FIN518_201315_CM_I-17_December_2012-Version_1

FIN518 - International Financial Management Term 2 2013 Faculty of Business School of Accounting and Finance Economic and Finance Institute Internal Mode Subject Coordinator Deirdre Keogh

Subject Overview Welcome to a new session of study at Charles Sturt University. The subject examines financial decision making in the international environment. Topics covered include foreign exchange, international finance markets, risk management in international finance and foreign investment analysis in international business. Assumed knowledge for this subject is equivalent to that covered in FIN516 or FIN530.

Introduction Welcome to a new session of study at Charles Sturt University. The subject examines financial decision making in the international environment. Topics covered include foreign exchange, international finance markets, risk management in international finance and foreign investment analysis in international business. Assumed knowledge for this subject is equivalent to that covered in FIN516 or FIN530. Introduction This subject extends financial management to an international context and is an essential component of international business studies. On the one hand there are opportunities for risk reduction through international diversification; on the other hand there is exposure to risks - such as foreign exchange risk - not normally encountered in a domestic setting. The ultimate aim of the corporate finance function remains unchanged: to maximise shareholder wealth. To this end decisions must be made on the most profitable investment mix and most cost effective means of financing those investments. Such decisions are always central to business success or failure and in an international context may assume global strategic significance. They are decisions necessarily restricted to the upper echelons of management, requiring expert analytical input from trained professionals making the practice of international corporate finance an increasingly specialist function offering a rewarding and challenging career path. The globalisation of finance, coupled with the increasing importance of the financial centres of Hong Kong, Singapore and Sydney has also created exciting opportunities for those seeking careers within financial institutions. Finance is a dynamic and innovative industry that can be expected to play an increasingly important role in the creation of national and regional wealth. In the undertaking of major infrastructure projects, the critical challenges for countries and companies are more likely to involve matters of finance than of engineering technology. It is against this background that we commend this subject to you and hope you will find it both challenging and rewarding. The subject will equip you with both an insight into the nature and potential of international finance and a qualification for new career opportunities.

Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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Aims This subject aims to extend your understanding of financial management to an international context, including the application of economic analysis to international issues and the development of a general understanding and awareness of recent institutional developments in international economic relations. Students who complete this subject should attain the following: An understanding of the basis concepts and terms in International financial management. A thorough knowledge of foreign exchange markets and the techniques available for managing foreign exchange risk and exposure. An understanding of the issues involved in multinational firm financing An understanding of the issues involved in foreign investment decisions and in managing the multinational corporation.

Your subject coordinator Deirdre Keogh

Other teaching staff Mr Valliapan Kasi ([email protected])

Subject author(s) Subject materials in this subject have been extensively revised this time by Dr. P K Basu and Dr. Alfred Wong in 2010.

Learning objectives - Be able to demonstrate a working knowledge of basic concepts and terms in international finance; - Be able to explain the functions and operation of international financial markets; - Be able to derive exchange rate values in spot and forward markets; - Be able to evaluate and apply risk management procedures to problem solving in international finance; - Be able to evaluate alternative foreign investment proposals; - Be able to debate strategic issues associated with foreign investment.

Learning outcomes Upon completion of this subject, you should be able to demonstrate competencies in technical, computational and analytical skills associated with corporate investment and financing decisions in an international context: You would also learn critical and evaluative skills relating to: • the role of corporate finance and treasury functions within profit-seeking organisations engaged in international transactions; • the role of international capital markets; • government of the international financial system; • key issues (including ethical considerations) associated with international investment and financing decisions; • ways in which accounting and finance practices are implicated in social and organisational functioning; and • the nature of corporate finance theory and resource in an international context.


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You should understand that critical and evaluative skills can only be developed to the required level through extensive study of, and reflection on, relevant literature. To assist students in this aspect of their studies, a set of readings has been incorporated into the study material for this subject. The readings cover the majority of the principal topics and students are urged to make the most of this resource. You will also develop communication skills in terms of written presentation.

Contact Procedures Academic enquiries Any questions concerning the teaching of this subject can be made by contacting your subject coordinator.

Subject Coordinator Deirdre Keogh Email [email protected] Phone (02) 63384243 Fax (02) 63384769 Campus Bathurst Building/Room number C2/320

Consultation procedures To be announced.

Minimum standards of consultation According to the Minimum Standards for Communication with Students Policy ( http://www.csu.edu.au/acad_sec/academic-manual/docs/p8.pdf), students can expect that the subject coordinator or nominee of the distance education forums will respond to their postings at least once a week during the teaching weeks of the session.

Contact procedures Academic enquiries Any questions concerning the teaching of this subject can be made by contacting your subject coordinator. Email: Mr Valliapan Kasi ([email protected])

Subject Delivery Class/tutorial times and location Seminar will be conducted by EFI facilitator Mr Valliapan Kasi on 5 - 6 January 2013. As per the schedule prepared by EFI, Phnom Penh, Cambodia, the Institute will inform you of lecture / tutorial times and location in due course.

Learning, teaching and support strategies To support your studies a Study Guide for this subject has been specifically written to guide you through the prescribed sections of the textbook as outlined in the study schedule below. You should use this schedule to plan your studies over the session. Information on effective time management is available on the CSU Learning Skills website via the following link: http://www.csu.edu.au/division/studserv/learning/student_resources Visit the Learning Skills website for advice about assignment preparation, academic reading and note taking, referencing, effective time management and preparing for exams at:


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http://www.csu.edu.au/division/studserv/learning

Student Workload CSU Academic Senate policy states that a standard 8 point subject should require students to spend a total of between 140-160 hours engaged in the learning and assessment activities. This means an average of 10 - 12 hours each week. This subject has been developed to comply with this policy.

