International Financial Management - Assignment Example

Question one International financial management An indirect quote is used in Australia and Europe. This a current quotation in foreign exchange market which is express the amount of foreign currencies needed to buy or sell a unit of local currency While direct quotes is used in the United States. Direct quote is a foreign exchange rate that is quoted as the local currency a unit of the foreign currency. Why Australia uses the type of spot quotes that it uses Australia uses the indirect quote since it expresses the amount of foreign currency needed to buy one unit of the local currency. The local currency is the base currency whilst the foreign currency is the counter currency. In this regards, the low exchange rate would imply that the local currency is depreciating turning to be weak because it is valued very small amount of foreign currency (Aravossis, 2006). Question two How much would AU$100,000 cost in US$ Quote in Australia is US$0.736 Hence, AU$100,000 cost in US$ will be 0.735Au$=1$ What of AU$100,000 US$100,000*0.735US$? 1$} =US$73,500 Question three If you converted $15,000 to British pounds and then back to $US, what would be its value in to US$? How many US$ would you need to earn $1,500 on a round-trip transaction Exchange rate US$1.523-33 $ Convert $15000 to British pound as follows {1.523*$15000/1}=22,845 pounds Convert the British pound to US dollar (495000/1.1933} =$19,150 What would need to earn $1,500 on a round-trip transaction? Round trip cost {22845-19150-1500) =$2,194 You need to earn {$15000*2194) =$17,194 in order to earn a round trip of $1500 The functions of the foreign exchange market Transfer Function: The main function of a foreign exchange market is to ensure that the conversion of one currency to another currency is effective and smooth. It accomplishes the transfer of purchasing power involving the two nations. The transfer of purchasing power is impacted through varieties of credit instrument like the bank draft or foreign bills. In executing the transfer functions, the foreign exchange market undertakes the payment globaly by clearing the debts in the both paths concurrently similar to local clearing (Bourke, 1998). Credit Function: The foreign exchange market provides credit t o local as well as international investors, to encourage foreign trade, when the foreign bills of exchange are employed in the global payment, a credit for at least three months until their maturity is needed. Hedging Function: The foreign exchange market hedges the foreign exchange risks. In a free exchange market when the exchange rates such as the prices of a currency in terms of another , changes, there might be a gain or loss. Under this situations, an individual to a company will undertake a big exchange risk where there is huge amount of net claim or net debt that are be complied with in foreign currency. The exchange risk must be minimized. In this regards, the exchange market provides for hedging forecasted or real claims or debt by way of forward contracts in returns. A forward contract is always for 3 months and it is a contract to enter into a buy or sell foreign exchange against the dollar currency at a constant date in the future at an agreed price. There is no cash that exchange hands at the time of entering into a contract but the contract makes it likely to turn down the probable changes in the exchange rate (Ehrhardt, 2008). The market participant and transactions Consumers and Travelers The consumers might buy goods in aforeign nations or through the internet with their credit card, the amount that they pay in the foreign current will changed to the local currency on their credit card statement. Travelers should go to bank or currency exchange bureau to change the currency to foreign currency when making use of the cash to pay for the services or good in foreign nations. The travelers require being alert of the exchange rate to guarantee that they acknowledge a fair transaction. Businesses The business frequently requires currency conversion when conducting the business in the foreign nation. Nig companies require currency conversion since; they deal with huge money in the foreign nation that needs to be converted to the parent company currency (Funke, 2002). Investors and Speculators The ventures and speculators need to convert currency anytime they transact in foreign venture, such as equity, bond, bank deposit or real estate investment. Investors and specialties also transact the business s currency conversion in an effort of taking advantage of change in currency exchange markets. Commercial and Investment Banks The commercial bank and venture banks trade currency as the business to their commercial banking, deposit as well as lending to its clients. The banking industry involves itself in currency market for hedge and speculative reasons (Schuster, 2015). Governments and Central Banks The environment and central bank transact the currency to enhance the economic situation or to get involved in an effort of adjusting the economic imbalances within the country. Since they nonprofit making institution, they tend to trade on a long term basis, it is uncommon for them to earn income. Three strategic motives why firms become multinationals Expanding the business operations Many companies become internationals in order to