries for working capital needs. Fortune Ltd requires INR 50 million whereas David Brothers Ltd requires USD 75 million at the current spot rate of INR 72.93/USD. Fortune Ltd can issue three year Bonds in U.S. capital market at 12% fixed rate and three year bonds in the India at LIBOR + 0.1%, i.e., floating rate. David Brothers Ltd can issue three year U.S. bonds in U.S. market at 13.40% fixed rate and INR Bonds in India at LIBOR + 0.6%, i.e., floating rate. Fortune Ltd is almost preferring to go with borrowing in India and David Brothers is about to finalize a proposal to issue bonds in U.S.