ST JOHN’S UNIVERSITY OF TANZANIA

FACULTY OF COMMERCE AND BUSINESS STUDIES

DEPARTMENT OF FINANCE, ACCOUNTING AND ECONOMICS

COURSE TITLE: INTERNATIONAL FINANCE.

COURSE CODE: FN 315.

STUDENT NAME: SIMON KEFASI SICHONE.

REGISTRATION NUMBER: 2023/0146.

COURSE INSTRUCTOR: TIMOTHEO MWAKIJUNGU.

NATURE OF WORK: INDIVIDUAL ASSIGNMENT.

YEAR OF STUDY: 3rd YEAR (2025/2026).

SUBMISSION DAY: 14th JANUARY, 2026.

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QUESTION 1

Required:
(a) Define International Finance and explain its importance to national economies and
multinational firms.
(b) Describe the foreign exchange market, highlighting its definition, key characteristics, and
geographical extent.
(c) Explain the organization and functions of the foreign exchange market.
(d) Discuss the major players and activities in the foreign exchange market.
(e) Calculation Exercise: A Tanzanian firm imports goods worth USD 50,000. The spot rate is 1
USD = TZS 2,500. Calculate the amount in TZS the firm will pay. If the firm decides to hedge
using a forward contract at 1 USD = TZS 2,550, calculate the gain or loss from hedging.

QUESTION 2

Required:
(a) Analyze the opportunities and risks faced by multinational corporations.
(b) Evaluate how the integration of world markets affects multinational business operations.
(c) Calculation Exercise: A US-based MNC wants to invest USD 1,000,000 in Tanzania. The
expected local return is 12% per annum. The USD interest rate is 5%. Calculate the expected return
in USD after 1 year if:

i. The spot rate is 1 USD = TZS 2,400

ii. The expected future spot rate is 1 USD = TZS 2,500

QUESTION 3

Calculation Exercises:

Current exchange rate is 1 USD = TZS 2,400. Inflation in Tanzania is 10%, and in the USA is 4%.
Calculate the expected future exchange rate using relative PPP.

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Spot rate = 1 USD = TZS 2,500; Tanzania interest rate = 12%, USA interest rate = 5%; calculate
the 1-year forward rate.

You have USD 100,000. Spot rate = 1 USD = TZS 2,500; forward rate = 1 USD = TZS 2,600;
Tanzania interest rate = 10%, USA interest rate = 4%. Determine if arbitrage exists and calculate
the profit.

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ANSWERS:

QUESTION ONE.

(a) Definition of international finance and its importance to national economies and
multinational firms.

International Finance, is a branch of economics and finance that deals with monetary interactions
between two or more countries. It focuses on issues such as foreign exchange rates, international
investment, international trade financing, balance of payments, and risk management in a global
context.

Importance to national economies.

Promotes international trade. Countries need foreign currency to import goods and services.
Example, Tanzania needs USD to import machinery from the USA.

Attracts foreign investment. International finance enables inflow of Foreign Direct Investment
(FDI) and portfolio investment. For instance, a Chinese company investing in Tanzania’s mining
sector brings capital, technology, and employment.

Supports economic growth and development. Access to international capital markets helps
countries finance development projects. For instance, Tanzania borrowing from the World Bank
to finance infrastructure projects.

Stabilizes the economy. Proper management of foreign exchange reserves helps control inflation
and exchange rate volatility.

Importance to multinational firms.

Facilitates cross border business operations. Firms can pay suppliers, employees and taxes in
different countries and this can be simple due to the comparison of the interest rates between
different countries, finally invest on a country with higher returns. For instance, Coca-Cola
operating in Tanzania but headquartered in the USA.

Manages exchange rate risk. Exchange rate fluctuations can cause losses or gains and this firms
always use hedging instruments like forwards and futures just to get a profit from their hedging.

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Enhances global investment decisions. Always firms compare returns across countries in order to
understand which country can provide with more returns after investing abroad. For instance, a
firm chooses to invest where returns are higher after considering exchange rate movements.

