Date: Wednesday, 4 th November 2011
Time Allocated: 3 hours (08:00 – 11:00 am)
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INSTRUCTIONS TO CANDIDATES
1 This paper consists of TWO Sections, A and B.
2 Section A consists of 4 questions, each question carries 15 marks.
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Answer ALL questions.
3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY
TWO questions.
You will be allowed 10 minutes to go through the paper before the start of the examination, you may write on this paper but not in the answer book.
Begin each answer on a new page.
Please write your examination number on each answer book used. Answer books without examination numbers will not be marked.
DO NOT open this question paper until instructed to do so.

Answer ALL questions from this section.
QUESTION 1
A Malawian trader would like to import 20,000 litres of raw materials from one of two possible sources; one is based in the South Africa and the other from Democratic
Republic of Congo (DRC). The following is the relevant information from the two sources:
South Africa:
Price: ZAR 240 per litre
DRC
Price: US$30 per litre
The supplier in DRC can only accept a bank draft while the South African supplier can be paid using a direct credit in his account. The exchange rates are as follows:
ZAR
US$
Buy: 19
Buy:160
Sell: 22
Sell: 165
The banks charge K7,000 processing fee for a bank draft and 0.05% commission for every foreign currency transaction.
Required:-
(a) Calculate the option that is less costly in monetary terms to the trader. (6 marks)
(b) What three other factors should the trader consider apart from the cost in choosing the source of the raw materials? (3 marks)
(c) Explain three reasons why an overvalued currency may cause shortage of foreign currency in a country. (6 marks)
A qualification examined by the Institute of Bankers in Malawi 2

QUESTION 2
A tea exporter expects to receive his payment of US$357,250 on 12 August 2011 and wants to hedge against exchange rate movement. On 12 July 2011, he decides to purchase a forward contract from a bank where the following information is displayed:
Spot rate
Currency
ZAR
Buy
22
Sell
25
GBP
US$
Forward Rates
1 month forward
ZAR
GBP
265
151
280
158
25
275
28
298
US$ 165 172
The cost of a forward contract is made up of (i) K10,000 fixed processing fee and (ii)
0.1% of amount of local currency involved in the conversion at the forward rate.
On 12 August, it turns out that that the exchange rates are:
Currency Buy Sell
ZAR
GBP
US$
23
269
161
27
286
171
The bank charges 0.05% commission for all foreign exchange transactions at spot rate.
(a) Show in detail how this exporter will go on hedging the risk and clearly calculate the results of the hedge and explain whether it was profitable or not. (13 marks)
(b) Mention two other means that the exporter would use to manage the risk .
(2 marks)
(15 marks)
QUESTION 3
An importer of children toys is considering a cheaper way of purchasing; FOB or CIF.
Following is the relevant information:
Source: Beira, Mozambique
Insurance Premium for transit: 3% of factory price of goods
Cost of transporting to Lilongwe, Malawi: K200,000
A qualification examined by the Institute of Bankers in Malawi 3

Purchase price: equivalent of K1,500,000 FOB K1,700,000 CIF
Required:
(a) What do the terms FOB and CIF stand for and mention the duties of the seller in both scenarios. (6 marks)
(b) Which option is cheaper for the importer using the information given above?
Show your calculations clearly . (5 marks)
(c) Define any four risks that can be covered under export credit insurance.
(4 marks)
(Total 15 marks)
QUESTION 4
Demonstrate in detail how a Malawian cotton exporter can arrange to be paid using documentary collection in a transaction which involves selling 20 ton of cotton lint to a customer based in Italy. In your response include how the documentary collection arrangement operates highlighting specific areas that will ensure that the transaction is concluded satisfactory. (Total 15 marks)
Answer ANY TWO questions from this section.
QUESTION 5
Explain five negative effects of exchange control regulations. (Total 20 marks)
QUESTION 6
Explain using examples, how the following contract agreements operate in international trade:
(i) Consignment;
A qualification examined by the Institute of Bankers in Malawi 4

(ii) Clearing arrangement;
(iii) Switch trading;
(iv) Factoring;
(v) Forfeiting. (Total 20 marks)
QUESTION 7
(a) Mention the currencies that are used in the following countries and their codes according to ISO 4217:
(i) Mozambique;
(ii) Brazil;
(iii) Belgium. (6 marks)
(b) Explain how the following factors affect the exchange rate of a local currency with foreign currencies:
(i) Market expectation;
(ii) Economic position;
(iii) Balance of payments;
(iv) Inflation. (14 marks)
(Total 20 marks)
QUESTION 8
(a) Reserve Bank of Malawi issued a press release in the daily paper regarding payment by tourists to tourist lodges. State its facts and explain any three reasons why it will be difficult to implement and reinforce such a directive.
(b) Explain four roles of banks in international trade.
(6 marks)
(8 marks)
(c) Adam Smith proposed that it would be beneficial for countries to practice free trade based on specialization. Explain by giving three reasons why in practice it may be difficult to implement . ( 6 marks)
(Total 20 marks)
A qualification examined by the Institute of Bankers in Malawi 5