ZQMS-ARC-REC-002 ASSIGNMENT COVER REGION: MIDLANDS PROGRAMME: SEMESTER: BBFH PIN: _P1823896C _________ EMAIL ADDRESS: email@example.com_____ CONTACT TELEPHONE/CELL: 0715343655 COURSE NAME: INTERNATIONAL FINANCE ASSIGNMENT NO. e.g. 1 or 2: YEAR: 2022 INTAK E: _____32______ FULL NAME OF STUDENT: MASEKESA LOGIC DUE DATE: 3:2 2 14/03/22 ASSIGNMENT TITLE: _Question 1 and 2 ___________________________ ID. NO.: 04-130382-V-04____________ COURSE CODE: __BBFH308 _____ STUDENT’S SIGNATURE __________________ SUBMISSION DATE: 13/03/22_____ ________________________________ Instructions Marks will be awarded for good presentation and thoroughness in your approach. NO marks will be awarded for the entire assignment if any part of it is found to be copied directly from printed materials or from another student. Complete this cover and attach it to your assignment. Insert your scanned signature. Student declaration I declare that: • I understand what is meant by plagiarism • The implications of plagiarism have been explained to me by the institution • This assignment is all my own work and I have acknowledged any use of the published or unpublished works of other people. MARK ER’S COMMENTS: _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ OVERALL MARK:____________________MARK ER’S NAME: MARK ER’S SIGNATURE: _________________________ DATE: ________________________________ Question 1 Eurocurrency is a currency which is deposited in a foreign bank outside of its home country. This term is used to all currency and not only to euros which are deposited anywhere outside of its local country for example Japanese yen deposited in United States, have they become Eurocurrency. Market imperfections between Eurocurrency and domestic currency market leads to differences in interest rates. It is this market imperfection which leads to Eurocurrency spreads to be narrower than domestic spreads. Due to market imperfections the euro market deposits interest rates will be higher that the domestic markets interest rates because of the following; there is no regulations in the euro market and that being the case there are no reserves requirements. Eurocurrency interest rates are determined by forces of competition and this leads to lower spreads. Also the higher volumes which are found in the euro markets enable them to afford narrower spreads than domestic markets. The fact that interest payments are paid gross and that securities are bearer securities gives the market anonymity and an obvious attractiveness from the tax point of view. Euro market has got a large catchment area and this helps to quickly arrange for large volumes of loans. The higher volumes which characterize euro markets enable them to afford narrower spreads than domestic markets They contain high credit rating required for corporations or government in euro markets enables them to obtain funds at lower interest rates. The use of tax haven countries in many such transactions helps companies to make huge after tax returns than their domestic counterparts and as a result financial institutions charges lower margins. There is also existence of sovereign risk which is risk associated with foreign currency deposits being frozen as a result foreign currency deposits attract a higher interest rate than domestic counterparts this in turn will lead to narrower spreads. The reasons why depositors and borrowers do not shift their business to euro markets are; existence of exchange controls in countries which prevent the outflow of funds inconveniences and cost involved in maintaining balances in foreign countries, the market involves large transactions- wholesale market, Euro markets prefer to lend to large well known corporates, banks and governments and lastly companies and corporations may not want to use euro markets because of the existence of sovereign risk. I agree with the assertion that Eurocurrency interest rates are more attractive and have a narrower spread as compared from domestic interest rates because of the reasons discussed above. Question 2 (a) Money market hedge is hedge against exposure to foreign currency risk which emanate from borrowing or depositing an appropriate amount of money today to fix payments and receipts in domestic currency. Any company which is involved in international trade is subject to this risk exposure when payment is delayed. Money market hedge tries to eliminate foreign currency risk. (b) Tuli Super Minerals borrows £1 000 000 /1.05 = £952 380-95 Tuli super minerals borrows Current CF CF at maturity £952 380-95 £1 000 000 Buy dollars at spot with £ at 1 238 095-24 $1.30 -952 380-95 Invest in ZW at 1.10 1 238 095.24 1 361 904-76 Collect £ receivables Net cash flow 1 000 000 0 1 361 904-76 (c) Assumptions of money market hedge -Suitable for a small business -No transaction cost -No capital controls -Suitable for smaller amount of capital -Effective for currencies where forward contracts are not readily available. References 1. Chrystal k a (1984), “A guide to foreign exchange markets” Federal Reserve Bank of St Louis Review, March 1984 2. Clark e (2002) International finance 2nd Edition, T.J. International, London 3. Imad A. Moosa (1998), International finance and analysis approach, McGraw Hill, Sydney.