Subject Content This subject contains the following topics: Introduction to International financial management Topic 1 The international monetary system Topic 2 The foreign exchange market Foreign Exchange and Interest Rate Exposure Topic 3 Measuring and managing transaction exposure Topic 4 Operating exposure Topic 5 Interest rate risk management and currency swaps Financing the Multinational Firm Topic 6 Global capital markets Topic 7 International debt & equity markets The Foreign Investment Decision Topic 8 Foreign investment theory Topic 9 Multinational capital budgeting Topic 10 GFC and Multinational firms Topic 11 Corporate governance in a globalised world


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Schedule Topic Topic Content

1

The international monetary system

Readings

Madura, Chapter 6. Reading 1: Butler, C. K. (2004). World Trade and the IMS. Madura, Chapter 7. Reading 2: Juttner. (2000). Foreign currency markets. Reading 3: Moosa. (2004). Currency options. Reading 4: Reserve Bank of Australia (2010). International and foreign exchange markets. Reading 5: Martin, I. (2007). Revolutionary transformation and extraordinary opportunity - today’s electronic FX market is changing everything

2

The foreign exchange market

3

Madura, Chapter 11. Measuring and managing Reading 6: Desai. (2007). Foreign exchange hedging strategies at GM: transaction exposure Transactional and translation exposures. Reading 7: Dumitrescu (2009)

4

Operating exposure

Madura, Chapter 12

5

Interest rate risk management and currency swaps

Madura, Chapter 18 (pp. 542-554). Reading 8: McGrath & Viney. (2002). Interest rates and currency swaps

6

Global capital markets

Madura, Chapter 17. Reading 9: Lowe, P. (2009). The growth of Asia and some implications for Australia

7

International debt and equity markets

Madura, Chapter 3. Reading 10: Levi, M. D. (2005). Portfolio investment. Reading 11: Pilbeam, K. (2006). The international debt crisis. Reading 12: Sahoo, G. (2010). International capital flows: An empirical study of the relationship between equity and debt investments

9

Foreign investment theory

Madura, Chapter 13 and Chapter 16. Reading 13: Sathye, M. M. et al. (2006). Investment in global operations

10

Assessment 1: Assignment: Due Monday 11 March 2013

11

Multinational capital budgeting

Madura, Chapter 14

12

GFC and Multinational firms

Reading 14: Ellis, L. (2009). The global financial crisis: Causes, consequences and countermeasures. Reading 15: Eitemand, D. K., Stonehill, A. I., & Moffett, M. H. (2010). Current multinational financial challenges: The credit crisis, chap. 5

13

Corporate governance in a globalised world

Madura, Chapter 15. Eiteman, Stonehill & Moffett, Chapter 2

14

Revision Examination period

Residential school There is no residential school for this subject.

Text and Learning Materials Prescribed text(s) Madura, Jeff. (2010) International financial management, 10th edition, South-Western Cengage Learning, USA. Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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Required reading / resources Study Guide and Readings

Recommended reading / resources Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2013). Multinational business finance (13th ed.). Boston, Mass: Pearson/Addison Wesley

Assessment Information Pass Requirements Your assessment in this subject will be based on one assessment items worth 50% and a final examination worth 50%. In order to meet terms in this subject you must submit all assessment items. Passing Grade In order to obtain a passing grade in this subject, a student must attain a minimum passing standard in both the final examination and the overall total mark for the subject. Both pieces of assessable work are compulsory and failure to submit any assessable work will result in a fail grade.

Grades Final grades for this subject are awarded by the Faculty of Business Assessment Committee in accordance with the University's Assessment Regulations on Assessment which are published in the Academic Manual http://www.csu.edu.au/academic/g1m.htm and Section 6 of the University Handbook. Marks may be scaled to produce a distribution of grades which conforms to the expected norms specified in the University's Assessment Regulations. High marks in the continuous assessment items will not automatically guarantee a specific award. In order to qualify for a Credit, Distinction or High Distinction a student is expected to achieve a commensurate mark in the final examination. Grading distribution The Academic Senate has approved the following definitions and guidelines for the awarding of grades within subjects taught at Charles Sturt University. HD High distinction (85-100%) an outstanding level of achievement in relation to the assessment process. DI Distinction (75-84%) a high level of achievement in relation to the assessment process. CR Credit (65-74%) a better than satisfactory level of achievement in relation to the assessment process. PS Pass (50-64%) a satisfactory level of achievement in relation to the assessment process. FL Fail (0-49%) an unsatisfactory level of achievement in relation to the assessment process. Note: The notional percentages specified above should be viewed only as guidelines for the awarding of final grades. It may be necessary for raw score totals to be scaled so that the distribution of final grades in the subject conforms to University expected norms.

Assessment Requirements Students will be assessed in subjects on the basis of a combination of norm and criterion referencing with marks and grades being awarded by a combination of predetermined standards and the performance of other students in the subject. The subjects that have a satisfactory/unsatisfactory grading scale will have this clearly identified within the Subject Outline.


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For further information please consult the Academic Regulations of the Academic Manual http://www.csu.edu.au/acad_sec/academic-manual/gcontm.htm

Presentation The assignments involve mathematical calculations, and the preparation of essays, short written answers and reports. Typed assignments are always preferred, however you may submit handwritten answers if you cannot have your assignments typed, providing that your handwriting is legible. Penalties will be imposed for illegible work, bad spelling and poor grammar. In submitting all assignments and all types of answers (i.e., calculations and written answers) you must pay close attention to presentation. In answering essay and short answer questions make certain that you attach a bibliography to your assignment which acknowledges all the sources you have used in developing your answer. For calculation questions students must show all workings. Preferred format for assignments Assignments in this subject should preferably conform to the following format: • Paper size: A4. [Large-format computer print-out sheets are also acceptable where appropriate.] • Word-processed and laser-printed. [Handwritten material must be legible.] • 1.5 or double line spaced. • 3.5 cm left and right margins. • Single and double-sided sheets are equally acceptable. • Sequentially numbered pages. • Referencing should conform to the guidelines at: http://www.csu.edu.au/division/studserv/learning/pdfs/apa.pdf • Apart from an assignment cover sheet, no additional cover, sleeve, binder or folder. • Where 'landscape' sheets are included in a 'portrait' format submission, they should be inserted with headers to the left; i.e. so that the paper is rotated clockwise in order to read the landscape sheets. • Single fastener (preferably a staple) in top left-hand corner. Declaration of authorship All individual assignments should be accompanied by a signed declaration confirming that material submitted is the student's own work. Academic standards As an undergraduate student in a university, you are expected to produce work to high academic standards. Written material must be presented well, be thoroughly researched, contain appropriate references, and demonstrate considerable thought and appreciation of the subject matter. It is expected that you will read the text and other literature thoroughly, and think deeply and critically about what you read. You will be expected to contribute to forum discussions with informed, intelligent insights. It is vital that you do not confine your readings to the text only. Broad reading from various academic literature, as well as management magazines and the business section of the quality newspapers will assist you in your studies.

