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HW - Assignment Example

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It is expected that the annual decrease of 3% annually will be unfavorable to the MNC at the end of the ten years
a. Agency cost refers to the cost of conflict between the managers and…
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Home Work Question A review of the exchange rate reveals an exchange rate that has an adverse effect to the MNC. It is expected that the annual decrease of 3% annually will be unfavorable to the MNC at the end of the ten years
Question 2
a. Agency cost refers to the cost of conflict between the managers and shareholders view on the manner of spending company resources. Managers may what to invest in future returns while shareholders what spending that will increase their share profit.
b. A product life cycle is the division of a company’s product into three stages of introduction growths and finally decline. It relates to the growth of MNC by evaluating the stages that an international product has to go through thus revealing product decline and appreciations as a result of competition
c. Low home inflation will mean high consumption and less saving. This will in turn increase imports and reduce export thus increasing deficit in a country’s current account. Foreign imports will signify a strong competition thus low inflation.
d. Negative current account is harmful to a country because it increase the debt the country has to incur thus reducing its competitiveness in the international market.
Question 3
The demand for South Korean won will increase with the increase in demand for imports. The supply for South Korean won will reduce due to increase in its exports. The result will be a shift in equilibrium value of the South Korean won upwards, thus increasing its value.
Question 4
The high interest rates in US will increase demand for US currency as a result of hot money flows. This will see appreciation in US dollar demand for Argentina pesos will decrease, while its supply will increase. The equilibrium value for the pesos will thus depreciate
Question 5
Rise in income levels of US will increase demand and consumption thus increasing imports. The demand for British pounds will increase, while supply for British pound for sale will decrease, the equilibrium value of the British pound will increase thus signifying an appreciation in the value of British pound
Question6
a. Currency futures are used for hedging by purchasing put options to lock the maximum amount for euros and purchasing call options to set minimum value for the euros
b. In speculating, the speculators who anticipate for appreciation of the currency will purchase the future contracts of the currency as opposed to those who anticipate the currency’s decline who will sell currency future contracts of that currency
Question 7
When the US based firm wants to lock its maximum price to be paid for euros in future, then the US firm can consider purchasing a call option for euros. Similarly, when the US firm wants the price of its receivables to be lock at minimum prices for the euros, then the US firm can consider put option on euros.
Question 8
A speculator should purchase a call option of Australian dollar when the Australian dollar is devalued and low compared to domestic currency. A speculators should purchase a put option on Australian dollar when the value of Australian dollar is higher than the value of domestic currency
Question 9
Direct intervention refers to the process through which central banks use to control exchange rate in a direct manner Central banks will use direct intervention to change value of currency by using currency reserves to buy a particular currency in the market thus placing an upwards pressure to that currency. Sometimes it may increase the supply of that currency in the market thus forcing its prices down (Gandolfo and Gandolfo, 2010)
Question 10
Indirect intervention refers to the process of central banks working with the banking institutions and encourage them to operate effectively through capital gains control. The central bank use indirect intervention to change the value of currency by influencing the factors that affect exchange rate like demand and supply.
References:
Gandolfo, Giancarlo, and Giancarlo Gandolfo. International Trade Theory and
Policy. Berlin: Springer, 2010. Print. Read More
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