Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – II - Question Paper

ques. Paper
International Finance and Trade – II (222) : July 2006

part D : Case Study (50 Marks)

· This part consists of ques. with serial number one - 5.

· ans all ques..

· Marks are indicated against every ques..

· Do not spend more than 80 - 90 minutes on part D.

Case Study

learn the case carefully and ans the subsequent questions:

1. For an Indian Company, the option ranging from the borrowing in home currency or foreign currency would depend on a number of criteria. explain those criteria for choosing a currency of borrowing.

(10 marks) < ans >

2. elaborate the reasons for the growth of Eurodollar market? explain the advantages; 7 Seas Info-tech can gain by borrowing in Eurodollar market than in borrowing dollar in the US market.

(8 marks) < ans >

3. discuss how the Eurocurrency interest rates are determined.

(6 marks) < ans >

4. a. Show the cash-flows from the Eurodollar loan and euro currency loan and obtain out the effective rupee cost of the loans if the 6-month dollar and euro LIBOR turned out as follows:

Period
(Months)
6–12
12–18
18 – 24
24 – 30
30–36
36– 42
42-48
48-54
54-60

US$ LIBOR

€ LIBOR
5.30%

3.00%
5.45%

3.25%
5.50%

3.50%
5.25%

3.35%
5.50%

3.10%
5.40%

3.00%
5.25%

3.25%
5.50%

3.30%
5.50%

3.30%


b. Show the cash-flows of the yen loan and obtain out the effective cost of the loan in rupee term.

(14 + six = 20 marks) < ans >

5. discuss the kinds of foreign exchange exposure 7 Seas Info-tech will face if it borrows in foreign currency.

(6 marks) < ans >

Mr. Praveen, recently appointed as a Vice-President (Finance) in the 7 Seas Info-tech Ltd., (SSIL) Bangalore and also a member of Top Management Committee (TMC) of the company. He noticed that in the middle of June, 2006 the Head of the Financial Planning Group placed a note to TMC that the SSIL would soon reach the threshold limits fixed for short term working capital borrowings from banks in India. The company also requires term loan to the extent of Rs.200 crore to meet company’s ongoing international expansion plans. For international expansion plans it is considering to borrow in foreign currency as the company can avoid the transaction cost for converting rupee into foreign currency, and also international interest rates are considered to be lower than the rupee term rates, so it can be cheap abroad.

TMC is of the opinion that Govt. of India liberalized the terms and conditions for External Commercial Borrowings by Indian companies, the company should borrow from US market in view of company’s good reputation in US market, even though the funds can be found on a softer terms from financial institutions in Japan and European countries. Mr. Praveen, discussed that the company could opt for borrowings from European market at a lesser rate of interest and more softer terms than from financial institutions from USA. Due to different reasons and less number of regulations Euro banks can charge lower cost of dollar borrowings than the banks in US. It is far easier to get a dollar loan in the Eurodollar market than US since there is no central bank which controls this market.

Earning:   Approval pending.