Plagiarism Charles Sturt University expects that the work of its students and staff will uphold the values of academic honesty and integrity. The Guide to Avoiding Plagiarism is located at: http://student.csu.edu.au/study/plagiarism. This is an important resource that will help you understand these values and apply them in practice. You should familiarise yourself with these requirements and ensure that all assessments submitted by you are your own work, have not been submitted elsewhere and comply with the University's requirements for academic integrity. The University has purchased Turnitin software. This software has two functions, a pre-emptive


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education function which students may use to check their own work prior to submission, and a plagiarism detection function which academics may use to check the student’s work for improper citation or potential plagiarism. Use by students is optional and is not a prerequisite for submission. You are encouraged to check your work for originality prior to submission. You can register with Turnitin to create a Student Account under the CSU Turnitin Licence at http://www.turnitin.com/login_page.asp. Further information on how to use Turnitin is provided within the Guide to Avoiding Plagiarism: http://student.csu.edu.au/study/plagiarism/checking.

Extensions Assignments should reach the University no later than the due date. Assignments, therefore, need to be posted some time in advance of the due date to arrive on time. You are requested to do all in your power to meet assignment deadlines. Extensions will only be given if you face unforeseen and unavoidable problems. Extensions cannot be given towards the end of session so in this case you need to apply for an incomplete grade or subject withdrawal. Work and family related pressures do not normally constitute sufficient reasons for the granting of extensions or incomplete grades. If it becomes obvious that you are not going to be able to submit an assignment on time because of an unavoidable problem, you must submit your request for an extension in writing prior to the due date . Extensions will not be granted on or after the due date. Assignments received more than 10 days after their due date without an extension having been granted, will be returned with no marks awarded. Pro-rata reductions in the awarded mark (10% per day including weekends) will be made for items received late without a granted extension. The last date for receipt of assignments by the University is the last day of the teaching session (prior to the exam period), in circumstances where your lecturer has granted an approved extension.

Online Submission NOTE THAT ASSIGNMENTS MUST BE SUBMITTED THROUGH EASTS. That is, the assignment is to be submitted electronically to the CSU Assignment Section via EASTS (Electronic Assignment Submission Tracking System). In order to access EASTS, click on the EASTS link in the menu bar on the left hand side. This will take you to the EASTS site where you are provided with step-by-step instructions to guide you through the online submission process. EASTS has a help function that will allow you to print out instructions to assist you in this process if required.

Faxed / Emailed Assignments The Faculty of Business has resolved not to accept faxed or emailed assessment tasks under any circumstances.

Penalties for Late Submission If you are unable to submit your assignment on time, you must contact your subject coordinator before the due date, giving cogent reasons for the delay. Assignments submitted late with no valid reason will lose marks. The penalty for late submission of an assignment without obtaining the subject coordinator's approval for an extension will be 10% deduction per day including weekends, of the maximum marks allocated for the assignment, i.e. 1 day late - 10% deduction, or 2 days late - 20% deduction. For example, for an assignment worth 20 marks, the calculations depending on the penalty given are Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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as follows: Marks received (before penalty) Less 1 day late penalty Student's final mark

18 marks 2 marks 16 marks

Marks received (before penalty) Less 2 days late penalty Student's final mark

18 marks 4 marks 14 marks

Resubmission Resubmission of an assignment after the due date is not permissible unless the resubmission is requested by the subject convenor.

Assignment Return You should normally expect your marked assignment to be despatched/returned to you within three weeks of the due date, if your assignment was submitted on time. If an assignment is submitted on time but not returned by the return date, you should make enquiries in the first instance to the subject coordinator.

Feedback Feedback on assignments will be provided and will include a numerical mark for the assignment.

Sample exam paper FACULTY OF BUSINESS SAMPLE FINAL EXAMINATION FIN518: INTERNATIONAL FINANCIAL MANAGEMENT LECTURER: WRITING TIME:

Three hours

READING TIME:

Ten minutes

MATERIALS SUPPLIED BY UNIVERSITY:

Answer Booklet (1 x 24 pp) General Purpose Answer Sheet

MATERIALS PERMITTED IN EXAMINATION: Pen/Pencil/Eraser Battery/Solar powered Calculator QUESTION STRUCTURE: PART A: 25 (twenty-five) Multiple Choice Questions – Answer ALL questions PART B: 5 (five) Short Answer/Computational Questions – Answer ALL questions INSTRUCTIONS TO CANDIDATES: 1. Enter your name and student number and sign in the space provided at the bottom of this page. 2. This is a closed book examination; therefore no written material, reference books or notes will be permitted into the examination room. 3. Answers to multiple choice questions (Part A) are to be recorded on the General Purpose Answer Sheet (GPAS) if provided (if not write your answers in the Answer


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Booklet). 4. Write answers to other questions (Part B) in the Answer Booklet provided. Number each question clearly. 5. The marks allocated to each question are shown in brackets after the question number. 6. A formula sheet is attached at the end. This examination is worth 50% of the final assessment for this subject. INSTRUCTIONS TO INVIGILATORS: QUESTION PAPER MUST NOT BE RETAINED BY THE CANDIDATE. STUDENT NAME: ............................................ STUDENT NO.: ........................ STUDENT SIGNATURE: .........................................................................................


