Suggested Answer_Syl2008_Jun2014_Paper_12

FINAL EXAMINATION
GROUP III
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

JUNE 2014

Paper- 12 : FINANCIAL MANAGEMENT & INTERNATIONAL FINANCE

Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.
Please: (i) Answer all bits of a question at one place.
(ii) Open a new page for answer to a new question.
(iii) Tick the question number answered on the front sheet of the answer-book.

Answer Question No. 1 from Part A which is compulsory and any five questions from Part B.

Part A (25 Marks)

1. (a) In each of the cases given below, one out of four answers is correct. Indicate the
correct answer (= 1 mark) and give workings/reasons briefly in support of your answer
(= 1 mark): 2×8=16

(i) X Ltd. issued ` 100, 12% Debentures 5 years ago. Interest rates have risen since
then, so that debentures of the company are now selling at 15% yield basis. What
is the current expected market price of the debentures?
(A) ` 75
(B) ` 80
(C) ` 90
(D) ` 85

(ii)
Given: Last year Current year
Sales unit 2,000 2,800
Selling price per unit ` 10 ` 10
EPS ` 9.60 ` 38.40
What is the Degree of Combined Leverage?
(A) 6.5
(B) 5.6
(C) 7.5
(D) 5.7

(iii) MI Ltd. has annual sales of ` 365 lakhs. The company has investment opportunities
in the money market to earn a return of 15% per annum. If the company could
reduce its float by 3 days, what would be the increase in company's total return?
(Assume 1 year = 365 days)
(A) ` 45,000
(B) ` 40,000
(C) ` 54,000
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(D) ` 46,000

(iv) In the inter-bank market, the DM is quoting ` 21.50. If the bank charges 0.125%
commission for TT selling, what is the TT selling rate?
(A) ` 21.47/DM
(B) ` 21.53/DM
(C) ` 22.78/DM
(D) ` 23.45/DM

(v) The required rate of return on equity is 24% and cost of debt is 12%. The company
has a capital structure mix of 80% of equity and 20% debt. What is the overall rate
of return, the company should earn? Assume no tax.
(A) 21.6%
(B) 14.4%
(C) 18.6%
(D) 17.22%

(vi) Consider the following quotes:

Spot (Euro/Pound) = 1.6543/1.6557
Spot (Pound/NZ's) = 0.2786/0.2800
Calculate the % spread on the Euro/Pound Rate.
(A) 0.0805%
(B) 0.0080%
(C) 0.8501%
(D) 0.0850%

(vii) Initial Investment ` 20 lakh. Expected annual cash flows ` 6 lakh for 10 years. Cost
of capital @ 15%. What is the Profitability Index? The cumulative discounting factor
@ 15% for 10 years = 5.019.
(A) 1.51
(B) 1.15
(C) 5.15
(D) 0.151

(viii) The following details relate to an investment proposal of XYZ Ltd.

Investment outlay— ` 100 lakhs
Lease Rentals are payable at ` 180 per ` 1,000
Term of lease—8 years
Cost of capital—12%
What is the present value of lease rentals, if lease rentals are payable at the end
of the year? [Given PV factors at 12% for years (1-8) is 4.9676.]
(A) ` 98,14,680
(B) ` 89,41,680
(C) ` 94,18,860
(D) ` 96,84,190

(b) State if each of the following sentences is T (= true) or F (= false): 1×9=9

(i) Fixed capital is a financial lubricant which keeps business operation going.
(ii) Forward Exchange Rate contract is for the purchase or sale of a specified quantity
of a specified currency price as agreed today.
(iii) Stochastic (irregular) Model is developed to avoid the problems associated with
the EOQ model.
(iv) TRIPS sets down minimum standards for many forms of Intellectual Property (IP)
regulations.
(v) Risk Adjusted Discount Rate (RADR) = Risk Free Return × Premium for facing the
risk.
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(vi) Buyout refers to the transfer of management control by creating a separate
business by separate business by separating it from their existing owners.
(vii) Feasibility study is included in implementation phase of project development
cycle.
(viii) Price of contract changes every day in Futures.
(ix) Interest Rate Guarantees (IRG) is an option contract.

Answer:

1. (a)
Interest on Debenture 12
(i) `80 [B]: Market value of Debentures =   ` 80
Current Yield Rate 0.15
(ii) `7.5 [C]: Degree of Combined leverage =

EPS / EPS (38.40  9.60)/ 9.60 3

   7.5
Sales / Sales (28,000  20,000)/ 20,000 40
(iii) `45,000 [A]:
Average sales per day = ` 3.65 lakhs/365 days
Increase in Total Returns = ` 1 lakhs @ 3days × 15% = `45,000.