(b) Foreign exchange market.

Definition.

The foreign exchange market is a global marketplace where currencies are bought and sold. It
determines exchange rates between different currencies. For instance, 1 USD is bought for TZS
2400.

Key characteristics.

Decentralized market. No single physical location, as this market trading occurs electronically. For
instance, banks in Tanzania can trade currencies with banks in London or New York.

Largest financial market in the world. Daily sales exceeds trillions of US dollars. This market
always operates 24 hours per day, as any time a person can buy or sell currencies on spot.

High liquidity. This means that the major currencies like USD, EUR and GBP are easily traded
and are always present in the market systems.

Various exchange rates. The foreign exchange market possess different exchange rates that
facilitate the trading just like hedging and these exchange rates influences the investors to invest
on foreign exchange market. Examples of exchange rates are spot rate, forward rate and swap rates.

Geographical extent.

The foreign exchange market has no single physical location as this means that, this is a globally
market. Major trading centres exist in different continents, that allow the day to day trading such
as Asia-Pacific (Tokyo, Hong Kong, Singapore and Sydney), Europe (London, Frankfurt and
Zurich) and North America (New York,). For example a Tanzanian importer buys USD from a
local bank, which may source it from a bank in London.

(c) Organization and functions of the foreign exchange Market

Organization.

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The foreign exchange market is organized through a network of participants mainly commercial
banks, central banks, foreign exchange brokers and corporations and individuals. There is no
central exchange as the transactions occur over the counter (OTC). Also, the foreign exchange is
linked through electronic trading platforms and operates through spot, forward, futures and swap
markets

Functions.

Currency conversion. The foreign exchange market enables conversion of one currency into
another. This enables different firms to make a beneficially investments due to the easy
determination of exchange rates of different currencies and also this simplify the payment process
into a foreign countries. For example, TZS converted into USD for imports.

Facilitates international trade and investment. The foreign exchange market ensures smooth
payment for exports and imports. This means that at any country a person can buy and sell different
goods and services due to the ability of changing a certain currency to another form of currency.

Hedging of exchange rate risk. Through foreign exchange market a firm can determines the
existence of arbitrage that influences the investments and this protects firms from unfavorable
currency movements. Example, by using forward contracts can help a firm to invest.

Credit provision. The foreign exchange market supports international payments through
instruments like letters of credit. Hence, this enable the importer to take possession of goods, sell
them to obtain money to pay off the bill.

(d) Major players and activities in the foreign exchange market

Major players.

Commercial banks. Conduct currency trading for clients. For example, CRDB bank and NMB
bank.

Central banks. Regulate and stabilize the currency. For example, Bank of Tanzania intervenes to
stabilize TZS. This can be done though buying and selling currencies and hence, facilitates
monetary policy.

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Multinational corporations (MNCs). Trade currencies to pay for imports, exports, and investments.
Example, Tanga Cement importing machinery.

Forex brokers and dealers. Act as intermediaries.

Speculators and investors. Aim to make profits from exchange rate fluctuations.

Activities.

Buying. Buying in the foreign exchange market means purchasing a foreign currency using the
home currency. Example, a Tanzanian importer needs to pay a supplier in the USA, so a firm needs
to buy USD using TZS in order to make a payment. Hence, this is called buying foreign currency.

Selling. Selling refers to the disposing of a foreign currency in exchange for the home currency.
Example a Tanzanian exporter receives USD 20,000 from the USA. The exporter sells USD to a
bank and receives TZS in return. Hence, this enable to convert export earnings into local currency.

Exchanging. Exchanging means the conversion of one currency into another at an agreed exchange
rate. Example, a tourist exchanges USD to TZS at a commercial bank or forex bureau. Hence, this
facilitate international trade, travel, and investment.

Speculating. Speculating involves buying or selling currencies with the aim of making profit from
future exchange rate movements. Example, a trader expects the USD to appreciate against TZS,
so he buys USD today and sells it later at a higher rate. But speculation involves high risk because
exchange rates are unpredictable.

