Attempt all the problems.
problem1) Describe the issues involved in international capital budgeting decisions. Are the traditional methods of evaluating capital budgeting decisions appropriate, why?
problem2) What are the various types of foreign exchange exposure? describe the methods to hedge foreign exchange exposure.
problem3)a) What are currency derivatives? Distinguish currency forward with currency futures.
b. An Indian exporter who has 3 month receivable of US$ 10,000 wants to hedge his position. Present spot rate of Rs/$ is 58.75 and Rs. is likely to appreciate in 3 months by at least 15%. How could the exporter hedge his position if the forecast it accurate? Show your calculation.
problem4) What are the International sources of funds? Describe after categorizing it into equity & debt fund and long-term & short term.
Company A is AAA rated Indian company who wishes to raise US$ 10 million to fund its US subsidiary from international market including US market. It could raise funds through 10.50 % fixed rate bonds. Alternatively, it could raise it through a floating rate bond at LIBOR + 0.50%.
The present exchange rate is Rs.50/US$.
Company B is BBB rated US Company who wishes to raise Rs. 500 million from Indian market to finance its Indian subsidiary. It could raise funds through 12.50 % fixed rate bonds. Alternatively, it could raise it through a floating rate bond at LIBOR + 1.25%.
Suppose that you are a swap dealer, who charge 0.50 % fee. Design a swap deal for Company A and Company B in such a way that it benefits both Companies. Also determine the fees of swap dealer and net saving for each company in the first year.