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What is the international fisher effect
Course:- Finance Basics
Reference No.:- EM131457885

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The questions to answer are as follows:

Question 1:

Explain the theory of comparative advantage.

Question 2:

Discuss whether good corporate governance is necessary for MNEs.

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 company imports Indian vegetables with Eurodollars on deposit in Australia.
- A Dutch firm engages an Australian firm to provide a service.
- A German firm pays the salary of its executive working for a subsidiary in Australia.
- An Australian airline buys hospitality items from a US based seller.
- An Australian firm buys 1% share of a Japanese company.

Question 4:

It is Dec 2016. An Australian firm owes Rs35,000,000 to an Indian firm, to be repaid within the next two months. To keep things simplified, assume that the repayment date can be either Jan 31, 2017 or Feb 28, 2017. Suppose the following information are available regarding the expected exchange rates:

Expected spot rate on Jan 31, 2017 (\$/A\$): \$0.74/A\$
Expected spot rate on Jan 31, 2017 (Rs/\$): Rs68.54/\$

Expected spot rate on Feb 28, 2017 (\$/A\$): \$0.73/A\$
Expected spot rate on Feb 28, 2017 (Rs/\$): Rs70.01/\$

Which of these payment dates would be more suitable for the Australian firm, assuming the firm would prefer that date that would require less Australian Dollar cash outlay at the time of repayment?

Question 5:

What is the International Fisher Effect? Why this concept is important to know in context of MNE?

Question 6:

Suppose, the price of a luxury watch in the US is currently \$450. The same watch is priced at A\$610 in Australia, and €430 in Germany. Given these information:

i. Determine the spot rate for A\$/\$ and for €/\$ if the PPP principle holds.

ii. What will be the price of this luxury watch in Australia and Germany one year from now if the PPP holds, the US price of the watch remains unchanged, the US inflation rate is 1.6%, the German inflation rate is 1.0% and the Australian inflation rate is 1.25%?

Question 7:

John is a Forex trader. He focuses principally on the Singapore dollar/Us dollar (S\$/\$) cross-rate. The current spot rate is S\$1.44/\$. After considerable study, he concludes that the exchange rate, in the coming 180 days, will probably be about S\$1.50/\$. He has the following options on the Singapore dollar to choose from:

 Option Strike Price Premium Put on S\$ S\$1.4700/\$ S\$0.003/\$ Call on S\$ S\$1.4700/\$ S\$0.004/\$

Discuss whether he should buy a Put on S\$ or Call on S\$, and what would be his net profit if the spot rate at the end of the 180 days is indeed S\$1.50/\$.

Question 8:

A long-term technical forecast of exchange rate is likely to be more inaccurate than a short-term technical forecast. Do you agree with this statement? Why or why not?

Question 9:

On Nov 19,2015, Australian Dollar's exchange rate against the US Dollar was \$0.7194/A\$; while on Nov 18, 2016, it was \$0.7339/A\$. What was the percentage change? Was it a devaluation or revaluation or appreciation or depreciation of the Australian Dollar against the US Dollar?

Question 10:

An Australian organization has a ¥35,000,000 account payable in 3 months. The current Japanese yen (¥)/Australian Dollar (A\$) spot exchange rate is ¥87.35/A\$. The organization expects the spot rate in 3 months to be ¥80.45/A\$. The 3-month forward exchange rate is ¥84.95/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 9.70% 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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The theory of Comparative advantage was first introduced by David Ricardo in 1817 in the work titled “Principles of Political Economy and Taxation”. As per the theory, where a country can produce goods and services at a comparative lower cost compared to other countries; it may be said to possess a comparative advantage on those goods. By implication, the benefit of this theory in the international trade arena is to inculcate free trade with the assumptions of a perfect competition scenario with no uncertainty, absence of cost information and government interference. The country would therefore export goods over which it has comparative advantage. To illustrate the concept,
Output
Countries Shoes Burger
US 1 4
Australia 4 1
Total 5 5

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