(e) Given.

Value of imports = USD 50,000

Spot rate = TZS 2,500/USD

Forward rate = TZS 2,550/USD

Calculation of amount payable using the spot rate.

Amount payable (spot rate) = USD 50,000 x TZS 2,500/USD

= TZS 125,000,000

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Hence, if a firm uses the spot rate will pay TZS 125,000,000

Amount payable using forward contract.

Amount payable (forward contract) = USD 50,000 x TZS 2,550/USD

= TZS 127,500,000

Hence, if a firm uses the forward contract will pay TZS 127,500,000

Gain or loss from hedging

Gain or loss = Amount payable (forward contract) – Amount payable (spot rate)

= TZS 127,500,000 – TZS 125,000,000

= TZS 2,500,000

The firm will pay TZS 2,500,000 more by using the forward contract.

Hence, the firm will get a loss of TZS 2,500,000 by using the forward contract.

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QUESTION TWO.

(a) Opportunities of multinational corporations.

A multinational corporation (MNC) is a large business organization that operates in more than one
country. I has parent company in its home country and Subsidiaries, branches, or production
facilities in other countries (host countries). A multinational corporation makes strategic decisions
centrally (at headquarters) but conducts production, marketing, or sales internationally. Examples,
Coca-Cola. Home country is United States and its operation is to produces and sells beverages in
Tanzania, Kenya, South Africa, Europe, and Asia

The following are the opportunities of multinational corporation.

Reduced cost of production (Accessing cheap materials). Multinational corporations reduce

production costs by locating operations in countries where raw materials, labor, land or energy are
cheaper. The developing countries often have abundant natural resources and lower labor costs.
Also, producing closer to raw material sources reduces input costs. Hence, this facilitate
investments abroad for the aim of getting a higher returns. For instance, a foreign cement company
produces cement in Tanzania because limestone and labor are cheaper than in Europe.

Reducing distribution costs. Multinational corporations reduce transportation and logistics costs
by producing goods closer to target markets. This mean that the local production minimizes
shipping, insurance and handling costs and also reduces delivery time and spoilage for perishable
goods. Example, Coca-Cola produces beverages in Tanzania instead of exporting from the USA.

Accessing available skills and knowledge. Different countries specialize in different skills,
expertise and professional knowledge. This means that multinational corporation target into local
talent pools such as engineers, IT specialists or t and technician skilled labor may be cheaper or
more abundant in certain regions. Example, an IT company opens a development center in India
due to availability of skilled programmers.

Sharing parent technology. Multinational corporations transfer advanced technology and

management practices from the parent company to subsidiaries. This includes machinery,
production techniques, software and managerial systems. Hence, host countries benefit through
technology spread over. Example, a Japanese automobile firm transfers robotic manufacturing

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technology to its African subsidiary. This lead to higher productivity and improved quality
standards.

Building sales and market share. Operating internationally allows multinational corporations to
expand customer base and dominate markets. This means that a large scale operations enable mass
production and aggressive pricing. Example, Unilever selling household products across Africa
increases its market share.

The following are the risks faced by multinational corporations.

Country risk. Country risk refers to the possibility that economic, social, or political conditions in
a host country may negatively affect a multinational corporation operations, profits, or asset values
such as economic instability (inflation, recession), weak financial systems, poor infrastructure and
social unrest. Example, a manufacturing MNC in a developing country faces frequent power
shortages and poor transport networks, increasing operating costs and causing production delays.
Hence, reduced profitability, difficulty in long-term planning and increased operational costs.

Political risk. Political risk arises from government actions or political events that can harm foreign
investors such as nationalization or expropriation of assets, policy changes (tax laws, investment
rules) and civil unrest, strikes or war. Example, a mining MNC faces nationalization threats, where
the government takes over operations with little or no compensation. This led into loss of assets
and reduced investor confidence.