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Part A – 25 (twenty-five) Multiple Choice Questions (25 marks - one mark each) Choose the answer that answers the question best.

1. A well-established, large China-based MNE will probably be most adversely affected by which of the following elements of firm value? A) An open marketplace. B) High-quality strategic management. C) Access to capital. D) Access to qualified labor pool. 2. Which of the following is NOT a reason governments interfere with comparative advantage? A) Governments attempt to achieve full employment. B) Governments promote economic development. C) National self-sufficiency in defense-related industries. D) All are reasons governments interfere with comparative advantage. 3. The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm. A) Rulers of sovereign states and unsavory customs officials. B) Corporate insiders and attorneys. C) Corporate insiders and rulers of sovereign states. D) Attorneys and unsavory customs officials. 4. The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________. A) Federal Reserve Discount rate B) federal funds rate C) LIBOR D) one-year U.S. Treasury Bill 5. ________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity. A) Financing; operating B) Operating; financing C) Operating; accounting D) Accounting; financing 6. When disequilibria in international markets occur, management can take advantage by A) doing nothing if they are already diversified and able to realize beneficial portfolio effects. B) recognizing disequilibria faster than purely domestic competitors. C) shifting operational of financing activities to take advantage of the disequilibria. D) all of the above 7. A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts. A) matched flow B) currency swap C) back-to-back loan D) none of the above 8. One of the most important factors in making debt less expensive than equity is A) the tax deductibility of depreciation. B) the tax deductibility of equity.


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C) the tax deductibility of dividends. D) the tax deductibility of interest. 9. Of the following, which is NOT identified by the authors as a country-specific environmental variable key to determining debt ratios? A) Agency costs. B) Government regulations. C) The existence of a viable corporate bond market. D) All of the above are key variables identified by the authors. 10. If a firm lies within a country with ________ or ________ domestic capital markets, it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets. A) liquid; segmented B) liquid; large C) illiquid; segmented D) large; illiquid 11. Reasons that firms may find themselves with relatively high costs of capital include: A) The firms reside in emerging countries with undeveloped capital markets. B) The firms are too small to easily gain access to their own national securities market. C) The firms are family owned and they choose not to access public markets and lose control of the firm. D) all of the above 12. The following would be an example of a policy, not a goal. A) Management shall minimize the firm's overall weighted average cost of capital. B) Management shall maximize shareholder's wealth. C) Management will not write uncovered options. D) Management will hire only happy employees. 13. ________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates. A) Operating B) Transaction C) Translation D) Accounting 14. A ________ hedge refers to an offsetting operating cash flow such as a payable arising from the conduct of business. A) financial B) natural C) contractual D) futures 15. Each ADR represents ________ of the shares of the underlying foreign stock. A) a multiple B) 100 C) 1 D) ADRs have nothing to do with foreign stocks. 16. Systematic risk A) is the standard deviation of a security's return. B) is measured with beta. C) is measured with standard deviation. D) none of the above 17. Which of the following is NOT a portfolio diversification technique used by portfolio


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managers? A) Diversify by type of security. B) Diversify by the size of capitalization of the securities held. C) Diversify by country. D) All of the above are diversification techniques. 18. In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity? A) enhance a firm's local image B) become more familiar with the local financial community C) get better local press coverage D) all of the above 19. For most firms, the cost of capital decreases to a low point as the firm ________ debt financing. At some point beyond this optimal level, the cost of capital increases as the amount of debt ________. A) decreases; increases. B) decreases; decreases. C) increases; increases. D) increases; decreases. 20. Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project? A) Parent cash flows must be distinguished from project cash flows. B) Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms. C) Differing rates of inflation between the foreign and domestic economies. D) All of the above add complexity to the international capital budgeting process. 21. When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary? A) The firm's tax rate. B) The firm's cost of debt. C) The firm's cost of equity. D) All of the above are necessary. 22. In general, which has the shorter maturity and is more appropriate for funding short-term inventory needs? A) Commercial paper. B) Euro-Medium-Term notes (EMTNs). C) The international bond market. D) all of the above 23. Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI? A) Fewer political risks. B) Greater agency costs. C) Lower front-end investment. D) All of the above are advantages. 24. Which of the following is NOT an advantage to a joint venture? A) Possible loss of opportunity to enter the foreign market with FDI later. B) The local partner understands the customs and mores of the foreign market. C) The local partner can provide competent management at many levels. D) May be a realistic alternative when 100% foreign ownership is not allowed. 25. An alternative strategy to engaging in bribery in international investments include: A) Refuse bribery outright.


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B) Retain local advisors to diffuse requests for bribes. C) Educate management and local employees about the firm's bribery policy. D) all of the above

Part B –Short Answer/Computational Questions Answer ALL questions in the answer book provided

QUESTION 1 (10 marks) a) Differentiate between basis risk and gap exposure by providing some real world examples. (5 marks) b) Caitlin Corporation wishes to raise $2,000,000 in U.S. dollars with debt financing. The funds, needed to finance working capital, will be repaid with interest in one year. Caitlin's treasurer is considering three sources: Borrow U.S. dollars from Bank of America at 8%. Borrow British pounds from National Westminster Bank at 14% Borrow Japanese yen from Sanwa Bank at 5%. If Caitlin borrows a foreign currency, it will remain uncovered; that is, it will simply change foreign currency for dollars at today's spot rate and buy foreign currency back one year later at the spot rate then in effect. The company has no operations in either the United Kingdom or Japan. Caitlin estimates the pound will depreciate 5% relative to the dollar and the yen will appreciate 3% relative to the dollar during the next year. Corporate income tax rates are 35% in the United States, 36% in the United Kingdom, and 40% in Japan. From which bank should Caitlin borrow, and what is its projected after-tax cost of borrowing (in dollars) from each source? (5 marks) QUESTION 2 (10 marks) Godusa and Kradenik companies both seek funding at the lowest possible cost. They face the following rate structure: Credit rating Cost of fixed rate borrowing Cost of floating rate borrowing

