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Question 1:

What is the theory of comparative advantage? Is the theory applicable in the current contexts? Why or why not?

Question 2:
Discuss and compare the different corporate governance regimes. Why should MNEs be concerned with such differences?

Question 3:
Classify the following as a transaction reported in a sub-component of the current account, or the capital and financial accounts of the countries involved:
An Australian firm purchases a web hosting service from a US firm.
Singaporean parents pay for their son’s study at an Australian university.
A German company buys an insurance policy from a US insurer.
An Indian firm pays the salary of its executive working for a subsidiary in Australia.
An Australian firm buys 100% shares of a Malaysian company.

Question 4:

Discuss what you understand by the term ‘impossible trinity’.

Question 5:

An Australian company is planning to import a new machine and is making a choice between two international suppliers. A supplier in Japan has quoted ¥2,500,000 as the price of the machine and ¥100,000 as the shipment cost. A supplier in Germany has quoted €20,000 as the price of a similar machine and €350 as the shipment cost. The following exchange rate information are available:
Exchange Rate between Australian Dollar and US Dollar: \$0.77/A\$
Exchange Rate between US Dollar and Japanese Yen: ¥107/\$
Exchange Rate between Euro and US Dollar: \$1.22/€
Which of these suppliers should the company choose? Assume that the choice is solely based on total Australian Dollar cash outlay required to cover the price of the machine and the shipping cost.

Question 6:

A German car now costs €50,000. The spot exchange rate is €0.67/A\$. If the expected inflation rates in Australia and Germany are respectively 2.50% and 0%, what will be the Australian Dollar price of that car 1 year from now:
i.If there is 100% exchange rate pass through?
ii.If there is 65% exchange rate pass through?

[[Please note a very similar solution indicated in week 3/4 resources- please particularly note my comments with respect to that solution; for 65% pass through determination, assume A\$ as the home currency during the percentage change of exchange rate calculation]]

Question 7:

John is a Forex trader. He focuses principally on the US Dollar/Singapore Dollar (\$/S\$) cross-rate. The current spot rate is \$0.76/S\$ After considerable study, he concludes that the exchange rate, in the coming 180 days, will probably be about \$0.95/S\$. He has the following options on the Singapore Dollar to choose from:
PUT on S\$ \$0.86/S\$ \$0.00014/S\$
CALL on S\$ \$0.86/S\$ \$0.00017/S\$
Discuss whether he should buy a PUT on S\$ or CALL on S\$, and what would be his net profit (in \$) if the spot rate at the end of the 180 days is \$0.92/S\$.

Question 8:

Is purchasing power parity an accurate estimator of future exchange rates? Why or why not? Please explain.

Question 9:

On a particular date, the exchange rate between the Great Britain Pound (GBP) and the Australian Dollar and the exchange rate between the Australian Dollar and Euro were respectively £0.5221/A\$ and A\$1.60/€. On a later date, the exchange rates were respectively £0.5507/A\$ and A\$1.64/€. What were the percentage change in the values of the GBP and Euro against the Australian Dollar between these two dates? Were the changes devaluation or revaluation or appreciation or depreciation of these currencies? Assume that Australian Dollar is the home currency.

Question 10:

An Australian organization has a ¥40,000,000 account receivable from a Japanese customer in 3 months. The current Japanese yen (¥)/Australian Dollar (A\$) spot exchange rate is ¥88.35/A\$. The Australian organization expects that the spot rate in 3 months will be ¥95.45/A\$. The 3-month forward exchange rate is ¥92.50/A\$. The Australian Dollar (A\$) 3-month borrowing rate is 8.00% per annum and the Australian Dollar (A\$) 3-month investment rate is 5.00% per annum. The Japanese yen (¥) 3-month borrowing rate is 4.00% per annum and the Japanese yen (¥) 3-month investment rate is 2.00% per annum. The organization’s weighted average cost of capital is 10% per annum. The organization is considering three hedge positions: remaining unhedged, forward market hedge and money market hedge. Which of these hedge positions should the organization adopt?

Competitive advantage is defined as the capability of a nation or an economy or a company to produce goods and services of equal amount at a lower cost or in an efficient manner compared to its competitors (Laursen, 2015). This in turn allows the producer to generate improved sales and maintain effective margins in comparison to its market rivals. The competitive advantage may arise because of various factors such as the cost structure of the organization, quality of the offered products as well as the distribution network (Levchenko & Zhang, 2016).

