FINC20023 International Financial Management

Determine the Australian dollar cash outlay for ABM Ltd. if it buys:

Which of the manufacturers should ABM choose, if the choice is solely based on required Australian dollar cash outlay?

 

Suppose the expected exchange rates after 3 months are respectively $0.80/A$ and $0.0077/¥. Also, suppose that the dollar and yen prices of the laptop will remain the same. Will there be any change in the purchase decision for ABM Ltd. if the laptop is purchased after 3 months and the spot exchange rates at that time equate the expected exchange rates?

1: Depicting the term Twin Agency Problem

Twin Agency Problem is mainly considered one of the biggest hurdle or obstacle in increasing investments in corporate ownership in foreign countries. The problems are rather twin problems instead to two problems, as it feeds on each other and could hamper shareholders investment. The first problem mainly directs to the manipulation, which could be conducted by corporate insiders in an organisation to directly improve their wealth. The second problems mainly depict the exploitation, which could be conducted by state rulers who control resources (Peseta 2014). Thus, it could be understood that Twin Agency Problem mainly reduces the impact of financial globalisations.

2: Discussing and comparing the stakeholder capitalism model with shareholder wealth maximization model

The stakeholder capitalism model mainly addresses the concern of employees, society, management, creditors, and shareholders. Moreover, shareholders wealth maximization model mainly addresses the concerns of shareholder regarding increment in their wealth accumulation. Both the overall models mainly depict the ways in which overall increment in profitability could be achieved. In addition, both the models are mainly concerned with the systematic risks, while unsystematic risks are being diversified for improving the overall return from investment (Denis 2016). Mutually the models mainly allow the management to make adequate steps, which could help in betterment of the company.

3: Classifying relevant transactions

• Debit to Australian company part of the current account and credit to the Chinese firm part of the current account.
• Debit to Australian resident current account, while credit to Singapore in the current account.
• Debit to German investor financial account, while credit to US in the financial account.
• Debit to Indian firm current account, while credit to Australia in the current account.
• Debit to Australian firm capital account, while credit to Japanese in the capital account.

4: Discussing about the impossible trinity

Impossible Trinity mainly consists of free capital flow, fixed exchange rate and sovereign monetary policy, which could not be conducted by any country. This combination was mainly conducted by Asian countries in the 1997-1998, which led to the Asian financial crisis. Aizenman (2013) mentioned that there have been no theories or models, which could be used in reducing the negative impact from impossible trinity. There have been instance where governments has followed all the three levels of impossible trinity and failed to achieve the goals. On the other hand, Beckmann et al., (2017) stated that majority of the countries mainly allow maximum of two levels, which are included in the impossible trinity. This control over impossible trinity characteristics could mainly help governments to adequately boost their economy and attain business growth.

5.i) Determining Australian dollar cash outlay for ABM ltd

AUD	USD	Amount
1	0.76	400
		526.32
USD	JAP	Amount
1	0.0089	50000
		445
		585.53

ii) Depicting the choice of adequate manufacturer if choice is based on Australian dollar cash outlay

According to the manufacturing decision based only on Australian dollar, the manufacturing company in US will be selected, as it depicts the lowest cost of manufacturing.

iii) Depicting the change in purchase decision:

AUD	USD	Amount
1	0.8	400
		500.00
USD	JAP	Amount
1	0.0077	50000
		385
		481.25

After seeing the overall change in spot rate the Japanese manufacturer’s offer is identified as most lucrative compared to US manufacturer, this could help in reducing the overall cost of the computer.

6: Depicting the value of car in Australian dollar in 1 year time frame

Spot exchange rate is A$/€	1.40
Australian inflation rate	1.6%
Germany inflation rate	2.0%
Difference in inflation rate	1.6% - 2.0% = -0.40%
Spot exchange rate is A$/€	1.40 * (1-0.40%)
Spot exchange rate is A$/€ at 1 yr	1.3944

7: Depicting the decision and net profit after 180 days

John is mainly expecting the Singapore dollar to decline against US dollar and in 180 days it is expected to reach S$1.34/$ from current spot rate of S$1.40/$. Thus, John could buy a put option on Singapore dollar with a strike price of S$1.3600/$ and premium of $0.003/S$. Moreover, the following table could adequately depict the net profit from the trade, which is conducted by John.

Particulars	Amount
Strike price	S$1.3600/$
Less Spot rate	S$1.3400/$
Less Premium	$0.003/S$ or S$0.00408/$
Net profit	S$0.01592/$

8: Discussing and comparing the different currency market strategy

There are relevant two type of currency market strategy, which is used direct and indirect intervention. The direct intervention mainly controls overall value of the foreign currency. In addition, the goal is to increase currency value then central bank buys its own currency, while decreasing currency value then central bank sells its currency. The second stage is the indirect intervention, which is used by the central bank to strengthen or weaken its current value. Central bank mainly increases or decreases the real rates to flow the capital in and out of the specific currencies. Both the strategy is mainly used in controlling valuation of the currency of a country (Carfi & Musolino, 2014).

9: Depicting the percentage change in the GBP

The change in GBP against Australian dollar could be witnessed after the United Kingdom Referendum on European Union Membership. Previously the GBP was £0.5114/A$, while it increased to £0.5725/A$ in July. The percentage change 11.95% could be witnessed, where the Australian currency appreciated against GBP. This indicated that more GBP could be accumulated by spending 1 Australian dollar. Francois, Gauthier & Godin (2014) mentioned that the use of hedging process mainly help international trades to reduce their risk from depreciating currency. Devaluation in GBP and appreciation in Australian dollars could be witnessed from the changing prices.

10: Depicting the appropriate hedge position that could be adopted by the organisation 

 

Amount Yen	40,000,000
Particulars	Rate	Amount	Present value
Spot	87.35	457,928
Forward	89.5	446,927	436,404
Unhedged position	91.45	437,397	427,099

 

Particulars	Japan	Australian
Borrowing	2.00%	1.00%
Lending	1.00%	1.50%
Borrowed	40,000,000
Amount received	39,215,686
Converted to A$ in spot rate		448,949
Interest amount received in three months		6,734
Amount received at the end of 3 months		455,683
PV of the amount received		444,954

From the overall evaluation of above table money market hedging is the most viable option as it effectively hedges the Australian company’s exposure in Japan. Whereas, the non-hedge scenario will provide A$427,099, while forward rate hedge will provide A$436,404. However, using the money market hedge will allow the Australian company to receive A$444,954 from its account receivables in 3 months after conducting the discounting factor.

References:

Aizenman, J. (2013). The Impossible Trinity—From the Policy Trilemma to the Policy Quadrilemma. Global Journal of Economics, 2(01), 1350001.

Beckmann, J., Ademmer, E., Belke, A., & Schweickert, R. (2017). The political economy of the impossible trinity. European Journal of Political Economy, 47, 103-123.

Carfi, D., & Musolino, F. (2014). Dynamical Stabilization of Currency Market with Fractal-like Trajectories. Scientific Bulletin of the Politehnica University of Bucharest, Series A-Applied Mathematics and Physics, 76(4), 115-126.

Denis, D. (2016). Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization. Financial Review, 51(4), 467-480.

François, P., Gauthier, G., & Godin, F. (2014). Optimal hedging when the underlying asset follows a regime-switching Markov process. European Journal of Operational Research, 237(1), 312-322.

Peseta, T. L. (2014). Agency and stewardship in academic development: The problem of speaking truth to power. International Journal for Academic Development, 19(1), 65-69.