Multinational Business Finance Assignment 2
Content
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IIPM
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT Multinational Business Finance - Re-Examination Assignment
Paper Code: IIPM/FIN04/MBF002 Max. Marks: 100 General Instructions: The Student should submit this assignment in his/her own handwritten (not in the typed format). The Student should submit this assignment within 2 days from the issue of the assignment. The student should attach this assignment paper with the answered papers. Write legibly and keep the length of the answer as per the weightage (in terms of marks) assigned to each question. DO NOT be unduly short or long in providing the relevant details. The student should only use the Rule sheet papers for answering the questions. Failure to comply with the above instructions would lead to rejection of assignment. Specific Instructions: There are Four Questions in this assignment. The student should answer all the questions along with their subparts. Marks are being assigned to each section of the question as well. Each Question carries equal marks (25 marks) unless specified explicitly.
Question-1(25Marks) Read the following case study carefully and answer questions which are being given in the last ……………………………………………………………………………………………………..
CASE STUDY MANAGING OPERATING EXPOSURE: CAN WE REALLY MANAGE THE SAME?
It is necessary for business executives to digest and control the dynamic interaction of currency exposure and exposure management for their company's long-term welfare This case recounts how a company assessed its foreign exchange exposure and decided to hedge these exposures
2 (Maloney, 2011). BCR is an indonesian based metal producer with business interests in eight countries. It is the world's fifth largest metal producer, owns 25 percent of the world's largest ironore producer and is a major producer of gold and fertilizer. BCR builds its business on large, low cost, and long life assets, which are globally competitive.
Most commodities produced by indonesian mining companies, including BCR, are exported and priced in US dollars. Thus, these companies would suffer significantly and their Indonesian currency revenue would drop if the Indonesain currency appreciated sharply against the US dollar. Given such an exposure, the conventional wisdom held that borrowing in US dollars would provide a "natural" hedge against their revenue stream. When forward markets began to develop, Indonesian mining companies often hedged up to 100 percent of forecasted revenues with a combination of debt servicing and forward contracts--often for periods up to ten years. In the early and mid-70’s, the Indonesian dollar declined sharply against the US dollar, and the "natural" hedge proved not to be a hedge at all, but rather an uncovered short position in the US dollar. As expected, the decline in the Indonesian currecny increased the cost of serving US dollar debt. And those companies that had also sold forward their expected dollar revenue stream also suffered further foreign exchange losses as these contracts matured. The positive effect of the stronger US dollar on dollar-denominated revenues was offset by a prolonged slump in mineral commodity prices.
Although BCR too experienced some currency losses, it fared better than many of its competitors for two reasons. First, it had relied more on the equity markets to finance capital expenditures. Second, it had not participated in new major projects in the early 1990s. In 2004, however, the company contemplated investment in new copper, uranium, and gold mine, with capital costs expected to be about $750 million. Under arrangements with a joint venture partner, the company planned to finance its share of the mine solely with debt, thereby increasing its total debt by a magnitude of two or three times.
When confronted with the need to decide the currency denomination of the debt, BCR concluded that taking a short position in US dollars, whether by borrowing or selling forwards, would not stabilize the volatility of its home country operating profits. Consequently, BCR decided to
3 borrow in a basket of currencies that included Indonesian currency, US dollars, Japanese yen, British pounds, and Deutsche marks. The company also decided to discontinue its practice of selling forward US dollar revenues, except when actual sales had been made. Answer the following carefully………………………………………………………… (i)What are two possible ways to hedge economic exposure? (ii)What are the different types of foreign exchange risk BCR will encounter? (iii)Evaluate pros and cons of various exchange-hedging instruments and techniques. (iv)Explain why borrowings in US dollars and forward sales of US dollar revenues by Indonesian mining companies had backfired. (v)Explain why BCR decided to borrow in a basket of currencies rather than exclusively in US dollars or Indonesain Currency. (vi)Explain why BCR decided not to hedge its economic exposure questions
Question-2[A][10Marks] Indus Ltd. is the wholly owned Indian subsidiary of US based company Gofts Ltd. Non consolidated balance sheets of both Gofts Ltd. and Indus Ltd. (only foreign operations), in thousands, are as follows: Assets Gofts Ltd.(Figures in Indus Ltd. (affiliate)(Figures dollars) in Rs.) Cash 2,200 8,000 Accounts receivable 2,400 4,600 Inventory 2,400 7,000 Net plant and equipment 4,600 9,000 Investment 2,000 Total 13,600 28,600 Plant &equipment and commons stock were acquired when exchange rate was Rs. 38.20/$. Liabilities and net worth Gofts Ltd. (parent) (Figures Indus ltd. (affiliate) (Figures in dollars) in Rs.) Accounts payable 1,000 12,000 Common stock 4,000 6,000 Retained earnings 8,600 10,000 Total 13,600 28,600 The current exchange rate is Rs. 43.20/$. Gofts Ltd. translates by current rate method.