Regulatory risk. Regulatory risk refers to losses caused by changes in laws, regulations, or
compliance requirements in the host country. This can affect the environmental regulations, labor
laws, health and safety standards and licensing and permits. Example, a pharmaceutical
multinational corporation faces delays due to new drug approval regulations, increasing costs and
reducing market competitiveness. Hence, higher compliance costs, operational delays and legal
penalties for non-compliance.

Currency risk (exchange rate Risk). Currency risk arises from unpredictable changes in exchange
rates that affect the value of foreign earnings, costs, and investments such as transaction risk which
affects payments and receipts in foreign currency, translation risk which affects financial
statements and economic risk which affects long-term competitiveness. Example, a US-based
MNC invests in Tanzania and earns TZS profits, but the shilling depreciates from TZS 2,400 to

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TZS 2,600 per USD, reducing the USD value of returns. Hence, it reduced profits and increased
uncertainty.

(b) How the integration of world markets affects multinational business operations.

Integration of world markets refers to the increasing linkage and interdependence of national
economies through international trade, foreign direct investment (FDI), global financial markets
and technology and information flows. This process also can be known as globalization.

The following are reasons on how the integration of world markets affects multinational
business operations.

Expansion of market size and access. Market integration allows MNCs to sell goods and services
across borders with fewer restrictions such as tariffs, quotas, and trade barriers. Firms are no longer
limited to their domestic markets. Example, a European electronics company sells smartphones in
Africa, Asia and America due to trade liberalization. Hence, lead into increased sales volume,
economies of scale and higher revenue growth.

Development of global supply chains. Integrated markets enable MNCs to source raw materials,
components and services from different countries, choosing the most cost-effective and efficient
locations. Example, a car manufacturer sources steel from China, electronics from Germany, and
assembles cars in Africa. Hence, this lead into lower costs, flexible production systems and
increased dependence on global logistics.

Increased competition worldwide. Market integration exposes firms to intense global competition,
forcing them to improve quality, efficiency and innovation. For instance, local African firms
compete with global brands such as Samsung and Apple and telecom companies face competition
from international operators entering domestic markets. Hence, this lead into improved product
quality, lower prices for consumers and pressure on inefficient firms.

Technology transfer and innovation. Integrated markets facilitate faster transfer of technology,
skills, and management practices across countries. Example, a Japanese car manufacturer transfers
advanced manufacturing technology to its African subsidiary and digital platforms allow
multinational corporations to use cloud systems globally. Hence, this lead into higher productivity,
improved product standards and skill development in host countries.

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Increased mobility of capital and finance. Financial market integration allows multinational
corporation to raise capital globally and invest where returns are highest. Example, a multinational
corporation raises funds in the US but invests in Tanzania due to higher returns and firms use
international banks to finance large projects. Hence, easier access to finance, lower cost of capital
and exposure to global financial shocks.

(c)

Given data.

Initial investment = USD 1,000,000

Expected local return in Tanzania = 12% per annum

USD interest rate = 5%

Spot exchange rate, Sₒ = 1 USD = TZS 2,400

Expected future spot rate, F = 1 USD = TZS 2,500

Investment period = 1 year

Convert USD to Tanzanian Shillings (TZS) at the Spot Rate.

USD 1,000,000 × TZS 2,400/USD = TZS 2,400,000,000

Apply the local return which is 12%.

S = Sₒ × (1 + ∆S)

S = TZS 2,400,000,000 x (1 + 0.12)

S = TZS 2,688,000,000

Convert back to USD at the expected future spot rate (1 USD = TZS 2,500)

USD value after 1 year = TZS 2,688,000,000 ÷ TZS 2,500/USD

= USD 1,075,200

Calculate the expected return in USD

Expected return in USD = forward investment ─ initial investment.

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 = USD 1,075,200−USD 1,000,000.

= USD 75,200.

The expected return after 1 year in Tanzania is USD 75,200

Compare with investment in the USA (5%)

Expected return in 1 year = USD 1,000,000 x (1 + 0.05)

= USD 1,050,000

Hence, an expected return after Tanzania investment is USD 1,075,200 and after investing in the
USA is USD 1,050,000. Therefore the US-based MNC earns a higher return by investing in
Tanzania, even after considering exchange rate changes and compared to investing at home in the
USA.