(iv) `21.47/DM [A]: TT selling rate = 21.50 (1 – 0.00125) = `21.47/DM

(v) 21.6% [A]:

Rate of return on equity fund = 24% × 0.80 = 19.2%
Cost of debt is = 12% × 0.20 = 2.4%
Overall rate of return Co. should earn 21.6%

(vi) 0.0850% [D]:

1.65571.6543
% spread on Euro/Pound rate =  100 = 0.0850%
1.6543
(vii) 1.51 [A]:
P.V. of inflows = 6.00 × 5.019 = ` 30.114 lakhs
P. V. of inflow s 30.114
Profitability Index =  1.51
P. V. of outflow s 20
(viii) ` 89,41,680 [B]:
P. V. of lease rentals = `18 lakhs × PVI FA(12%, 8)
= `18 lakhs × 4.9676
= ` 89,41,680

(b) (i) False

(ii) True
(iii) True
(iv) True
(v) False
(vi) True
(vii) False
(viii) True
(ix) True

Part B
(75 Marks for any five questions.)

2. (a) XYZ Ltd. sells its products on a gross profit of 20% of sales. The following information is
extracted from its annual accounts for the year ending 31st March, 2014.

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`
Sales (at 3 months credit) 40,00,000
Raw materials 12,00,000
Wages (15 days in arrears) 9,60,000
Manufacturing expenses and general expenses (One month in arrears) 12,00,000
Administration expenses (one month in arrears) 4,80,000
Sales promotion expenses (payable half yearly in advance) 2,00,000

The company enjoys one month credit from the suppliers and maintains 2 months
stock of raw materials and 1½ months stock of finished goods. Cash balance is
maintained at ` 1,00,000 as a precautionary balance. Assuming a 10% margin, find
out the working capital requirement of XYZ Ltd. 10
(b) The beta co-efficient of a security 'X' is 1.4. The risk free rate of return is 10% and the
required rate of return is 14% on the market portfolio. If the dividend expected during
the coming year is ` 3.50 per share and the growth rate of dividend and earning is 8%,
at what price should the security 'X' be sold, based on the CAPM? 5

Answer:

2. (a) Statement of working capital requirement:

` `
Current Assets:
Debtors (40,00,000 × 3/12 × 80%) (@ CGS) 8,00,000
Raw material stock (12,00,000 × 2/12) 2,00,000
Finished goods stock (1 ½ months of cost
Production – cost of production is 80% on 40,00,000) 4,00,000
Advance payment of sales promotion 1,00,000
Cash 1,00,000
Total 16,00,000
(-) Current Liabilities:
Sundry creditors (1/12 of 12,00,000) 1,00,000
Wages (arrear for 15 days ) (1/24 of 9,60,000) 40,000
Manufacturing and general expense
(Arrears for 1 month) (1/12 of 12,00,000) 1,00,000
Administrative expenses (Arrears for 1 month)
(1/12 of 4,80,000) 40,000 2,80,000
13,20,000
(+) 10% Margin 1,32,000
Net working capital requirement 14,52,000

(b) Expected rate of Return by applying CAPM Formula:

E(Ri) = Rf + Bi (Rm – Rf)
= 10% + 1.4 (14% - 10%) = 10% + 5.6% = 15.6%
Price of security X is calculated with the use of dividend growth model formula.

D1
Re = g
P0
3.50
0.156   0.08
P0
Or
3.50 0.08
0.156  
P0 1
Or

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3.50  0.08P0
0.156 
P0
0.156P0 = 3.50 + 0.08P0
0.156P0 – 0.08P0 = 3.50
0.076P0 = 3.50
3.50
P0   ` 46.05
0.076

3. (a) The credit terms of a firm currently is Net 30. It is considering to change it to Net 60.
This will have the effect of increasing the firm's sales. As the firm will not relax credit
standard, the bad debts losses are expected to remain at the same percentage, i.e.,
3 per cent of sales. Incremental production, selling and collection costs are 80 per
cent of sales and expected to remain constant over the range of anticipated sales
increase. The relevant opportunity cost of receivables is 15 per cent. Current annual
credit sales are ` 600 crore and current level of receivables is ` 60 crore. If the credit
terms are changed, the current sales are expected to change to ` 720 crore and the
firm's receivables level will also increase. The firm's financial manager estimates that
the new credit terms, will cause the firm's collection period to increase by 30 days.
Required:
(i) Determine the present collection period and the collection period after the
proposed change in credit terms.
(ii) What level of receivables is implied by the new collection period?
(iii) Determine the increased investment in receivables, if the new credit terms are
adopted.
(iv) Are the new credit terms desirable? (Assume 360 days in a year) 2+1+2+5=10

(b) Explain the steps to be adopted in Money market hedge. 5

Answer:

3. (a)
(i) Present collection period = 360 days × current level receivables/Current Annual
credit sales
= 360 days × `60 Crore/ `600 Crore
= 36 days

New collection period = 36+30

= 66 days.

