a)Explain three benefits of investing in foreign markets to an MNC. (3 Marks)

b)Suppose Marcus BG (UK company) determines on 01 January it will need $500,000 to purchase vehicles on 01 July. It can negotiate an NDF with a local bank and it will look like this:

Buy: $500,000

Settlement date: 01 July

Reference index: U.S. dollar closing exchange rate (Sterling pounds) quoted by Federal Reserve System in 180 days.

Assume the direct quote for the U.S. dollar (which is the reference index) is 1.2955: $1.

i.What is the pound position at the time of the agreement?

ii.Explain what effect this has on Marcus BG if the value of the dollar increases to 1.3150 by 01 July?

iii.Explain what effect this has on Marcus BG if the value of the dollar decreases to 1.2805 by 01 July?

(5 Marks)

c)Suppose a UK bank exporter expects to receive US$ 1m in one year's time asks a UK bank to arrange a futures contract.What is the futures rate that the bank would give the exporter?

Given the following information (while all else held constant):

Spot Rate 1 = US$ 1.2715

Eurodollar one-year fixed-interest rates 3%

Eurosterling one-year fixed-interest rates 1.6%

(7 Marks)

d)i) One method of valuing an MNC is the Financial Academic Model.

Explain what it is.

ii) The following information is given on a U.S. MNC regarding its cash flows from its home operations and its subsidiaries:

Expected cash flow in the U.S. $2,000,000

Expected cash from Canada CAD 5,000,000

Expected cash from Singapore SGD 3,000,000

Expected cash from Australia AUD 6,000,000

Expected exchange rates: $0.7127:AUD 1; SGD 1.36: $1; $0.7515:CAD 1.

Calculate the expected cash flow of the MNC.

iii)Calculate the value of the MNC at the end of year using the Financial Academic Model given its cost of capital is 15%.

(6 Marks)

e)i) Explain the difference between Interest Rate Parity (IRP), Purchasing Power Parity (PPP) and International Fischer Effect.

ii)Assume 1 CAD = $0.7645 in the 90-day forward market and 90-day risk-free rate is 0.1% in the U.S. and 0.15% in Canada. The spot rate is $0.7515. Does the interest rate parity hold?

iii)Give three reasons why the Interest Rate Parity may not hold exactly in a market and yet earn no arbitrage.