4 Now answer the following questions carefully…………………………………………. (i) Calculate the accounting exposure for Gofts Ltd, by the current rate method and monetary / non monetary method. (ii) Prepare a consolidated balance sheet for Gofts Ltd. and Indus Ltd.
Question-2[B][15Marks] Prepare a table of balance of payment based on following information and show how the following inflows/outflows would be shown in the table:(i)An Indian Company imports cloth worth Rs.5000 from Nepal. (ii)Karim of Bangladesh immigrates to India with Rs. 1000. (iii)Karim finds a job and sends Rs. 1500 to his family in Bangladesh. (iv)Profit made by a Mauritian subsidiary of the ABC company is Rs. 20 000 of which25 per cent is remitted to the parent company in India. (v)The government of Sri Lanka issues bonds for Rs. 50 000 with an interest rate of 5 per cent. Indians buy 20 per cent of these bonds. (vi)An exporter, Madam, sells spare parts worth Rs. 25 000 to Colombia and receives payment on delivery. (vii)A US exporter sells to India a process equipment for Rs. 150 000.
Question-3[A][20 Marks] Coca Cola Ltd Balance sheet as on 31st March 2011looks like as follows: (Rs.) Liabilities Equity shares of Rs 10 each Reserves and Surplus Secured Loans Current Liabilities and Provisions X Ltd Assets 20,00,000 Land Building 10,00,000 Machinery 10,00,000 Stock 500,000 Debtors Misc Expenditure 45,00,000 Total X Ltd and 15,00,000 10,00,000 500,000 10,00,000 500,000 45,00,000
Total
The secured loans forming a part of capital structure of the company include ECB of USD 2 million at USD/INR 50. There are certain questions which are coming to the mind of the CFO of the company. You have been hired as a financial consultant of Coca Cola to answer and guide him on under mentioned queries:
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Now answer the following questions carefully…………………………. (i) What is ECB? Is it used in calculating MPBF? (ii) Explain ant three guidelines on ECBs (iii)How can the client protect himself against the chances of rising LIBOR or USD appreciation. (iv)What could be the possible alternative to ECB with attendant advantages and disadvantages? Question-3(B) [5Marks] An Indian company C & Co. imports equipment worth $1.0 million and is to pay after 3 months. On the day of the contract, the rates are Rs. 35.00/$: Comment on the following situations (with appropriate reasoning) (i)There is an anticipation of a further fall of rupee. What should it do?. (ii)What should C & Co. do if it knows with a high probability that in 3 months dollar will settle at Rs. 36.00/$.
Question-4(A)[10 Marks] Apollo Tyres Limited imports annually Rs 1000 crores worth of raw materials billed normally in EUR. There is a strong chance that EUR shall start getting appreciated against USD which means EUR/USD shall move to 1.3500 from its current level of 1.2000.However not much of volatility or movements are expected on USD/INR currency pair. The client has asked for your consultancy on EUR/USD currency pair and certain other queries as mentioned below: Now answer the following questions carefully……………………………………………….. (i)What type of non fund based funding opportunity is there with such client for his trade finance? (ii)Which accounting standard should he refer to for better accounting on such forex movements? (iii)Please advise him what to do on EUR/USD currency pair? Question-4[B][15Marks] You have been hired as CFO of Asahi Glass Limited and have opened up an LC for 90 days cycle for importing goods from Japan billed in USD from Citi bank Ltd. The LC amount is USD 50 Mio (Spot USD/INR=40). The owner’s son (new Finance Director) is lacking knowledge because of inexperience and has certain queries on trade and finance: Now answer the following questions carefully………………………………………………… [i]Please explain to him the trade flow and financial flow and the role of LC in such trade and financial flows.
6 [ii]He wants to know how is this LC limit set up by the Bank? [iii]Which type of a vanilla option would the client take in case he wants to hedge his foreign exposure? [iv]Explain the concept of permanent working capital to him.