Godusa AA 10.00% p.a. LIBOR + 0.5%

Kradenik BB 13.00%p.a. LIBOR + 1.0%

In what type of borrowing has each company a comparative advantage? Why? (3 marks) If a swap were arranged, what is the maximum savings that could be divided between the two parties? (3 marks) Describe a transaction that would generate such a savings divided equally between the two firms? (4 marks)

QUESTION 3 (10 marks) TRT Co. USA exported a product to PRC Co. UK and billed them GBP10 millions payable in one year. The money market interest, option market and forex rates are given as follows: The U.S. interest rate The U.K. interest rate The spot exchange rate

6.10% pa 9.00% pa $1.50/GBP


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The forward exchange rate The OTC put option

$1.46/GBP (1-year maturity) X=$1.46 and P=$0.02 per pound

What are the available alternatives to manage this transaction exposure? (2 marks) Calculate each alternative to be able to determine which available alternative is the most acceptable one. (5 marks) What is the break-even rate, i.e. the rate that the TRT Co. will be indifferent between the two hedging methods? (3marks) QUESTION 4 (10 marks) a) Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets. What are the dimensions of a strategy to capture this lower cost and greater availability of capital? (5 marks) b) “Corporate fraud has increased substantially in the globalised world in recent years. Expansion of multinational corporations and weak corporate governance in several emerging markets could be the major factor responsible for this.” Critically evaluate the statement. (5 marks)

QUESTION 5 (10 marks) a) What is a private equity fund? How do they differ from traditional venture capital firms? (5 marks) b) Gas du Ancy, a European gas company, is borrowing US$650,000,000 via a syndicated eurocredit for 6 years at 82 basis points over LIBOR. LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight leading investment bankers, which will charge up-front fees totaling 1.2% of the principal amount. What is the effective interest cost for the first year if LIBOR is 4.00% for the first six months and 4.20% for the second six months? (5 marks)

Answers Part A – Multiple Choice Questions 1. A 2. D 3. C 4. C 5. B 6. D 7. B 8. D 9. D 10. C 11. D 12. C 13. A 14. B 15. A 16. B 17. D 18. D 19. C Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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20. D 21. D 22. A 23. B 24. A 25. D

Part B: Outline of Answers Please note that these are just outline of answers. These are not full answers. You need to use arguments to expand and provide a clear answer to each question. There is no specific word limit for each question. Each question carries 15 marks. So you should distribute time accordingly (it is a 2 hour exam). Do not write in dot points. Try to explain the answers clearly & adequately. Write detailed workings in case of quantitative answers

QUESTION 1 a) Interest risk is concerned with the sensitivity of profit cash flows and value of the firm due to changes in interest rates. For example, the exposure that borrower faces relating to higher interest to be paid on outstanding loan, or fall in value of investment. Basis risk is risk of the basis widening or narrowing. It therefore affect the interest income on asset and interest expenses on liabilities for financial institution, it change in net interest income. For example, a MNC borrows and invest at the following rates: Investment rate (asset) Borrow (liability) Basis spread 12% 5% 7% 10.5% 4.5% 6% In this example, a 0.5% fall in borrowing rate does not result in a equal drop in the lending rate. As a result the basis spread falls. Gap risk is the mismatch timing in re-pricing interest rate sensitive asset or liabilities/ For example, when financing working capital with a 6months loan of 10% pa for permanent assets that give a 15% return. When 6month loan matured it has to be rolled over at an uncertain rate. Should the 6month rate increased, then the cost of financing will increase, while the return on permanent assets remain unchanged. Another example an investor can invest a fixed sum of money in FD for 6month or 3month and then review the amount upon maturity. The risk is that the interest at the end of the 3month may fluctuate below the current rate. b) After-tax of borrowing from B of America: $2m x .08 x .65 = $104,000 NatWest [($2m x 1.14 x.95) - $2m] x .65 = $107,900 Sanwa [($2m x 1.05 x 1.03) -2m] x 0.65 = $105,950 Bank of America is the cheapest source;

QUESTION 2 a) Godusa has a 3% absolute advantage in fixed rate borrowing, but only a ½% disadvantage in floating rate. Hence, Godusa has a comparative advantage in fixed rate borrowing. Kradenik has a 3% Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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disadvantage in fixed rate borrowing, but only a ½% disadvantage in floating rate borrowing. Hence Kradenik has a comparative advantage in floating rate borrowing. b) Godusa could save 3% on fixed rates while giving away a ½% on floating. Hence the total savings would be 2.5%. If divided equally between the parties, each would save 1.25%. c) Godusa Godusa borrows fixed <10..00%> Kradenik borrows floating Godusa pays Kradenik LIBOR Kradenik pays Godusa fixed 10.75% All-In borrowing Cost LIBOR-0.75% Savings 1.25%

Kradenik LIBOR <10.75%> 11.75% 1.25%

QUESTION 3 a) 1. DO nothing 2. FMH 3. MMH 4. OMH b) 1. S - $15mil or F - $14.6mil 2. F-$14.6mil 3. Borrow GBP9,174,312 (10mil/1.09%) in the UK convert this amount into $13,761,468 and the spot $1.50/GBP; invest it in the US, collect GBP10mil and repay the pound loan. Receive dollar amount of the investment $14.600,918 (=13,761,468x1.061) 4. $200,000 cost of the option (=$0.02x10mil) carried forward 6%pa its $212,200. Net proceeds 14,387,800 (=14,600,000 - $212,200) c) 1.48 ($10mil X S rate - $212,200= $14,600,000)

