International Finance : Solution Essays

International Finance:
Chapter 6
Question 17 Effects of September 11 Within a few days after the September 11, 2001 terrorist attact on the United States, the federal Reserve reduced short-term interest rates to stimulate to stimulate the U.S. economy.  How might this action have affected the foreign flow of funds into the United States and affected the value of the dollar? How could such an effect on the dollar have increased the probability that the U.S. economy would strengthen.

Question 18:  Intervention Effects on Corporate Performance, Assume you have a subsidiary in Australia. the subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong.  The Hong Kong dollar is tied to the U.S. dollar.  Your subsidiary borrowed funds from the U.S. parent, and must pay the parent $100,000 in interest each month.  Australia has just raised its interest rate in order to boost the value of its currency (Australia dollar, A$). The Australian dollar appreciates against the U.S. dollars as a result.  Explain whether these actions would increase, reduce, or have no effect on:

a: The volume of your subsidiary’s sales in Australia (measured in A$)

b: The cost to your subsidiary of purchasing material (measured in A$)

c  The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A&). 
Briefly explain each answer.

Question 26:  Impact of Devaluation. The inflation rate in Yinland was 14 percent last year.  The government of Yinland just devalued its currency (the yin) by 40 percent against the dollar.  Even thought it produces products similar to the United States, it has much trade with the United States and very little trade with other countries. It presently has trade restrictions imposed on all non-U.S.countries.  Will the devaluation of the yin increase or reduce inflation in Yinland? Briefly explain.

Chapter 7:

Question 23:  Economic Effects on the Forward Rate.  Assume that Mexico economy has expanded significantly, causing a high demand for loanable funds there by local firms.  How might these conditions affect the forward discount of the Mexican peso?

Question 26:    Deriving the Forward Rate.  Before the Asian crisis began, Asian central banks were maintaining a somewhat stable value for their respective currencies.  Nevertheless, the forward rate of Southeast Asian currencies exhibited a discount.  Explain

Question 34:  Movement in Cross Exchange Rates.  Assume that cross exchange rates are always proper, such that triangular arbitrage is not feasible.  While at the Miami airport today , you notice that a U.S. dollar can be exchanged for 125 Japanese yen or 4 Argentine peso at the foreign exchange booth.  Last year, the Japanese yen was valued at $0.01, and the Argentine peso was valued at $.30.  Based on this information, the Argentine peso has change by what percent against the Japanese yen over the last year.

Question 36:  IRP and Changes in the Forward Rate:  Assume that interest rate parity exists.  As of this morning, the 1-month interest rate in Canada was lower than the 1-month interest rate in the United States.  Assume that as a result of the Fed’s monetary policy this afternoon, the 1-month interest rate in the United States declined this afternoon, but was still higher that the Cabadian1-month interest rate.  the 1-month interest rate in Canada remained unchanged.  Based on the information, the forward rate of the Canadian dollar exhibited a ————-[discount or premium} this morning that ————–{increased or decreased] this afternoon.  Explain.