The theory of competitive advantage will certainly be valid in this context as the organizations operating in the competitive environment are always eager to grab a competitive edge and hence are always looking to produce at an efficient manner so as to gain a competitive advantage over their rivals and thereby accruing a greater market share.

2.The governance activities incorporates the process of managing or governing the particular processes associated to people. It involves maintaining the legal compliances while performing a specific work. In other words it implements the way through which the policies, procedures and rules are being enacted or followed (Tricker & Tricker, 2015).

The Governance Regime in turn determines whose authority or administrative guidelines will be followed, and certainly in accordance with that the different governance regimes are designed,

There are mainly four type of government regimes, which are namely, Market Based, Bank Based, Family Based and Government Affiliated.

The market based corporate governance regime emphasises on the responsibilities of all the stakeholders of the organization. This may include the shareholders, management, board of directors, suppliers, customers and employees (McCahery et al., 2016).

In a bank based corporate governance the supervisory board of an organisation is designed in such a way that the board is majorly dominated by the corporate insiders or the bankers.

If an organisation is owned and controlled by a family then it can be regarded that the organisation is being controlled by the family and hence the system will be characterised as a family based corporate governance.

Under the government based corporate governance, an organization’s functions and decisions are controlled by the government.

The key aspect of these four types of corporate governance can be compared and contrasted. It would certainly be observed that these types of corporate governances are only different from the aspect of the controlling authority, the efficiency of these systems would also depend on the efficacy of the controlling authorities as well (McCahery et al., 2016).

Types of Governance Regimes

3. An Australian firm purchases a web hosting service from a US firm:

This can be regarded as the debit to the current account of the Australian firm, while credit to the current account of the US firm.

Singaporean parents pay for their son’s study at an Australian University:

Debit to the current account of the Singaporean parents and credit to the current account of the Australian University.

A German Company buys an insurance policy from an US insurer:

Debit to the financial account of the German company and credit to the balance of payments of the US insurer.

An Indian firm pays the salary of its executives working for a subsidiary in Australia:

Debit to the current account of the Indian firm while at the same time credit to the executive working in subsidiary in Australia.

An Australian firm buys 100% shares of a Malaysian company:

Debt to the financial account of the Australian firm and credit to the financial account of the Malaysian company.

4. The impossible trinity is also known as the trilemma or Mundell Fleming trilema. This clearly depicts the limitedness of the options through which the countries can implement monetary policies. As per the proponents of this theory a country will never be able to achieve a free flow of capital, fixed exchange rate as well as the independent monetary policy simultaneously (Majumder et al., 2015). If it practices any of the two options the third option will automatically be eradicated.

5.

 Supplier in Japan Value Machine ¥ 2,500,000.00 shipment cost ¥    100,000.00 Total cost ¥     2,600,000.00 Price in AUD AUD     31,557.23 AUD/USD 0.77 USD/AUD 1.30 USD/Japan Yen 107.00 Japan Yen/USD 0.01 Japan Yen/AUD 0.01
 Supplier in Germany Value Machine €     20,000.00 shipment cost €          350.00 Total cost €          20,350.00 Price in AUD AUD   32,242.86 AUD/USD 0.77 Euro/USD \$                    1.22 Euro/AUD AUD              1.58

From the overall examination and evaluation as presented above the actual cost that would be accrued while importing the machine from Japan and German could be obtained. However, the results depicted in the above table signifies that purchasing the machine from the Japanese supplier would be more beneficial for the Australian company. This is because I such a case the company will have to pay 31,557.23 AUD and will also ensure a savings of 867.65 AUD.

6.

 Particulars Germany Australia Pass Through 100% spot exchange rate € 0.67 German car Price € 50,000.00 AUD 74,626.87 Inflation rate 0% 2.50% One-year price € 0.65 Price of the car after 1 year 100% pass through AUD 76,492.54
 Particulars Germany Australia Pass Through 65% spot exchange rate € 0.67 German car Price € 50,000.00 AUD 74,626.87 Inflation rate 0% 2.50% One-year price € 0.66 Price of the car after 1 year 65% pass through AUD 75,839.55

7.