(ii) New Level of receivables = New Sales × New Collection period/360 days
= ` 720 Crores × 66 days /360 days
= ` 132 Crores.

(iii) Increase in investment in Receivables = New level of receivables – Old level of

Receivables
= `132 Crore – `60 Crore
= ` 72 Crore.

(iv) Statement showing the evaluation of Credit Policies:

Present Policy Proposed Policy

` [in crore] ` [in crore]
A. Expected Profit:
(a) Credit sales 600.00 720.00
(b) Variable Cost of credit sales 480.00 576.00

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(c) Bad debts 18.00 21.60
(d) Expected Profit [(a) – (b) – (c)] 102.00 122.40
B. Opportunity cost of Investment
In receivables:
Present – `480 × 36/360 × 15% 7.2 15.84
Proposed – `576 × 66/360 × 15%
C. Net gain [A-B] 94.8 106.56

(b) Steps to be adopted in Money market Hedge:

i. Indentify whether Foreign Currency (FC) is asset or liability

ii. Create the opposite position either by borrowing or depositing the amount equal
to present value of FC liability
iii. Convert the borrowed funds in to required currency
iv. Invest the borrowed funds
v. Settle the payment by withdrawing deposited amounts along with interest.

4. (a) Relax Ltd. is a manufacturer of high quality product. The management of company is
considering computerising the company's ordering, inventory and billing procedures.

The Management estimates that the annual savings from computerising include a
reduction of 10 clerical employees with annual salaries of ` 60,000 each, ` 32,000
from reduced production delays caused by raw material inventory problems, ` 48,000
from lost sales due to inventory stock-outs and ` 12,000 associated with timely billing
procedures.
The purchase price of the computer system is ` 8,00,000 and installation costs are `
2,00,000. These outlays will be capitalized (depreciated) on a straight line basis to a
zero book salvage value, which is also its market value at the end of five years. The
operation of the new system requires two computer specialists with annual salaries of
` 1,60,000 per person and annual maintenance cash costs of ` 48,000. The company's
tax rate is 40% and its required rate of return for this project is 10%. Present value of
annuity of ` 1 at 10% rate of discount for 5 years is 3.791 and at the end of 5 years is
0.621.

You are required to:

(i) Calculate the project's initial net cash outlay.
(ii) Calculate the project's operating cash flows over its 5 years life.
(iii) Calculate the project's payback period.
(iv) Evaluate the project using NPV method. 2+3+2+3=10

(b) Describe the marketable securities, which are available in India to invest surplus cash.
5
Answer:

4. (a)
`
Purchase price of the system 8,00,000
Net cash outlay project 2,00,000
10,00,000

(i) Calculation of Project’s operating and terminal value cash flows over 5 year life

Savings:
`
Reduction in salaries (10 × 60,000) 6,00,000
Reduction in Production delay 32,000
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Reduction in cost of sales 48,000
Saving from timely billing procedure 12,000
6,92,000

Cost
10,00,000
Depreciation = 2, 00,000
5

Salaries of computer specialist

1, 60,000 × 2 = 3, 20,000
Maintenance Cost 48,000 5, 68,000
Profit Before Tax 1, 24,000
Less: Tax 40% 49,600
Profit after tax 74,400
Add: Depreciation 2, 00,000
Net cash inflow p.a. for 5 years 2, 74,400

(ii) Calculation of Project payback period.

Year Net Cash Inflow Cumulative cash in flow

1 2,74,400 2,74,400
2 2,74,400 5,48,800
3 2,74,400 8,23,200
4 2,74,400 10,97,600
5 2,74,400 13,72,000

The payback period is 3 years and fraction of the 4th years.

`1,76,800
12  7.73 months
` 2,74,400

Thus = 3.8 years

(iii) Evaluation of project using NPV method:

Year Cash Flow P.V. at 10% Total P.V.