………………………………ALL THE BEST………………………………
IIPM
THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT Multinational Business Finance - Re-Examination Assignment
Paper Code: IIPM/FIN04/MBF002 Max. Marks: 100 General Instructions: The Student should submit this assignment in his/her own handwritten (not in the typed format). The Student should submit this assignment within 2 days from the issue of the assignment. The student should attach this assignment paper with the answered papers. Write legibly and keep the length of the answer as per the weightage (in terms of marks) assigned to each question. DO NOT be unduly short or long in providing the relevant details. The student should only use the Rule sheet papers for answering the questions. Failure to comply with the above instructions would lead to rejection of assignment. Specific Instructions: There are Four Questions in this assignment. The student should answer all the questions along with their subparts. Marks are being assigned to each section of the question as well. Each Question carries equal marks (25 marks) unless specified explicitly.
Question-1(25Marks) Read the following case study carefully and answer questions which are being given in the last ……………………………………………………………………………………………………..
CASE STUDY MANAGING OPERATING EXPOSURE: CAN WE REALLY MANAGE THE SAME?
It is necessary for business executives to digest and control the dynamic interaction of currency exposure and exposure management for their company's long-term welfare This case recounts how a company assessed its foreign exchange exposure and decided to hedge these exposures
2 (Maloney, 2011). BCR is an indonesian based metal producer with business interests in eight countries. It is the world's fifth largest metal producer, owns 25 percent of the world's largest ironore producer and is a major producer of gold and fertilizer. BCR builds its business on large, low cost, and long life assets, which are globally competitive.
Most commodities produced by indonesian mining companies, including BCR, are exported and priced in US dollars. Thus, these companies would suffer significantly and their Indonesian currency revenue would drop if the Indonesain currency appreciated sharply against the US dollar. Given such an exposure, the conventional wisdom held that borrowing in US dollars would provide a "natural" hedge against their revenue stream. When forward markets began to develop, Indonesian mining companies often hedged up to 100 percent of forecasted revenues with a combination of debt servicing and forward contracts--often for periods up to ten years. In the early and mid-70’s, the Indonesian dollar declined sharply against the US dollar, and the "natural" hedge proved not to be a hedge at all, but rather an uncovered short position in the US dollar. As expected, the decline in the Indonesian currecny increased the cost of serving US dollar debt. And those companies that had also sold forward their expected dollar revenue stream also suffered further foreign exchange losses as these contracts matured. The positive effect of the stronger US dollar on dollar-denominated revenues was offset by a prolonged slump in mineral commodity prices.
Although BCR too experienced some currency losses, it fared better than many of its competitors for two reasons. First, it had relied more on the equity markets to finance capital expenditures. Second, it had not participated in new major projects in the early 1990s. In 2004, however, the company contemplated investment in new copper, uranium, and gold mine, with capital costs expected to be about $750 million. Under arrangements with a joint venture partner, the company planned to finance its share of the mine solely with debt, thereby increasing its total debt by a magnitude of two or three times.
When confronted with the need to decide the currency denomination of the debt, BCR concluded that taking a short position in US dollars, whether by borrowing or selling forwards, would not stabilize the volatility of its home country operating profits. Consequently, BCR decided to
3 borrow in a basket of currencies that included Indonesian currency, US dollars, Japanese yen, British pounds, and Deutsche marks. The company also decided to discontinue its practice of selling forward US dollar revenues, except when actual sales had been made. Answer the following carefully………………………………………………………… (i)What are two possible ways to hedge economic exposure? (ii)What are the different types of foreign exchange risk BCR will encounter? (iii)Evaluate pros and cons of various exchange-hedging instruments and techniques. (iv)Explain why borrowings in US dollars and forward sales of US dollar revenues by Indonesian mining companies had backfired. (v)Explain why BCR decided to borrow in a basket of currencies rather than exclusively in US dollars or Indonesain Currency. (vi)Explain why BCR decided not to hedge its economic exposure questions
Question-2[A][10Marks] Indus Ltd. is the wholly owned Indian subsidiary of US based company Gofts Ltd. Non consolidated balance sheets of both Gofts Ltd. and Indus Ltd. (only foreign operations), in thousands, are as follows: Assets Gofts Ltd.(Figures in Indus Ltd. (affiliate)(Figures dollars) in Rs.) Cash 2,200 8,000 Accounts receivable 2,400 4,600 Inventory 2,400 7,000 Net plant and equipment 4,600 9,000 Investment 2,000 Total 13,600 28,600 Plant &equipment and commons stock were acquired when exchange rate was Rs. 38.20/$. Liabilities and net worth Gofts Ltd. (parent) (Figures Indus ltd. (affiliate) (Figures in dollars) in Rs.) Accounts payable 1,000 12,000 Common stock 4,000 6,000 Retained earnings 8,600 10,000 Total 13,600 28,600 The current exchange rate is Rs. 43.20/$. Gofts Ltd. translates by current rate method.