 Particulars Value Current spot rate \$    0.76000 Spot price in 1 year \$    0.92000 Strike price (Call Option) \$    0.86000 Premium (Call Option) \$    0.00017 Total price \$    0.86017 Profit \$    0.05983

As per the results of the table above it can be stated that practicing the call option would certainly be better for the forex trader as it is anticipated that there would be an increase in the price. Hence it can be stated that the call option would in turn allow the forex trader to derive the maximum profits from investments. In such a context the net profit that would be generated is calculated to be \$0.05983.

The Mundell Fleming Trilemma

8.The Purchasing power parity signifies the changes in the expected inflation rates of two countries in response to the changes in their exchange rates. Inflation is responsible for reducing the real purchasing power of the currency of a nation (Gelb & Diofasi, 2015). For instance if a country possesses 10% rate of inflation then the currency of the country would be able to purchase 10% of less the real goods by the ned of the year. Hence it can be stated that the relative purchasing power parity between two countries examines the changes in the relative price levels of the two countries and ensures that the exchange rates would fluctuate to compromise the differentials in inflation.

Hence it can be stated that the purchasing power parity mainly emphasises over the exchange rate adjustments on the basis of the level of inflation prevailing in the countries. Therefore, purchasing power parity could not be regarded as a geed predictor of future inflation rate (Majumder et al., 2017).

9.

 Currency Value 1st day 2nd day Percentage change Pound to AUD £ 0.52 £ 0.55 5.48% AUD to Euro AUD 1.60 AUD 1.64 2.50%

From the results obtained in the above table it can be stated that the Australian Dollar have appreciated against pound by 5.48%. on an added n otion, the devaluation of the Australian currency has also been observed from the dates, while the value of the currency declined 2.5% against the value of Euro. Hence it can easily be stated that the Australian Dollar have appreciated against Euro while previously 1 Australian Dollar was providing higher amount of pound sterling in exchange of the currency. A depreciation in the value of Euro hve been observed as more of the AUD is required to purchase 1 Euro.

10.

 Forward rate Hedge Value Forward exchange rate ¥ 92.50 Value in AUD AUD   432,432.43 Expected spot rate ¥ 95.45 Value in AUD AUD   419,067.57 Profit from currency exchange AUD     13,364.86 PV value AUD     12,149.87
 No Hedge Value Expected spot rate ¥                  95.45 Value in AUD AUD   419,067.57 spot exchange rate ¥                  88.35 Value in AUD AUD   452,744.77 Loss in currency exchange AUD   (33,677.19) PV Value AUD   (30,615.63)
 Money Market Hedge Value Australia 3-month borrowing rate 8% 3-month investment rate 5% Japan 3-month borrowing rate 4% 3-month investment rate 2% WACC 10% Borrowing in Japan ¥ 38,461,538.46 Convert AUD 435,331.50 Value in 1 year AUD 457,098.08 Expected spot rate ¥ 95.45 Expected exchange value AUD 419,067.57 Profit from hedge AUD 38,030.51 PV Value AUD 34,573.19

The overall evaluation as presented in the above table it can be stated from the evaluation of the three different hedging methods the money market hedge would be the most fruitful option for the Australian economy. The implementation of money market hedge would allow the company to accrue a profit of 38030.51 AUD. On the other hand the forward rate hedging or the overall hedging measure would provide a profit of only 13364.86 AUD. This is substantially lower than that of the money market hedge profit. On as added notion, the overall no hedge policy in turn is increasing the amount of loss to the Australian company, as the currency conversion is reducing the value of payment to the company. Therefore, using the money market hedge is considered as the most efficient measure for the Australia based companies.

Reference List:

Gelb, A., & Diofasi, A. (2015). What Determines Purchasing Power Parity Exchange Rates?.

Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), 99-115.

Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.

Majumder, A., Ray, R., & Santra, S. (2015). Preferences, purchasing power parity, and inequality: analytical framework, propositions, and empirical evidence.

Majumder, A., Ray, R., & Santra, S. (2017). Sensitivity of Purchasing Power Parity Estimates to Estimation Procedures and their Effect on Living Standards Comparisons. Journal of Globalization and Development, 8(1).

McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance, 71(6), 2905-2932.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

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