VELAMMAL COLLEGE OF ENGINEERING AND TECHNOLOGY, Madurai – 625 009

Department of Management Studies

Internal Assessment Test – Answer Key
Programme MBA Year/Sem./Sec. II/III/A
Course Code 23MBA310 Date 06/08/2025
Course Name International Finance Max. Marks 50
Course Coordinator Dr. N. Arunsankar Time 1.30 Hrs.
PART A
Answer All Questions (5 X 2 = 10)
Pattern COs Marks
International Finance is the study of monetary interactions between two or
1 more countries, focusing on cross-border capital flows, exchange rates, K1 CO1 2
international monetary systems, and global financial markets.
Exchange rate determines the value of one country’s currency in terms of
another.
 It influences trade competitiveness, investment decisions, capital
2 flows, and balance of payments. K2 CO1 2
 Fluctuations directly affect export revenues, import costs, and
foreign investments.

Forward Rate Parity (FRP) states that the difference between the forward
exchange rate and the spot exchange rate equals the interest rate differential
between two countries.
3 Example: K1 CO1 2
If spot rate (₹/$) = 80, Indian interest rate = 6%, US interest rate = 3%, then
Forward Rate = Spot × (1 + i₹) / (1 + i$) = 80 × (1.06/1.03) ≈ 82.33.

Political and legal risks (government policies, instability).

Cultural and operational risks (different consumer behavior, management
4 K2 CO2 2
issues).

The cost of capital in international projects refers to the required return on

investment, considering global factors like exchange rate risk, country risk
5 K1 CO2 2
premium, and international borrowing/lending rates.

PART B
Answer All Questions (3 X 8 = 24)
6.a) Evolution: K4 CO1 8
 Pre–World War II: Gold Standard System.
 Post–1944: Bretton Woods system and establishment of IMF &
World Bank.
 1970s: Floating exchange rates.
 1990s onward: Financial globalization, capital mobility, derivative
markets.
Importance:
 Facilitates international trade & investment.
 Helps manage exchange rate risk.
 Provides access to foreign capital.
 Supports global economic stability and growth.
 (or)
IMF: Provides monetary cooperation, exchange rate stability, balance of
payments support, and policy advice.
World Bank: Long-term loans for development projects.
BIS: Forum for central banks’ cooperation.
6.b) K4 CO1 8
WTO: Promotes free trade and settlement of trade disputes.
ADB / Regional Banks: Provide regional financial and infrastructure
support.

Process:
1. Market research & feasibility study.
2. Choice of entry mode (subsidiary, joint venture, merger, export).
3. Financing decision (FDI, loans, equity).
4. Regulatory and tax compliance.
7.a) Financial Implications: K4 CO2 8
 Exchange rate risk.
 Transfer pricing.
 Working capital management in foreign subsidiaries.
 Repatriation of profits.

(or)
 Currency risk: Exchange rate fluctuations.
 Political risk: Expropriation, policy changes.
 Credit risk: Default by foreign partners.
7. b) K4 CO2 8
 Liquidity risk: Difficulty in repatriation of funds.
 Taxation issues: Double taxation and complex structures.

NPV (Net Present Value): Considers time value, reliable method.

IRR (Internal Rate of Return): Useful for comparing profitability.
Payback Period: Measures risk and liquidity preference.
8. a) PI (Profitability Index): Ratio measure useful under capital constraints. K4 CO2 8
APV (Adjusted Present Value): Considers financing structure &
subsidies.

(or)
Supply chain disruptions.
Cultural and HR challenges.
Technological risks (cybersecurity, IT failures).
8. b) K4 CO2 8
Compliance risks (laws, tax regimes).
Inflation and interest rate fluctuations affecting operations.

PART C
Answer All Questions (1 X 16 = 16)
9. a) Case: Indian Pharma Company entering Latin America K5 CO1 16
(i) International finance institutions that can assist:
 IMF & World Bank: Provide financial stability and development
funds.
 IFC (International Finance Corporation): Private sector
 financing.
 Regional banks (IADB – Inter-American Development Bank):
Infrastructure and trade finance support.
 EXIM Bank of India: Export financing and credit support.
(ii) Exchange rate risks & monetary policy factors:
 Exchange Rate Risks:
o Depreciation of local currency against INR/USD may
reduce returns.
o Translation, transaction, and economic exposure.
 Monetary Policy Factors:
o Inflation in Latin America affecting input costs.
o Interest rate volatility impacting cost of borrowing.
o Central bank interventions and capital controls.
o Currency convertibility restrictions.

(or)
Factors influencing exchange rate determination & impact on trade
and capital flows:
 Factors influencing exchange rate:
o Balance of payments position.
o Inflation and interest rate differentials.
o Purchasing Power Parity (PPP) & Interest Rate Parity
(IRP).
9. b) o Political stability and investor confidence. K4 CO1 16
o Central bank interventions.
 Impact on international trade & capital flows:
o Appreciation makes exports costly, imports cheaper.
o Depreciation boosts exports but raises import costs.
o Volatile exchange rates discourage FDI.
o Stable exchange rates attract long-term capital inflows.