Team 8HW_1

docx

School

Arizona State University *

*We aren’t endorsed by this school

Course

MISC

Subject

Finance

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by PresidentAardvark2617

Team 8HW_1 Team 8: Leila Bandringa, Branden Garbin, Brad Johnson, Shana Lear, and Janna Rowell Part 1 Module #1 Chapter 1: - Question 2: How is international financial management different from domestic financial management? o Three main components separate domestic financial management from that of international. These include foreign exchange and political risks, market imperfections, and expanded opportunities. 1. Foreign exchange risks and political risks: with rapidly changing currency prices, a profitable transaction can quickly turn into a huge deficit. Political risk may include any change in the country’s economic market situation, like an income tax change. The government can change the laws at any time. 2. Market imperfections: when companies operate across borders, they face additional challenges. These barriers include legal restrictions, excessive transaction and transportation costs, information asymmetry and discriminatory taxation. 3. Expanded opportunity set: when a company conducts business across borders, it increases the opportunities for the industry. What is important to examine is how other countries construct their own economies, regulate trade, enact, and enforce policies, and impose taxes. Collectively, these characteristics are what separate domestic financial management from international. - Question 9: Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President George W. Bush stated that while tougher laws might help, “ultimately, the ethics of American business depends on the conscience of America’s business leaders.” Describe your view on this statement. o Many corporations like the ones mentioned above have seen their leaders act in their own interests instead of the shareholders. What we take away from this quote is to note the importance of corporate governance. By implementing regulations and rules for the shareholders and business leaders to follow, we can encourage management to act in the interest of others. Unfortunately, this must

be in place since we cannot trust leaders to behave ethically always, and I think President Bush was spot on that we need to encourage the right actions. Chapter 4: - Question 8: Many companies grant stock or stock options to managers. Discuss the benefits and possible costs of using this kind of incentive compensation scheme. o The primary benefit of this approach is that by granting stock and stock options to managers, companies can encourage their leaders to run their teams or drive work that will act in the enhancement of the shareholders as well as their own wealth. On the other hand, similarly to what was mentioned above, you can’t always trust that leaders will act ethically when it comes to financial decisions. By using compensation committees, companies can have people who work independently from the organization examine the actions of managers and monitor them sharply. - Question 9: It has been shown that foreign companies listed on U.S. stock exchanges are valued more than those from the same countries that are not listed in the United States. Explain why U.S.-listed foreign firms are valued more than those that are not. Also explain why not every foreign firm wants to list stocks in the United States. o There are several reasons why a country might want to list its stocks in the United States. First, companies in countries with weak investor protection can bond themselves credibly to better investor protection by listing their stock in countries with strong investor protection – like the United States or the United Kingdom. Companies can choose to outsource a superior corporate governance regime via cross-listings. The beneficial effects from U.S. listings will be greater for firms from countries with weaker governance mechanisms. According to a 2002 report, foreign firms listed in the U.S. are valued more than those from the same countries that don’t list their stock in the U.S. The study reports firms listed in the U.S. potentially have more growth opportunities. o Firms that might not choose to list their stock in the U.S. are those in mature industries with limited growth potential. Module #2 Chapter 2: - Question 3: Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce. This, of course, implies that the equilibrium exchange rate should be 2 francs per pound. If the current market exchange rate is 2.2 francs per pound, how would you take advantage of this situation? What would be the effect of shipping costs? o 2.2 francs/pound

o You’d want to buy gold in France for 12 francs o Ship the gold to England and sell it for 6 pounds because the pound is overvalued o Now, exchange the 6 pounds you received from the sale and exchange it for francs o 6 x 2.2 francs = 13.2 francs o An arbitrage profit of 1.2 francs exists (13.2-12.0 = 1.2) o There would be no arbitrage profit, however, if shipping costs exceed 1.2 francs per ounce - Question 9: There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. Benefits of a flexible exchange rate regime include:  Allows the country to respond quickly to changes in economic conditions  Gives the country more control over its monetary policy  Brings the country better managing of its balance of payments  Helps a country attract foreign investment b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime.  Opponents of flexible exchange rates say it can lead to higher levels of inflation compared to a fixed exchange rate regime. In addition, proponents of a fixed exchange rate regime say a flexible regime can bring higher levels of unemployment as firms adjust to changes in the exchange rate. A flexible exchange rate can also make it more difficult for a country to pursue an independent monetary policy, as changes in the rate can lead to changes in the money supply. Greater fluctuations in the exchange rate can also make it more difficult for companies to plan for the future. c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.  A flexible exchange rate system has several advantages. First, it allowed countries to maintain autonomy over monetary policy without the obligation to maintain a specific exchange rate. Furthermore, since exchange rates can be adjusted to changing circumstances, the system can adapt to changing economic conditions more effectively. Finally, a flexible exchange rate framework helps improve overall stability. Chapter 5:

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Problem 12: The current spot exchange rate is $1.95/pound and the three-month forward rate is $1.90/pound. On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.92/pound in three months. Assume that you would like to buy or sell 1,000,000 pounds. a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? 1.95 x 1,000,000 = $1,950,000 1.90 x 1,000,000 = $1,900,000 1.92 x 1,000,000 = $1,920,000 Judging by these numbers, we’d want to take the three-month forward rate. Our expected dollar profit would be $20,000. 1,920,000 – 1,900,000 = 20,000 b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.86/pound? 1.86 x 1,000,000 = 1,860,000 This would not be a profit. In fact, it would be a loss of $40,000. 1,900,000 – 1,860,000 = 40,000 Chapter 6: - Problem 3: Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S. and 5.8 percent per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000. a. Determine whether interest rate parity is currently holding The Interest rate parity holds if in the given following equation, the right-hand side (R.H.S) is equal to left-hand side (L.H.S). F=S [(1+i $ ) / (1+i * )] $1.52/£ = $l.50 * [(1+8% / 4)/(1+5.8% / 4)] $1.52/£ = $l.50 * [1.02/1.0145] $1.52/£ != $1.51/£ The R.H.S is not equal to the L.H.S. Therefore, the IRP is not holding.

b. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. 1. In the U.K. borrow £1,000,000. Repayment in 3 months would be: £1,000,000 * (1 + 5.8% / 4) = £1,014,500. 2. In the U.S. buy $1,500,000 3. Invest $1,500,000 in the U.S. with a maturity value of: $1,500,000 * (1 + 8% / 4) = $1,530,000. 4. Convert the $1,530,000 back to pounds $1,530,000 * (1 / $1.52/£) to get a £1,006,579. 5. Repay original loan of £1,000,000 to receive an arbitrage profit of £1,006,579 - £1,000,000 = £6,579.95 c. Explain how IRP will be restored as a result of covered arbitrage activities. When borrowing the £1,000,000, the pound interest rate will rise. When buying $1,500,000 a spot, the dollar interest rate will fall. Investing $1,500,000 at the interest rate, the spot exchange rate will rise. Finally, converting the mature loan of $1,530,000 back to pounds (£1,006,579) and making an arbitrage profit, the forward exchange rate will fall. These adjustments will continue until the IRP is restored. - Problem 6: In the October 23, 1999 issue, The Economist reports that the interest rate per annum is 5.93 percent in the United States and 70.0 percent in Turkey. Why do you think the interest rate is so high in Turkey? On the basis of the reported interest rates, how would you predict the change of the exchange rate between the U.S. dollar and the Turkish lira? According to the International Fisher Effect (IFE), the expected change in the exchange rate between the Turkish Lira and the US Dollar, given the interest rates of 5.93% in the US and 70% in Turkey, is approximately 60.48%. This means that the Turkish Lira is expected to depreciate by about 60.48% against the US Dollar. This calculation aligns with the IFE's principle that a currency in a country with a higher interest rate is expected to depreciate against a currency in a country with a lower interest rate, due to the anticipated higher inflation rate. - Problem 8: Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105

Current South African price level 111 Base rand spot exchange rate $0.175 Current rand spot exchange rate $0.158 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected U.S. one-year interest rate 10% Expected South African one-year interest rate 8% The current ZAR spot rate in USD that would have been forecast by PPP. a. The current ZAR spot rate under PPP = [(Current US price level / Base price level) / (Current South African price level / Base price level)] x Base rand spot exchange rate = [(105 / 100) / (111 / 100)] x 0.175 = (1.05 / 1.11) x 0.175 = $0.166 /rand b. Using the IFE, the expected ZAR spot rate in USD one year from now. Current rand spot exchange rate $0.158 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected Exchange rate in One Year = Current Spot rate * Expected Inflation in USD / Expected Inflation in South Africa = 0.158*1.07/1.05 =$0.161 c. Using PPP, the expected ZAR spot rate in USD four years from now. The expected ZAR spot rate in USD four years from now.= Current Spot Rate* Expected inflation in US for Compounded for 4 years /Expected inflation in South Africa Compounded for 4 years = $0.158*(1.07)^4/(1.05)^4 = 0.158*1.07840

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

=$0.170 Part 2 1. Charles de Gaulle once stated about Brazil: “...the country of the future... and always will be.” What are the problems that have prevented this country from becoming the country of the future? Several issues prevented Brazil from fulfilling the potential of becoming "the country of the future." Due to heavy reliance on coffee exports, Brazil suffered economically during the Great Depression. This led to a nearly 40-year import substitution strategy involving government investment and protectionism. Although it resulted in growth and diversification in the short run, it was unsustainable. Coupling the substitution strategy, Brazil's difficulties in increasing exports were compounded by internal factors such as high taxes and inadequate infrastructure. External barriers to Brazilian products in world markets worsened the situation. Economic instability and debt have been another major problem. The 1980s, known as the "lost decade," saw soaring inflation, collapsing investment, and stagnation due to the largest external debt in the developing world. The situation worsened with the 1998 Asian financial crisis, leading to a devalued currency and a stagnant economy. By 1999, 35% of Brazilians lived below the poverty line, with northeast Brazil experiencing severe poverty. The country also had one of the most unequal income distributions in the world. A lack of investment in basic education has also been identified as a key factor holding Brazil back in terms of globalization and competitiveness. A significant portion of social spending in Brazil went to pensions, with only a small fraction allocated to education and culture. Finally, the Brazilian government's expenditure and planning have been problematic. In the 1970s, the government embarked on an ambitious National Development Plan, which emphasized import substitution and large-scale projects. This led to an increase in foreign debt and inflation, burdening the economy. 2. Is regional integration good for developing and developed countries? Regional integration presents many benefits for both developing and developed nations. For developing countries, it opens up access to larger markets, enabling them to diversify their trade and reduce their reliance on specific commodities or trading partners. This expansion can lead to economies of scale, making production more cost-effective and increasing competitiveness. Moreover, regional integration attracts foreign investment, critical for economic growth and development, and facilitates technology and knowledge transfer in developing nations. Participation in regional blocks can also strengthen political and economic institutions, promoting stability and good governance.