expand its business operations, seeking the new market or for extra profits, it might as ne to focus on the economics of scales that a high global demand might bring. The motive behind the market that seeks activities is a strong amongst the companies who have the benefit linked to technology or brand that gives the company a competitive edge over local competitors. Companies also go international in order to secure main suppliers. A safe and fortunate access to input and supply store as well as access to the market afford the company more specifically the manufacturing firms a competitive advantage over the less privileged competitors. For instance the Coca-Cola Company which is there leading beverage company across the globe (James, 2015). Low cost of production The company goes global in order to have access to low cost on factor of production such as labor which is the key factor in Europe and United states and provide a competitive disadvantage unlike to imports. In this regards, companies might offshore the production to the parent nation and turn to be competitive. The lower of capital through government subsidy is a strong force to turn to multinational corporations. Strict regulation Some firms venture in other countries due to strict regulations in the local market and to minimize seasonal downturn in local market need by developing foreign need. Furthermore, companies which to go global in their operations when the need for their product has flooded in the local market. For instance, the tobacco company exploited the market in developing nations since the market in the developed nations turns to be flooded. Some companies centre on the economies of scale that a large need in a foreign country might separate from the extra profits. The government aid for exporters like the provision of information concerning the foreign market as well as funding the business opportunity which entice more companies to become multinational corporations (Schuster, 2015). The theory of Purchasing Power Parity (PPP) The purchasing power parity is a theory that estimates the net adjustment that should be made on a currency exchange rate involving nations that permits the exchange to be similar to the purchasing power of every nation’s currency. With the use of purchasing power parity is an option to the use of market exchange rate. The real purchasing power of a currency is the amount of the currency required to purchase a specific unit of good. The purchasing power parity is reestablished in every nation on the basis move relative living standards and the rate of inflation. The purchasing power plus parity eventually would imply matching the purchasing power of tow diverse currency by accounting for dissimilarities in the inflation rates and the cost of living in any nations. In this regards, the theory of purchase power parity aids in reducing the false worldwide contrast that might arise with the usage of market exchange rates. For instance, where the nation produce similar amount of product in tow diverse years, because the market exchange rate changes significantly. Whether GDP of one nation is evaluated in its won currency is changed to other country’s currency with use of market exchange rate, one nation may be conditional to depict superior real GDP unlike for the other nation in one year but low in the other nations. Both of these conclusions might fail to depict the realism of their relative levels of production. But where one nation’s GDP is changed into other nation’s currency with the sue of purchase power parity exchange rates of observed market exchange rates, the misleading conclusion will not transpire (Funke, 2002). The difference between absolute purchasing power parity and relative purchasing power parity Purchasing power parity Under the purchasing power parity, the change in two nations’ prices level will have an impact on the exchange rate. As per the purchasing power parity, when a nations’ inflation rate groups relative to that of another nations, the former currency is anticipated to depreciate. The purchase power parity will not hold where the government defines the diverse basket of consumer price index. Moreover, some good purchase power parity places more emphasize on just the price level and the exchange rates and it doesn’t entails the cost of transport and dealing cost. The absolute PPP The theory assumes that the equilibrium in exchange rate involving two nations will make the purchasing power to be same. The absolute purchasing power parity is possible of holding well for a commodity that is simply movable between two nations but is probable of being false for other goods and services that cannot be simply be moved since the transportation expense will deform the parity. The absolute PPP is same to the law of single price. The notion of the law of ingle price implies that the price of similar product in diverse nations must be same when they are appraised in a common currency (Schuster, 2015). Bibliography Aravossis, K. (2006). Environmental Economics and Investment Assessment. Londion: Cingage Learning. Bourke, P. (1998). Concentration and other determinants of bank profitability . Journal of Banking and Finance, 13, 65-79. Damodaran, A. (2010). Applied Corporate Finance - Page 552. New York: Cingage Learning . Ehrhardt, M. (2008). 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