0 -10,00,000 1.000 -10,00,000
1-5 2,74,400 3.791 10,40,250
NPV = 40,250
Since NPV is positive the project can be accepted.

(b) Types of marketable securities available in India to invest surplus cash:

Issued by Safety Maturity Marketability

TB Government No Default risk Short term Highly
(Treasury Bill) marketable
CPs Creditworthy large Low Default risk Short term Highly
(Commercial companies marketable
Papers
CDs Banks Low Default risk Short term Highly
(Certificate of marketable
Deposits)

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ICD Companies High Default risk Short term Less marketable
(Inter Corporate
Deposits)
MMMF Mutual Funds Low Default risk Short term High marketable
(Money Market
Mutual Funds)

5. (a) PCT Ltd. is in the process of raising ` 15 lakhs as additional capital. For this purpose,
two mutually exclusive alternative financial plans have been identified. The current
level of EBIT is ` 51 lakhs which is likely to remain unchanged. The relevant information
is as under:

Present capital structure 9,00,000 Equity shares of ` 10 each and 10% Bonds of ` 60
lakh
Current EBIT ` 51,00,000
Current EPS ` 2.50
Current market price ` 50 per share
Tax Rate 50%
Financial Plan I 60,000 Equity shares @ ` 25 per share
Financial Plan II 12% Debentures of ` 15,00,000

Required:
(i) Calculate the indifference level of EBIT between the two plans.
(ii) Calculate the financial BEP under both the plans.
(iii) Which alternative financial plan is better? 4+4+2=10

(b) Explain the features of Venture Capital. 5

Answer:

5. (a)
(i) Indifference Point:

Plan -I Plan-II
EBIT X X
Less : Interest 6,00,000 7,80,000
EBT X - 6,00,000 x-7,80,000
Less : Tax 50% 0.5 (x-6,00,000) 0.5 (x-7,80,000)
EAT 0.5x - 3,00,000 0.5x- 3,90,000
No. of Equity Share 9,60,000 9,00,000
EPS 0.5x  3,00,000 0.5x  3,90,000
9,60,000 9,00,000

Equal EPS under plan

0.5x  3,00,000 0.5x  3,90,000
=
9,60,000 9,00,000
9,00,000 (0.5x – 3,00,000) = 9,60,000 (0.5x – 3,90,000)
x = 34,80,000

The indifference Level of EBIT = ` 34,80,000

(ii) Financial BEP

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0.5x  3,00,000
Plan – I =0
9,60,000
3,00,000
x = = ` 6,00,000
0.5
0.5x  3,90,000
Plan – II =0
9,00,000
3,90,000
x = = ` 7, 80,000
0.5

(iii) Selection of Financial Plan

(51,00,000 6,00,000)(1 0.5)
EPS (Plan I) = ` 2.34 per Share
9,60,000shares
(51,00,000 6,00,000 1,80,000)(1 0.5)
EPS (Plan II) = ` 2.4 per Share
9,00,000
Plan II is better.

(b) Features of Venture Capital:

(i) High Degree of risk - Venture capital financing is, invariably, an investment in a
highly risky project with the objective of earning a high rate of return.

(ii) Equity participation - Venture capital financing is, invariably, an actual or

potential equity participation wherein the object of venture capital is to make capital
gain by selling the share once the project become profitable.

(iii) Long-term investments - Venture capital financing is a long term investment. It

generally takes a long period to encash the investment in securities made by the
venture capitalists.

(iv) Participation in management - In addition to provide capital, venture capital

funds take an active interest in the management of the form that of a traditional
lender or banker. It is also different from that of accompany stock market investor
who merely trades in the shares of a company without participating in their
management. It has been rightly said, “Venture capital combines the qualities of
banker, stock market investor and entrepreneur in one”.

(v) Achieve social objectives - It is different from the development capital provided
by several central and state level government bodies in that the profit objective is the
motive behind the financing. But venture capital profits generate employment, and
balanced regional growth indirectly due to setting up successful new business.

(vi) Investment is illiquid - A venture capital is not subject to repayment on demand as

with an overdraft or following a loan repayment schedule. The investment is realized
only when the company is sold or achieves a stock market listing. It is lost when the
company goes into liquidation.