Developed countries, however, benefit from enhanced market access made possible by regional integration. Saturated industries in domestic markets stand to gain new growth opportunities, and integration also enables access to resources and labor from developing countries within the region. Furthermore, developed countries can influence regional policies and standards, potentially creating favorable conditions for their industries and investments. Overall, regional integration acts as a positive platform for mutual benefit, fostering economic growth, stability, and development across different nations, regardless of their economic status. This interconnectedness not only enhances trade and investment opportunities but also promotes a more integrated approach to addressing global challenges, benefiting all participating countries. 3. Is globalization good for developing and developed countries? Globalization is a force for good that promotes international collaboration and mutual comprehension, which eliminates the boundaries between nations and cultures. It encourages the unrestricted exchange of ideas, resources, and technologies, which in turn stimulates innovation and economic development on a global scale. This interdependence allows countries to gain knowledge from each other, thereby improving global standards for both developing and developed countries. For Brazil like many developing countries, globalization has opened doors to global markets, allowing for the expansion and diversification of its economy, especially in sectors such as agriculture and manufacturing. This integration into the global economy attracted significant foreign direct investment, which helped to modernize infrastructure and industries. Additionally, the arrival of multinational companies facilitated a transfer of technology and best practices, leading to innovation and productivity gains in Brazil. Globalization can bring benefits like economic growth, access to international markets, and foreign investment, which can help to drive development in countries. However, it can also make these countries more vulnerable to global economic fluctuations, which can deepen inequalities. This was seen in Brazil during the 1998 Asian financial crisis, when the country became increasingly exposed to the impacts of global economic volatility. For developed countries, globalization meant access to new markets in emerging economies like Brazil, offering opportunities for exports and investments. It also allowed businesses to optimize costs through outsourcing and offshoring, benefiting from lower labor costs in developing nations. However, this shift often led to job displacement and industrial changes in the developed world, sparking debates over the socio-economic implications of globalization. Moreover, increased competition from emerging markets sometimes resulted in trade imbalances and adjustments in domestic economies. Part 3 1. Is country analysis relevant?

For those involved in international financial decision making, country analysis is both extremely relevant and necessary to make succinct choices. When it comes to researching and potentially investing/expanding into outside markets, being diligent in gaining a deeper understanding of the prospective market is essential. There are several factors to consider before making any global expansion plans. These factors are traditionally addressed in a thorough country analysis report. Some of these factors include political atmosphere and its associated risk (even opportunities), operational considerations, economic environment and points of concern, commodity markets and forecasts, governmental climate, and more. Since investing in foreign markets has so many components and areas of consideration, this helps show why analyzing the country, both in its current and future states, is relevant. Additionally, interpreting and acting on forecasting models helps decision makers evaluate the stability of a country’s economy in both short- and long-term depictions. While a near-term decision may look enticing, knowing where that country’s economy may be in an additional ten years may change some people’s minds. A proper analysis would highlight areas of contention – even down to a regional level. Understanding key geographic markets helps us to better make conclusions on where investments should be made. Another key contributor to these financial choices is examining the regulatory environment in the specific country of consideration. While reviewing the economic levels and growth opportunities are important, assessing the geopolitical climate in the area is equally principle. When it comes to operating businesses globally, being aware of potential policies or regulations that may impact the business is critical. Collectively, these areas all show the relevance of country analysis projects. Sure, companies can choose to make decisions without reviewing the above, although not doing so could greatly impact them in the end. Going forward with international financial decisions is a lot more complex than it may make out to be. Having a thorough analysis of a country (economically, politically, etc.) aids in the decision-making process and ideally makes picking the right path for a company’s future that much easier. In all, evaluating these key measures shows how important and relevant country analyses are. Part 4 Supplemental Readings for Foreign Exchange Foundations, Markets and Determination Module (i.e., module 2): - Read Foreign Exchange Markets and Transactions (Harvard Business School Note in course packet), and do exercise #’s 1, 3 and 5 in the Appendix (the Appendix starts on page 23 of this reading) - For additional background and understanding, read Exchange Rate Regimes (Harvard Business School Note in course packet)

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version