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FINC20023 International Financial Management

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Questions:

1:

Discuss what you understand by the term ‘twin agency problem’.

2:

Discuss and compare the shareholder wealth maximization model and the stakeholder capitalism model.

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 company imports vegetables from a Chinese firm.
  • An Australian resident pays Singapore Airlinesfor a flight to Singapore.
  • A German investor buys some US treasury bonds.
  • AnIndian firm pays the salary of its executive working for a subsidiary in Australia.
  • An Australian firm buys 100% share of a Japanese company.

4:

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

5:

ABM Ltd. is an Australiansoftware development company which wishes to purchase a laptop and is making a choice between two laptop manufacturers. A laptop manufacturer in Japan has quoted the laptop price to be ¥50,000, while a laptop manufacturer in the US has quoted the price of a similar laptop to be $400. The spot exchange rate for the US dollar against the Australian dollar is $0.76/A$, and the spot exchange rate for the US dollar against the Japanese yen is $0.0089/¥.

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

(a) from the Japanese manufacturer

(b) from the US manufacturer

  1. Which of the manufacturers should ABM choose, if the choice is solely based on required Australian dollar cash outlay?
  2. 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?

6:

A German car now costs €50,000. The spot exchange rate is A$1.40/€. If the expected inflation rates in Australia and Germany are respectively 1.6% and 2.0%, what will be the Australian dollar price of that car 1 year from now if there is 100% exchange rate pass through?

7:

John is a US based Forex trader. He focuses principally on the Singapore dollar/US dollar (S$/$) cross-rate. The current spot rate is S$1.40/$. After considerable study, he concludes that the exchange rate, in the coming 180 days, will probably be about S$1.34/$. He has the following options on the Singapore dollar to choose from:

Option

Strike Price

Premium

Put on S$

S$1.3600/$

$0.003/S$

Call on S$

S$1.3600/$

$0.004/S$

Discuss whether he should buy a Put on S$ or Call on S$, and what would be his net profitif the spot rate at the end of the 180 days is indeed S$1.34/$.

8:

Discuss and compare the different currency market intervention strategies.

9:

As per the RBA, on Jun 20 2016, just before the United Kingdom Referendum on European Union Membership, the exchange rate between Australian Dollarand the Great Britain Pound (GBP) was £0.5114/A$; while on Jul 20 2016, it was £0.5725/A$. What was the percentage change? Was it a devaluation or revaluation or appreciation or depreciation of the GBP against the Australian dollar? Assume that Australian dollar is the home currency.

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$) spot exchange rate is ¥87.35/A$. The Australian organization expects the spot rate in 3 months to be ¥91.45/A$. The 3-month forward exchange rate is ¥89.50/A$. The Australian Dollar (A$) 3-month borrowing rate is 4.00% per annum and the Australian Dollar (A$) 3-month investment rate is 6.00% per annum. The Japanese yen (¥) 3-month borrowing rate is 8.00% per annum and the Japanese yen (¥) 3-month investment rate is 4.00% 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?

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