6. (a) An Indian customer who has imported equipment from Germany has approached a
bank for booking a forward Euro contract. The delivery is expected in six months from
now. The following rates are quoted:
($/Euro) spot 0.8453/0.8457
6-m swap 15/20
`/$ spot 46.47/46.57
6-m swap 20/30
What rate the bank will quote, if it needs a margin of 0.5%? 5

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(b) As a dealer in the bank, you observed the following quotes in the market.
`/$ 42.18/42.60
`/£ 68.59/69.96
`/€ 46.25/47.17
Compute the cross rates for $/£ and $/€. 5
(c) Why Purchasing Power Parity (PPP) theory does not always work in practice? Explain.
5
Answer:

6. (a) calculation of outright forward rates

$/€ 6m forward rates:
Bid rate = 0.8453 + 0.0015 = 0.8468
Offer Rate = 0.8457 + 0.0020 = 0.8477
`/$ 6m forward Rates:
Bid rate = 46.47 + 0.20 = 46.67
Offer Rate = 46.57 + 0.30 = 46.87
The customer needs € to pay for imports. He would purchase Euros. Therefore he
needs a quote of Euro in Rupee terms. We therefore need to find only ask quote.
(`/€) = (`/$) × ($/€) = 0.8477 x 46.87 = 39.73
The bank would quote `39.73 + 0.5% = `39.93/£

(b) To calculate the $/£ bid and offer rates, we calculate

Bid ($/£) = Bid ($/`) × Bid (`/£)
Ask ($/£) = Ask ($/`) × Ask (`/£)
Substituting Values
Bid ($/£) = 1/Ask (`/$) × Bid (`/£) = 1/42.6 × 68.59 = 1.6101
Ask ($/£) = 1/Bid(`/$) × Ask (`/£) = 1/42.18 × 69.96 = 1.6586

Now to calculate $/€ bid and offer rates, we calculate

Bid ($/€) = Bid ($/`) × Bid (`/€)
Ask ($/€) = Ask ($/`) × Ask (`/€)

Substituting,
Bid ($/€) = 1/ Ask (`/$) × Bid (`/€) = 1/42.6 × 46.25 = 1.0856
Ask ($/€) = 1/Bid(`/$) × Ask (`/€)= 1/42.18 × 47.17 = 1.1183

(c) Why purchasing power parity theory doesn’t always work in practice?

Anything which limits the free trade of goods will limit the opportunities people have
in taking advantage of these arbitrage opportunities. A few of the larger limits are:

(i) Import and Export Restrictions - Restrictions such as quotas, tariffs and laws will
make it difficult to buy goods in one market and sell them in another. If there is a 300%
tax on imported cricket bats, then in our first example it is no longer profitable to buy
the bat in India instead of the Australia. Australia could also just pass a law make it
illegal to import cricket bats.

(ii) Travel costs - If it is very expensive to transport goods from one market to another,
we would expect to see a difference in prices in the two markets.

(iii) Perishable goods - It may be simply physically impossible to transfer goods from
one market to another. There may be a place which sells cheap sandwiches in
Indore, but that doesn’t help me if I’m living in Delhi. Of course, this effect is mitigated
by the fact that many of the ingredients used in making the sandwiches are
transportable, so we’d expect that sandwich makers in Delhi and Indore should have
similar material costs.
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(iv) Location - You can’t buy a piece of property in Indore and move it to New Delhi.
Because of that real estate prices in markets can vary wildly. Since the price of land is
not the same everywhere, we would expect this to have an impact on prices, as
retailers in New Delhi have higher expenses than retailers in Indore.

7. (a) Y Ltd., an Indian company has an export exposure of 6 million (60 lakhs) Yen value at
the end of March, 2014. Yen is not directly quoted against Rupee. The current spot
rates are:
USD/INR = 61.75
USD/JPY = 185.25
It is estimated that Yen will depreciate against Doller to 210 and Rupee to depreciate
against Doller to 65.
Forward rates for March 2014:
USD/YEN = 195.45
and USD/INR = 62.35
(i) Calculate the expected loss, if hedging is not done.
(ii) How the position will change with company taking forward cover? 4+3=7

(b) An importer has to make payment of 1 Million Thai baht to its trading partner in
Bangkok. The currency quotes available are:
For Doller in India : ` 58.0843/58.0996
For Doller in Thailand: Thai Baht 52.9400/52.9600
What is the amount of bill payable in terms of Indian Rupee? 3
(c) Narrate the assumptions of the Black-scholes Option Pricing Model. 5

Answer:

7.(a) Calculation of Spot Rate of 100 Yen.