4 Now answer the following questions carefully…………………………………………. (i) Calculate the accounting exposure for Gofts Ltd, by the current rate method and monetary / non monetary method. (ii) Prepare a consolidated balance sheet for Gofts Ltd. and Indus Ltd.
Question-2[B][15Marks] Prepare a table of balance of payment based on following information and show how the following inflows/outflows would be shown in the table:(i)An Indian Company imports cloth worth Rs.5000 from Nepal. (ii)Karim of Bangladesh immigrates to India with Rs. 1000. (iii)Karim finds a job and sends Rs. 1500 to his family in Bangladesh. (iv)Profit made by a Mauritian subsidiary of the ABC company is Rs. 20 000 of which25 per cent is remitted to the parent company in India. (v)The government of Sri Lanka issues bonds for Rs. 50 000 with an interest rate of 5 per cent. Indians buy 20 per cent of these bonds. (vi)An exporter, Madam, sells spare parts worth Rs. 25 000 to Colombia and receives payment on delivery. (vii)A US exporter sells to India a process equipment for Rs. 150 000.
Question-3[A][20 Marks] Coca Cola Ltd Balance sheet as on 31st March 2011looks like as follows: (Rs.) Liabilities Equity shares of Rs 10 each Reserves and Surplus Secured Loans Current Liabilities and Provisions X Ltd Assets 20,00,000 Land Building 10,00,000 Machinery 10,00,000 Stock 500,000 Debtors Misc Expenditure 45,00,000 Total X Ltd and 15,00,000 10,00,000 500,000 10,00,000 500,000 45,00,000
Total
The secured loans forming a part of capital structure of the company include ECB of USD 2 million at USD/INR 50. There are certain questions which are coming to the mind of the CFO of the company. You have been hired as a financial consultant of Coca Cola to answer and guide him on under mentioned queries:
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Now answer the following questions carefully…………………………. (i) What is ECB? Is it used in calculating MPBF? (ii) Explain ant three guidelines on ECBs (iii)How can the client protect himself against the chances of rising LIBOR or USD appreciation. (iv)What could be the possible alternative to ECB with attendant advantages and disadvantages? Question-3(B) [5Marks] An Indian company C & Co. imports equipment worth $1.0 million and is to pay after 3 months. On the day of the contract, the rates are Rs. 35.00/$: Comment on the following situations (with appropriate reasoning) (i)There is an anticipation of a further fall of rupee. What should it do?. (ii)What should C & Co. do if it knows with a high probability that in 3 months dollar will settle at Rs. 36.00/$.
Question-4(A)[10 Marks] Apollo Tyres Limited imports annually Rs 1000 crores worth of raw materials billed normally in EUR. There is a strong chance that EUR shall start getting appreciated against USD which means EUR/USD shall move to 1.3500 from its current level of 1.2000.However not much of volatility or movements are expected on USD/INR currency pair. The client has asked for your consultancy on EUR/USD currency pair and certain other queries as mentioned below: Now answer the following questions carefully……………………………………………….. (i)What type of non fund based funding opportunity is there with such client for his trade finance? (ii)Which accounting standard should he refer to for better accounting on such forex movements? (iii)Please advise him what to do on EUR/USD currency pair? Question-4[B][15Marks] You have been hired as CFO of Asahi Glass Limited and have opened up an LC for 90 days cycle for importing goods from Japan billed in USD from Citi bank Ltd. The LC amount is USD 50 Mio (Spot USD/INR=40). The owner’s son (new Finance Director) is lacking knowledge because of inexperience and has certain queries on trade and finance: Now answer the following questions carefully………………………………………………… [i]Please explain to him the trade flow and financial flow and the role of LC in such trade and financial flows.
6 [ii]He wants to know how is this LC limit set up by the Bank? [iii]Which type of a vanilla option would the client take in case he wants to hedge his foreign exposure? [iv]Explain the concept of permanent working capital to him.
………………………………ALL THE BEST………………………………