QUESTION 4 a) Global integration of capital markets has given many firms access to new and cheaper sources of funds beyond those available in their home markets. These firms can then accept more long-term projects and invest more in capital improvements and expansion. If a firm resides in a country with illiquid and/or segmented capital markets, it can achieve this lower global cost and greater availability of capital by a properly designed and implemented strategy. b) Fraud is a deliberate misrepresentation (or deception) to gain money or advantage which causes another person to suffer damages, usually monetary losses. It is often a result of overall corrupt or inadequate governance practices. It is usually not an organisational affair. In almost all cases, corporate frauds are initiated by individuals or groups within a corporation for their personal gains. Globalisation has certainly expanded the market for MNCs. While expanding into culturally diversified emerging markets MNCs often face serious challenges. Corporate greed and confusing corporate governance in such markets may provide opportunities of corporate fraud. At initial stages fraudulent practices may increase company value in some cases, but the end results are always negative (disastrous in some cases). Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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This is an open question. Answers should be marked according to the depth & quality. Try to use practical examples to support your arguments

QUESTION 5 a) Private equity funds are usually limited partnerships of institutional and wealthy individual investors who raise their capital in the most liquid capital markets, especially the United States. They then invest the private equity fund in mature, family-owned firms located in emerging markets. The investment objective is to help these firms to restructure and modernize in order to face increasing competition and the growth of new technologies. Private equity funds differ from traditional venture capital funds. The latter usually operate mainly in highly developed countries. They typically invest in high technology start-ups with the goal of exiting the investment with an initial public offering (IPO) placed in those same highly liquid markets. Very little venture capital is available in emerging markets, partly because it would be difficult to exit with an IPO in an illiquid market. The same exiting problem faces the private equity funds, but they appear to have a longer time horizon, they invest in already mature and profitable companies, and they are content with growing companies through better management and mergers with other firms. b) Initial Issuance Principal borrowed for six years, in Issuance fees Interest Costs LIBOR Spread over LIBOR Total interest cost

Value US$ $650,000,000 1.20% First 6-months 2nd 6-months 8.000% 7.000% 0.820% 0.820% 8.820% 7.820%

Calculation of the effective cost of funds Issuance Face value of syndicated loan $650,000,000 less fees for issuance (7,800,000) Net proceeds of syndicated loan $642,200,000 Interest payment due at end of 6-month period (annual rate divided by 2 for 6-month period) Total interest payments in first year of loan

First 6-months

2nd 6-months

$(28,665,000)

$(25,415,000)

$(54,080,000)

Effective interest cost (interest payment/proceeds) 8.421%

Assessment Items Item number

Title

Type

Value

Due date*

Return date**

1

Assignment

Assignment

50%

11-Mar-2013

01-Apr-2013

2

Final Examination

Exam

50%

To be Advised.

-


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* due date is the last date for assessment items to be received at the University ** applies only to assessment items submitted by the due date

Assessment item 1 Assignment Value: 50% Due date: 11-Mar-2013 Return date: 01-Apr-2013 Length: 3000 words Submission method options EASTS (online)

Task Answer all questions nine (9) questions below (Covers topics 1-7) Submission method: It is recommended that your name and your student number be included in the header or footer of every page of any assignment. Students are to submit to: Economics and Finance Institute (EFI) The Learning Centre in Cambodia Street 134 Sangkat Phsar Depor 2 Khan Toul Kork, Behind at Hotel and Restaurant Le President, Phnom Penh, Cambodia. The Assignment Section will record the receipt of your assignment on the computer system and date stamp it. It will then be forwarded directly to the marker. Assignments are also to be submitted electronically to Chuor Martin ([email protected]), Admin & Finance Supervisor


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Question 1 (10 marks) What strategic responses can a multinational firm make to avoid loss from its economic exposure?

Question 2 (5 marks) When a multi-national company (MNC) restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain this statement.

Question 3 (5 marks) Why might a firm use a 'local' capital structure at a particular subsidiary that differs substantially from its 'global' capital structure?

Question 4 (10 marks) Explain how characteristics of MNCs can affect the cost of capital. How could the cost of capital of an Australian based MNC be affected by the recent ongoing capital market uncertainties in Europe?

Question 5 (15 marks) The Finance Manager of XYZ Ltd. believes interest rates are going to rise so he wants to swap his future floating rate interest payments for fixed rates. At present he is paying LIBOR + 2% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.00% per annum. The company has just made an interest payment today, so the next payment is due six months from today. The Manager finds that he can swap his current floating rate payments for fixed payments of 7.00% per annum. XYZ’s weighted average cost of capital is 12%, or 6% per six month period. a. b.

If LIBOR rises at the rate of 50 basis points per six months period starting tomorrow, how much does the manager save or cost his company by making this sway? (7.5 marks) If LIBOR falls at the rate of 25 basis points per six months period starting tomorrow, how much does the manager save or cost his company by making this sway? (7.5 marks)


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Question 6 (15 marks) ABC Ltd. wishes to hedge a €4,000,000 account receivable arising from a sale to Olivetti (Italy) where the payment is due in 3 months. ABC’s Italian unit does not have ready access to local currency borrowing, thus eliminating the money market hedge alternative. Citibank has offered ABC the following quotes: Assumptions Values Account receivable due in 3 months, in Euro (€) € 4,000,000.00 Spot rate ($/€) 1.200 3-month forward rate ($/€) 1.218 3-month euro interest rate 4.20% 3 month put options on Euros Strike rate ($/€) 1.200 Premium, percent per annum 3.40% ABC's weighed average cost of capital 9.80% a.

What are the costs and risk of each alternative? (10 marks)

b.

Which alternative should ABC choose if it wishes to play it safe? (2 mark)

c.

Which alternative should ABC choose if it is willing to take a reasonable risk and has a directional view that the dollar is going to depreciate versus the euro over the next 3-month period? (3 marks)

Note: you must provide detailed steps of calculations.