USD/INR = 61.75
USD/JPY = 185.25
JPY/INR = 61.75/185.25 1 Yen = 0.3333
100 Yen = ` 33.33
Calculation of Expected rate of 100 Yens.
USD/INR = 65
USD/JPY = 210
JPY/INR = 65/210 1 Yen = 0.3095
100 Yen = ` 30.95

(i) Calculation of Expected loss without forward cover:

60 Lakh Yens
Current Exposure =  33.33 = 19, 99,800
100 Yens
60 Lakh Yens
Expected Exposure =  30.95 = 18, 57,000
100 Yens
Expected loss without forward cover = ` 1, 42,800

(ii) Calculation of Expected loss with forward cover

Forward Rate
USD/INR = 62.35
USD/JPY = 195.45 1 Yen = 0.3193
JPY/INR = 62.35/195.45 100 Yen = ` 31.90

Current exposure without forward cover:

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 Suggested Answer_Syl2008_Jun2014_Paper_12
60 Lakh Yens
 33.33 = 19, 99,800
100 Yens
60 Lakh Yens
Exposure if forward cover is taken  31.90 = 19, 14,000
100 Yens
Expected loss if forward cover is taken = ` 85,800

The loss is minimized when the exposure is hedged with forward cover is suggested to
take forward cover.

7.(b)As a direct quote of `/Thai baht is not available the cross rate will be used by the
importer to buy Thai baht.
`/US$ : ` 58.0843 – 58.0996
Thai baht / US$ : ` 52.9400 – 52.9600
For cross rate (` / Thai baht)bid = (` /US$)bid × (US$/Thai baht)bid
= 58.0843 × 1/52.9600
= 1.0968

And (` /Thai baht)ask = (` /US$)ask × (US$/Thai baht)ask

= 58.0996 × 1/52.9400 = 1.0975

So cross Rate of ` / Thai baht: 1.0968 – 1.0975

As the importer is to buy 1 million Thai baht; his payment in rupees will be
= 10, 00,000 × 1.0975
= ` 10,97,500.

7.(c)The BS model is based on the following assumptions:

(i) It considers only those options which can be exercised at their maturity that is
European options.
(ii) The market is efficient and there are no transactions cost and taxes.
(iii) The risk free rate or interest rates are known and constant during the period of option
contract.
(iv) No Dividend is paid in shares.
(v) Share prices behave in a manner consistent with a random walk in continuous time.
(vi) The probability distributions of Financial returns on the shares is normal.
(vii) The variance / standard deviation of the return is constant during the life of option
contract.

8. Write short notes on (any three): 5×3=15

(a) Social Cost Benefit Analysis (SCBA)
(b) TRIMS
(c) Covered Interest Arbitrage
(d) Leveraged Lease

Answer:

7. (a) Social cost benefit analysis is a systematic evaluation of an organization's social

performance as distinguished from its economic performance. It is concerned with
the influence on the social quality of life instead of economic quality of life.
It is used to determine:
Which alternative is socially viable or most suitable.
Which alternative is the optional or best. The total benefits expected from a project to
the society are composed of the private benefits (internal profit or returns) accruing
to owner of the project plus the external benefits (spillovers). Thus social benefits
equal to internal benefits to the owner plus the external benefits to the society as

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whole. Similarly cost is compared. Social cost and benefits are measured both
directly and indirectly on employment, environment, culture and income distribution.

(b) TRIMS – Trade Related Investment Measures.

TRIMs are the rules a country applies to the domestic regulations to promote foreign
investment, often as part of an industrial policy- It is one of the four principal legal
agreement of the WTO trade treaty- It enables international firms to operate more
easily within foreign markets- Example: Local content requirements, manufacturing
requirements, trade balancing requirements, domestic sales requirements,
technological transfer requirements, export performance requirement, foreign
exchange restrictions, remittance restrictions, and licensing requirements etc.,

(c) The process of borrowing in one currency and simultaneously investing in another with
the exchange risk hedged in the forward market is referred to Covered Interest
Arbitrage. One would first calculate LHS= (1+ rh) and RHS=(F/S) × (1+ rf), i.e. the two
parts of IRP equation. If LHS is not equal to RHS, then there exists arbitrage and profit
can be made by arbitrageur.

(d) Under a Leveraged Lease arrangement, the lessor borrows a substantial portion of
the purchase price of the asset from a lender, which is typically a commercial bank
or a financial institution, with full recourse to the lessee and without recourse to it
(lessor). The lender obtains an assignment of the lease and the rentals to be paid by
the lessee and insists on first mortgage on the asset. The trustee through whom the
transaction is rented receives the rentals from the lessee and passes on to lender and
the surplus left after satisfying the claims of the lender goes to the less or who as
owner of the asset is entitled to the tax benefits.

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