ASSIGNMENT OF INTERNATIONAL

FINANCE
Question No. 1
A. Describe the key theories that justify International Business? How
firms engage in International Business?
Theory of International Business:
International trade is the purchase, sale or exchange of goods and services across national
border. International trade produces many benefits to countries both exporting and
importing products, the benefits are that they get goods or services, they cannot produce
enough of their own likewise, for the exporter, one of the benefits is though the trade. They
need or the money in which to purchase these goods from another country or source.
International trade also helps the economics at the countries.
Other key theory of International Business:
International business is a brood term, collectively used to describe all commercial
transaction (Private, Government & Semi-Government) that take place between two or
more nations. International business is a newly coined term. But the concept is quite
traditional. Actually, the term international business is derived from “International trade.”
How firms engage in International Business:
Firms use several methods to conduct international business. The most common methods
are:
1. International Trade
2. Licensing
3. Franchising
International Trade:
International trade is a relatively conservative approach that can be used by firms to
penetrate markets or to obtain supplies at a low cost. This approach entails minimal risk
because the firm does not place any of its capital at risk. If the firms experience a decline in
its exporting or importing, it can normally reduce that part of its business at a low cost.
Many large U.S based MNC’s. including boeing, Dupond, General Electric. And IBM, generate
more than $4 billion in annual sales from exporting Nonetheless, small business account for
more than 20 percent of the value of all all U.S exports.
Licensing:
Licensing is an arrangement where one firm provides its technology (copyrights, patents,
trademarks, or trade markets) in exchange for fees or other considerations. Starbucks has
licensing agreements with SSP to sell Starbucks products in train station. And airports
throughout Europe, sprint Nextel corporation has a licensing agreement to develop
telecommunication services in the United Kingdom.
Licensing allows firms to use these technologies in foreign markets without a major
investment in foreign countries and without the transportation cost that result from
exporting.
A major disadvantage of licensing is that it is difficult for the firm providing the technology
to ensure quality control in the foreign production process.
Franchising:
Under a franchising arrangement. One firm provides a specialized sales or services strategy,
support assistance, and possibly an initial investment in the franchise in exchange for
periodic fees. For example, Mcdonald’s Pizza Hut, Subway Sandwiches, Blockbuster, and
Dairy queen have franchises that are owned and managed by local resident in many foreign
countries.
As in the case of Licensing, Franchising allows firms to penetrate foreign countries. The
recent relaxation at barriers in countries throughout Eastern Europe and south America has
resulted in numerous franchising arrangements.

(b) Today you notice the following exchange rate quotations:

(a) $1 = 3.00 Argentine pesos and (b) 1 Argentine peso = .50 Canadian dollars. You need
to purchase 600,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you
need for your purchase?
Question No. 2
a) What is the Balance of Payment? Explain the Components of Balance of
Payment?
Balance of Payment:
The balance of payment is a summary of transactions between domestic and foreign
resident period of specific country over a specified period of time. It represents an
accounting of a country’s international transaction for a period. Usually a quarter or a year.
It accounts for transactions by Business, Individual, and The Government.
Components of Balance of Payments:
A balance of payments statement can be broken down into various components. Those that
receive the most attention are the:
Current Account
Capital Account
Financial Account
Current Account:
The current account represents a summary of the flow of funds between one specified
country and all other countries due to purchase of goods and services or to the cash flows of
generated by income-producing financial assets.
Components of Current Account:

 Merchandise (Goods & Services)

 Factor Income
 Transfers.
Capital Account:
The capital account represents a summary of the flows of funds resulting from the sale of
assets between one specified country and all other countries oven a specified period of
time, thus it compares the new foreign investments made by a country with the foreign
investments within a country over a given time period.
Financial Account:
The Financial account refers to special types of investment including DFI and portfolio
investment for all three accounts, transactions that reflect inflows of funds generate
positive number for the country’s balance where’s transactions that reflect outflows of
funds generate negative numbers for its balance.
Components of Financial Account:

 Direct Foreign investment

 Portfolio investment
 Other Capital investment

(b) You just came back from Canada, where the Canadian dollar was worth $.70. You still
have C$1250 from your trip and could exchange them for dollars at the airport, but the
airport foreign exchange desk will only buy them for $.62. Next week, you will be going
to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for
$.20 per peso. You met a tourist at the airport who is from Mexico and is on his way to
Canada. He is willing to buy your C$1200 for 4,000 pesos. Should you accept the offer or
cash the Canadian dollars in at the airport? Also calculate your profit or loss on this deal.
Question No. 3

(a) The spot rate of Euro is quoted on Monday at $ 1.30. Explain direct and indirect
quotation?
(b) If the pesos are worth $ 0.07, and the Canadian $ is worth $ 0.70. Find the value of
pesos in C$?
(c) Bank of Florida quotes an Ask Rate of $ 0.190 for the Peruvian currency and a bid rate
of $ 0.188. Find Bid/ask spread?