Question 7 (5 marks) Explain the foreign exchange situation for countries that use the euro when they engage in international trade among themselves. What would happen if Greece, Portugal and Italy leave the Euro zone?

Question 8 (15 marks) Go to the currency converter at http://au.finance.yahoo.com/currencies/investing * and determine the bid-ask spread for the Australian dollar against US dollar, Euro, British pound, Japanese yen, Chinese RMB and Indian rupees (that is, USD/AUD, EUR/AUD, GBP/AUD, JPY/AUD, CNY/AUD and INR/AUD). Do you observe any difference in the bid-ask spreads of the A$ between currencies of developed countries and those of developing/emerging countries? If so, explain the nature of differences, and possible explanations. * Go to ‘Currencies investing’ – Click on individual rates (eg. USD/AUD) to get bid/ask prices – add currencies if needed.


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Question 9 (20 marks) You are considering the measurement of investment performance of a company with respect to international portfolios and have the following information about two managers.

Performance and Attribution Data - Annualised Returns for last five (65) years

Manager / Index

Total Return (%)

Country / Security Return (%) Currency Return (%)

Manager A

- 6.0

2.0

-8.0

Manager B

-2.0

-1.0

-1.0

EAFE Index*

-5.0

0.2

-5.2

* Europe, Australasia and Far East Index a. Assume that the table above for Managers A and B accurately reflects their investment skill and that both managers actively manage current exposure. Describe one strength and one weakness for each manager. b. Recommend and justify a strategy that would enable the company to take advantage of the strengths of each manager whilst minimising their weaknesses.

Rationale The aim of this assessment is to check your understanding of the theory presented thus far. It also aims to broaden and straighten your understanding of developing an financial model, applying them to real situations and analysing the result of its application. Generic skills that you may acquire from this assessment are: concise writing on the broad topics; general presentation of your writings; linking causes and consequences; theoretical analysis of the topics; improving your general knowledge from different areas.

Marking criteria Correctness of the answers. Supporting arguments. Demonstrated evidence of clear understanding of the topics and the specific questions. Ability to write answers in clear and targeted manner.


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Assessment item 2 Final Examination Value: 50% Date: To be advised Duration: 3 hours Submission method options N/A - submission not required/applicable

Rationale The final examination is designed to: allow you to demonstrate your overall understanding of the subject; give you wider scope in answering and in interpreting different concepts and practical problems in international finance; assess whether you have clearly understood and remembered essential concepts, knowledge and terms covered in the subject.

Requirements MUST pass this Final Exam to pass the subject.

Marking criteria Marks will be awarded based on the following criteria: correctness of your answers. supporting documents. demonstrated evidence of clear understanding of the subject and the specific questions. ability to write your answers in a clear and targeted manner.

Material provided by the University Answer Booklet (1 x 24 pp) General Purpose Answer Sheet

Material required by the student Pen/Pencil Eraser Battery/Solar powered Calculator


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Support Services Student Central Student Central is the first point of contact for currently enrolled students to access all non-teaching services. Student Central liaises closely with Divisions and Schools to ensure the timely and accurate resolution of student enquiries. You may direct your enquires in person to Student Central staff situated within the Learning Commons found on campus at Albury-Wodonga, Bathurst, Dubbo, Orange, and Wagga Wagga. You may also contact Student Central through: [email protected] (mailto:[email protected]) 1800 ASK CSU (1800 275 278) Phone from outside Australia: + 61 2 6933 7507

Information on Your Library Services Finding Information CSU Library provides you with free access to over 600,000 books and 50,000 journals, and much more. Get an introduction to your library with the Library Orientation Toolbox (http://www.csu.edu.au/division/library/find-info/toolbox).

Primo Search Finding the resources you need is easy with Primo Search (http://primo.unilinc.edu.au/primo_library/libweb/action/search.do?dscnt=1&dstmp=1328694476534&vid=CSU&from Search most of the Library’s collections, including online resources, print publications and CSU research. Plus, you can easily place loan requests, view your current loans, and renew items online. Online Resources You’ll find journal databases, eBook collections, and other useful online information sources listed under Key Resources (http://student.csu.edu.au/library/find-information). Borrowing Your borrowing privileges depend on your enrolment. Visit Information for Students (http://student.csu.edu.au/library/help/information-for-students) to find out what you are eligible for. The Library FAQs (http://www.csu.edu.au/division/library/how-to/faq) have more information on borrowing and access to resources. Need help? CSU Library staff are available to answer your questions by phone, Live Chat, email, forum, or in person. See Ask a Librarian (http://student.csu.edu.au/library/contacts/ask-a-librarian) for more information. Keep up to date with what is happening in your Library through Facebook, Twitter and our blog.

CSU Library Facebook (http://www.facebook.com/CSULibrary)

CSU Library Twitter

(http://twitter.com/CSU_Library) CSU Library Blogs (http://student.csu.edu.au/library/about-your-library/library-blog)

Academic Learning Assistance Learning Skills provides individual, group support and materials that can assist in making your learning and understanding easier. This support is available face to face, via telephone and online,


