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International Financial Management final - Assignment Example

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The acquisition strategy is considered a foreign direct investment because the company acquires full control of the business assets and decisions.
4. Establishment of a new…
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International Financial Management final
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Download file to see previous pages The Swiss franc’s value and euro’s value are expected to be $0.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co?
6. Assuming the bid rate of a New Zealand dollar is $.36 while the ask rate is $.365 at Bank X. Assume the bid rate of the New Zealand dollar is $.33 while the ask rate is $.34 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
7. Briefly explain the theory of interest rate parity. If interest rate parity holds what type of arbitrage is not feasible? You may wish to utilize a chart to explain when arbitrage opportunities exist and who can take advantage of the arbitrage.
The theory of interest rate parity entails a situation where the difference of interest rates between two given countries is equal to the difference of spot exchange rate and the forward exchange rate. Thus, if the theory of interest rate parity holds, an arbitrage will not be feasible if the spot exchange rate and forward exchange rate markets are in state of equilibrium. In contrast, if the spot exchange rate and forward exchange rate markets are in state of equilibrium, the arbitrage will be feasible.
8. Assume that Mexico’s inflation rate is lower than the U.S. inflation rate. This will cause U.S. consumers to increase their imports from Mexico and Mexican consumers to reduce their imports from the U.S. According to purchasing power parity (PPP), this will result in a depreciation of the Mexico Peso.
9. The interest rate in the U.K. is 4%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:
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