Reference no: EM131309356
Assignment: International Financial Management
Answer ALL questions
1. Inflation in Brazil is expected to be 24% p.a. by the third quarter of this year. ABC plc imports from Brazil paying in Brazilian real.
a. Explain and evaluate the role of Purchasing Power Parity theorem in ABC's decision as to whether or not to look for a cheaper alternative.
b. The financial press reports that carry traders in the UK are actively investing in Brazil. Explain the significance of these reports for your decision as to whether to continue importing from Brazil.
c. How might a futures contract be used to manage the possible effects of volatile import prices - what are the advantages and disadvantages?
2. Consider the following data from the Trading Economics website in July 2016 after the referendum result in favour of the UK leaving the EU:
| Base |
Exchange Rate |
Annual change in the number |
| Euro Area |
EURUSD |
1.1043 |
-1.0% |
| United Kingdom |
GBPUSD |
1.2970 |
-16.4% |
| Australia |
AUDUSD |
0.7562 |
1.5% |
| New Zealand |
NZDUSD |
0.7252 |
7.8% |
| Japan |
USDJPY |
102.31 |
-16.7% |
| China |
USDCNY |
6.7011 |
7.9% |
| Switzerland |
USDCHF |
0.9832 |
4.8% |
a. Calculate the percentage change of each currency against the pound (GBP - note that you will need to consider cross exchange rates) explain your analysis clearly.
b. As the changes against the pound (GBP) do not represent interest rate differentials, does this mean that the International Fisher Effect is irrelevant? Explain and discuss in relation to the concept of an efficient market.
c. Explain how a range forward or cylinder type option contract with a bank might have helped a UK based company importing goods from the US over the past year.
3. Discuss whether the risks of foreign direct investment into a developing country outweigh the benefits of diversification, for a multinational company from a developed country?
4. Compare and contrast the use of derivatives with non-market methods to manage exchange rate risk and commodity price variation in international trade?
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