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QUESTION THREE.

(a) Data given.

Current exchange rate (Spot), Sₒ = 1 USD = TZS 2,400

Inflation in Tanzania: πh = 10%

Inflation in the USA: πf = 4%

Recall from relative purchasing power parity.

S = Sₒ × (1 + ∆S)

∆S = πf ─ πh

= 4% ─ 10%

= -6%

S = TZS 2,400/USD x (1 ─ 0.06)

S = TZS 2,256/USD.

The expected future exchange rate is 1 USD = TZS 2,256. Inflation in Tanzania (10%) is higher
than in the USA (4%). Therefore, the Tanzanian Shilling is expected to appreciate and the
exchange rate falls from TZS 2,400 to about TZS 2,256 per USD.

(b)

Given:

Spot rate Sₒ = TZS 2,500/USD

Interest rate in Tanzania id = 12% = 0.12

Interest rate in USA if = 5% = 0.05

Time = 1 year

Interest rate parity (IRP) formula.

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Since the exchange rate is quoted as TZS per USD, Tanzania is the home country and the USA is
the foreign country.

1+𝑖𝑑
F = Sₒ x (1+𝑖𝑓 )

1+0.12
F = TZS 2,500/USD x (1+0.05 )

F = TZS 2,667/USD.

The 1-year forward rate is 1 USD = TZS 2,667. Tanzania’s interest rate (12%) is higher than the
USA’s interest rate (5%). Therefore, the TZS is expected to depreciate and this causes the forward
rate (2,667) to be higher than the spot rate (2,500).

(c) Given

Funds available = USD 100,000

Spot rate Sₒ = 1 USD = TZS 2,500

Forward rate F = 1 USD = TZS 2,600

Tanzania interest rate id = 10%

USA interest rate if = 4%

Time = 1 year

Calculate theoretical forward rate (IRP).

1+𝑖𝑑
F = Sₒ x (1+𝑖𝑓 )

1+0.1
F = TZS 2,500/USD x ( )
1+0.04

F = TZS 2,644/USD.

Comparison.

Theoretical forward rate (IRP) = TZS 2,644/USD

Actual forward rate = TZS 2,600/USD

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Therefore, the forward rate is too low as USD is underpriced in the forward market. Hence,
arbitrage opportunity exists.

Since Tanzania has the higher interest rate, borrow USD.

Convert to TZS at spot rate of TZS 2,500/USD.

= USD 100,000 x TZS 2,500/USD

= TZS 250,000,000.

Invest in Tanzania at an interest rate of 10%.

Recall from,

S = Sₒ x (1 + ∆S)

S = TZS 250,000,000 x (1 + 0.1)

S = TZS 275,000,000.

Convert back to USD using forward rate.

= TZS 275,000,000 ÷ TZS 2,600/USD.

= USD 105,769.23

Repay USD Loan (Including Interest).

= USD 1,000,000 x (1 + 0.04)

= USD 104,000

Calculation of profit.

Profit= USD 105,769.23 − USD 104,000

Profit= USD 1,769.23

The profit after 1 year is USD 1,769.23. The Tanzania’s interest rate is higher, so funds should
flow into Tanzania and the forward rate does not fully compensate for the interest rate difference.
Hence, this mispricing creates a risk free arbitrage profit.

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References.

Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International economics: Theory and policy
(11th ed.). Pearson Education.

Madura, J. (2021). International financial management (14th ed.). Cengage Learning.

Pilbeam, K. (2018). International finance (5th ed.). Palgrave Macmillan.

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2021). Multinational business finance (15th
ed.). Pearson Education.

Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management (11th ed.). Wiley.

International Monetary Fund. (2023). Balance of payments and international investment position
manual (7th ed.). IMF.

Bank of Tanzania. (2022). Foreign exchange regulations and guidelines. Bank of Tanzania.

World Bank. (2023). World development indicators. World Bank Publications.

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