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providing assistance in a range of areas such as: academic language and learning, maths and statistics, critical reading and thinking, analytical thinking, essay and report writing, avoiding plagiarism, referencing, how to do oral presentations and exam preparation. STUDYLINK provides access to a variety of short, non-award subjects in preparation for university study. Subjects are available throughout the year through flexible, online delivery, and each is designed to help you gain confidence, skills and knowledge for your university studies. Student Support - http://student.csu.edu.au/support A wide range of services are provided to support your student academic experience. Services are available on campus with relevant services also available via telephone and online. Services provided include: Orientation Student mentoring Scholarship and financial assistance Counseling support and referral Academic appeals and legal advice referral Disability, welfare and equity support and referral Health and wellbeing Social and recreational activities Graduation Indigenous student support International student support Residential Student Support - http://student.csu.edu.au/campus/residences/residential-advisors The Residential Support Scheme operates across all campuses to provide for the pastoral care and welfare of residents and actively encourages student participation and involvement in all aspects of residential life. The residential community is supported and structured to provide an environment to support student academic achievement. For assistance and initial contact go to Student Central Email: [email protected] (mailto:[email protected]) ( mailto:[email protected] (http:// [email protected])) Phone: 1800 ASK CSU (1800 275 278) Phone from outside Australia: + 61 2 6933 7507 Academic Language and Learning Assistance Learning Support (http://student.csu.edu.au/study) (http://student.csu.edu.au/study) provides learning advice to individual students and student groups and materials that can assist you to develop your learning skills and understanding of the requirements of studying at university. This support is available face to face, via telephone and online, and provides assistance in a range of areas such as: academic language and learning, maths and statistics, critical reading and thinking, analytical thinking, essay and report writing, avoiding plagiarism, referencing, how to do oral presentations and exam preparation. Studylink (http://www.csu.edu.au/student/studylink/) (http://www.csu.edu.au/student/studylink/) provides access to a variety of short, non-award subjects in preparation for university study. Subjects are available throughout the year through flexible, online delivery, and each is designed to help you gain confidence, skills and knowledge for your university studies. Career Development Career Development (http://student.csu.edu.au/study/careers) (http://student.csu.edu.au/study/careers) includes a range of services, from first through to the final year of study, which support students’ Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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self-assessment, awareness of opportunities, improvements to decision making, and gaining the necessary skills for making successful transitions post-study. This support is available face to face, via telephone and online.

Policy and Procedures University Policies and Regulations Academic matters are defined by, and are subject to, Charles Sturt University policies and regulations. Your Subject Outline should be read in conjunction with all such academic regulations and policies, as some of these may affect the outcome of your studies.

Variations to Subject Outlines Should it be necessary to change the content of the Subject Outline during a teaching session, it will be done in consultation with the Head of School and other support services of the University. You then will be notified of the changes in writing by the subject coordinator.

Variations to Assessment Should it be necessary to vary the assessment in this subject, you will be notified in writing by the Subject Coordinator, or Subject Convenor where one is appointed. The variations to assessment include variations to the assessment tasks and/or assessment procedures for assignments, examinations and any other assessment task published in the Subject Outline. The variations will be communicated only after the Subject Coordinator or Subject Convenor has obtained approval from their Head of School. The overriding principle is that such changes will not disadvantage students and is made in accordance with the Awards, Courses and Subjects policy ( Part L6.3 (http://www.csu.edu.au/acad_sec/academic-manual/docs/l6-3.pdf), Section 1.4) of the Academic Manual.

Evaluation of Subjects It is University policy that all subjects are evaluated every time that they are offered. The University's Division of Learning and Teaching Services administers surveys through the Online Evaluation Survey System. Staff in the faculties and schools value your feedback very highly and take account of your comments when reviewing learning and teaching in each subject. If you are interested in the details of any enhancements to this subject as a result of the latest survey, please contact the subject coordinator. Surveys for each of the subjects you are enrolled in for this session will be available for you to complete for a period of 4 weeks from the last week of the teaching session. An email message will alert you to the availability of the surveys online. Please complete the subject evaluation by following the link: http://online.csu.edu.au/evaluations/ Individual subject results are reported to the subject coordinator and Heads of Schools after grades have been submitted for each teaching session (except where subjects have one student the results are not reported to staff). The aggregated results for subjects are available within 3 weeks of the release of grades. They can be accessed online at: http://www.csu.edu.au/division/landt/evalunit/online

Special Consideration Academic regulations provide for special consideration to be given if you suffer misadventure or extenuating circumstances during the session (including the examination period) which prevents you from meeting acceptable standards or deadlines. Applications for special consideration must be submitted in writing and include supporting Charles Sturt University Subject Outline FIN518 201315 CM I-17 December 2012-Version 1

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documentary evidence. Such applications should be sent to the Student Administration Office. For further information about applying for special consideration please refer to Part C3 - Special Consideration Regulations (http://www.csu.edu.au/acad_sec/academic-manual/docs/c3.pdf) of the Academic Manual.

Assessment Regulations The assessment practices of all University subjects are conducted in accordance with the University?s Assessment regulations (http://www.csu.edu.au/acad_sec/academic-manual/docs/g1.pdf).

Academic Conduct The University expects that you, as a student, will be honest in your studies and research and that you will not do anything that will interfere with or frustrate the studies and research of other students. In particular, you are expected to: acknowledge the work of others in your assignments and other assessable work; not knowingly allow others to use your work without acknowledgment; report honestly the findings of your study and research; and use only permitted materials in examinations. Details of expected academic conduct are provided in: the Student Academic Misconduct Rule (http://www.csu.edu.au/acad_sec/academic-manual/docs/g6.pdf); the Academic Progress regulations (http://www.csu.edu.au/acad_sec/academic-manual/icontm.htm); Students are also expected to be responsible in the use of University facilities and resources and to abide by University rules concerning the Library and electronic resources. the Rule of the Library (http://www.csu.edu.au/division/library/about/policies/rule.htm); and the Code of Conduct for Users of Electronic Facilities (http://www.csu.edu.au/adminman/tec/PER12.rtf). Copies of the Rule of the Library and Code of Conduct for Users of Electronic Facilities can also be obtained from the Library or the Division of Information Technology (DIT) Service Desk. Penalties for breaching the above Rules and Code include suspension or exclusion from the University. Students also have expectations of the University and of other students in the cooperative endeavour of studying. Details of these expectations are provided in the Student Charter (http://www.csu.edu.au/student/charter/).

Subject Outline as a Reference Document This Subject Outline is an accurate and historical record of the curriculum and scope of your subject. University policies ( L6.3 ? 1.3.8(f) (http://www.csu.edu.au/acad_sec/academic-manual/docs/l6-3.pdf)) require that you retain a copy of the Subject Outline for future use such as for accreditation purposes.


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FIN518_201315_CM_I-17_December_2012-Version_1

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