(d) Today, you notice that the euro is valued at $1.33 while the Mexican peso is valued at
$.10. One year ago, the euro was valued at $1.40, and the Mexican peso was worth
$.09. Determine how the euro changed against the Mexican peso over the last year.
Question No. 4
a. What is meant by Bid / Ask spread? Also write the factors affecting the spread?
Bid / Ask Spread of bank:
Commercial banks charge fees for conducting foreign exchange transaction thus they buy a
currency form customer at a slightly lower price than the price at which they buy a currency
and sell it. This means that a bank bit price for a foreign currency will always be less than its
ask price. The difference between the bit and ask price is known as bit / Ask spread, which is
meant to cover the cost associated with fulfilling request to exchange currencies. The bit /
ask spread is normally expressed as a percentage at the ask quote.
Ask / bit Spread:
Bid / Ask spread is the amount by which the ask price exceeds the bid price for an asset in
the market. The bid / ask spread is essentially the difference between the highest price that
a buyer is willing to pay for an assets and the lower price that a seller is willing to accept to
sell it.
Factor that Affect the Spread:
The Spread on currency quotation is influenced by the following factors.
Spread= (Oder cost + Inventory cost + Competition – Volume + Currency risk)
Order Cost:
Order cost are the cost of processing orders, including clearing costs and the cost of
recording transaction.
Inventory Cost:
Inventory cost are the cost of maintaining on inventory of a particular currency, Holiday on
inventory involves an opportunity cost because the funds could have been used for some
other purpose if interest notes are relatively high the opportunity cost of holding on
inventory should be relatively high. The higher inventory costs, the larger the spread that
will be established to cover these cost.
Competition:
The more intense the competition, the smaller the spread quoted by intermediaries.
Competition is more intense for the more widely traded currencies because there is more
business in those currencies.
Volume:
More liquid currencies are less likely to experience a sudden change in price currencies that
have a large trading volume are more liquid because there are numerous buyers and sellers
at any given time. This means that the a few large transactions are unlikely to cause the
currency price to change abruptly.
Currency Risk:
Some currencies exhibit more volatility than others because of economics or Political
conditions that cause the demand for and supply of the currency to change abruptly.

(b) Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth
$.008. What is the cross rate of the zloty with respect to yen? That is, how many yen
equal a zloty?

(c) Assume you have $1,000 and plan to travel from the United States to the United
Kingdom. Assume further that the bank’s bid rate for the British pound is $1.52 and its
asked rate is $1.60. Before leaving on your trip, you go to this bank to exchanged dollars
for pounds. Now suppose that because of an emergency you cannot take the trip, and
reconvert the pounds back to U.S. dollars, if the exchange rate has not changed what
number of dollars you will lose?
Question No. 5:
How equilibrium exchange rate is determined? Explain the factors with graph that effect
equilibrium exchange rate?
Equilibrium Exchange rate:
The exchange rate at which the supply for a currency meets the demand of the
same currency. As foreign exchange rate is affected by a number of factors. The equilibrium
exchange rate in turn are also influenced by its supply and demand. Hence equilibrium is
achieved when a currency demand is equal to its supply. This is determined at a point where
demand for and supply of foreign exchange are equal.
Graphical intersection of demand and supply curves determines the equilibrium exchange
rate of foreign currency. At any participate time the rate of foreign exchange must be such
at which quantity demanded of foreign currency is equal to quantity supplied of that
currency.
Factors that influence exchange rate:
The equilibrium exchange rate will change over time as supply and
demand schedules changes. The factor that cause currency supply and demand schedules.
The following equation summarize that factors that can influence currency spot rate.
Relative Inflation Rates:
Changes in relative inflation rate can effect international trade activity
which influences the demand and supply of currencies and therefore influences exchange
rate.
Relative Interest Rates:
Change in relative’s interest rate affect investment in foreign securities
which influence the demand for and supply of currencies and therefore influence the
equilibrium exchange rate.
Real Interest Rate:
A relatively high interest rate may attract foreign influence. The high
interest rate may reflect expectation of high inflation because high inflation can place
downward reassure o the local currency. For this reason, it is helpful to consider the real
interest rate which adjust the nominal interest rate for inflation.
Real Interest Rate:
Nominal interest rate inflation rate. This relationship is sometimes called the
fisher effect.
Relative Income Level:
The third factor that effect the exchange rate is relative income level
because income can affect the amount of imports demand can effect exchange rate.
The other factor is held constant in reality changing income level also effect exchange rate
indirectly through their effect on interest rate.
Government Control:
The government of the foreign countries can influence the equilibrium exchange rate in
many ways.
Imposing foreign exchange barrier.
Imposing foreign trade barrier.
Intervening in the foreign exchange market.
Effecting macro variable such as Inflation interest rate, and income level.
Expectation:
Fifth factor affecting exchange rate is market expectation of future exchange rate like other
financial markets foreign exchange market react to any news that may have a future effect.
Many institutional investors take currency position as participated interest rate movements
in various countries.

(B) Silk Bank expects that the Pakistan Rupee will depreciate against the U.S dollar from its
spot rate of 1$ = PKR 118 to $1= PKR 124 in 60 days. The following interbank lending
and borrowing rates exist:
Currency Lending Rate Borrowing Rate
U.S Dollar 11.0 % 12.0 %
Pak Rupee 13.0 % 15.0 %
Assume that Silk Bank has a borrowing capacity of either $1 million or 108 million Pak
Rupees in the interbank market, depending on which currency it wants to borrow.
(a) How could Silk Bank attempt to capitalize on its expectations without using deposited
funds? Estimate the profit or loss that could be generated from this strategy.
(b) Assume all the preceding information with this exception Silk Bank expects the
Pak Rupee to appreciate from its present spot rate of $1=PKR 118 to $1=PKR114 in
90 days. How could it attempt to capitalize on its expectations without using deposited
funds? Estimate the profit or loss that could be generated from this strategy.