International Finance

This document provides information on international finance, including topics such as exchange rate systems, taxation, financial market instruments, forex risk, and investment forms. It also includes references for further reading.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Author’s Note:

1INTERNATIONAL FINANCE
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................2
Question 4..................................................................................................................................3
Question 5..................................................................................................................................3
Question 6..................................................................................................................................4
Question 7..................................................................................................................................4
Reference....................................................................................................................................6

2INTERNATIONAL FINANCE
Question 1
The Exchange rate followed by the Australian economy is the floating exchange rate
system however the exchange rate in China is a fixed exchange rate regime with movement
of the currency in a band of around 2%. The key advantage of the exchange rate placed in
Australian economy will allow and reflect economic reality about the economy the key
disadvantage will be the rapid and infrequent movement of the currency. The key advantage
of the fixed exchange rate is the stability in the price movement in the currency exchange rate
regime followed by the Chinese economy (Tang 2015). The key disadvantage of having a
fixed exchange rate regime is that the large changes at a time can disrupt the performance of
the economy when the currency would be devalued at a single point of time to a lower value
(Lardy 2016).
Question 2
Bell Beijing would be earning their profits from the business operations done in Bell
Beijing and the income will be earned in the Yuan currency. The company will be
transferring the income earned in the Chinese economy by paying off with the taxes in the
China at 25% which is the Corporate Tax Rate in China. The income henceforth would not be
taxed in Australia as there is tax treaty between the two economies which avoids the effects
of double taxation effect on the income earned by the company. The company can apply
relevant financial derivatives instrument for the purpose of hedging while transferring the
income from Yuan to Australian Dollars so that the forex risk is mitigated by the company
(Gay 2016).

3INTERNATIONAL FINANCE
Question 3
A) China follows a fixed exchange rate regime with the movement of its currency in a
band of 2% and any large changes which happens in the Yuan currency will be
dependent on the Central Bank of China whether it devalues the currency or buys
Yuan Currency from Open Market Operation by selling Dollars. The reserves held
and the outlook of the economy as per the Central Bank of China is the key factor
which will decide the movement of Yuan Currency (McKinnon and Schnabl 2014).
B) If the Chinese Yuan Currency starts falling then the same would affect the reserves of
the Central Bank if the Central Bank keeps the exchange rate at a fixed rate. Since
China is large importer of goods from Australia it will raise questions about China’s
ability in paying off with the due amount it owes or whether it would devalue the
Chinese Currency (Fratzscher and Mehl 2014).
Question 4
The financial market will provide exposure to the business in the way of access to
various financial products and services offered which can help the Bell Beijing company in
prosper there business activities. Financial derivatives instruments such as derivatives helps
institutions in mitigating and hedging the risks associated with the forex risks. The risk of
currency exchange rate can easily be hedged by entering into contract like call and put or
futures contract on a specific currency according to the price belief of the investors. The most
likely financial market instruments which we can consider for the purpose of hedging is the
futures contract or the forwards contract that will help in mitigating the risk associated with
the forex risk (Cavusgil et al. 2014).

4INTERNATIONAL FINANCE
Question 5
The currency in which we would be raising the initial capital for the purpose of
investment will be the Australian dollar as the same will be easily available for the company
within the Australian economy from various financial institution deepening ion the goodwill
and the credibility of the company. The disadvantage would be that the company will be
exposed to the financial risk as the payment will be made in Australian Dollar and the
operations of the company is currently in China where Yuan currency is the principal
currency and major fluctuation and changes can significantly influence the level of
profitability for the company (Chkili and Nguyen 2014).
Question 6
The company is for sure exposed to forex risk which can significantly influence the
financial position of the company. The business operation of the company is primarily in
Yuan Currency and the repayment of initial investment will be done in Australian dollar any
changes such as weakening of Chinese Yuan currency will lead to substantial loss for the
company. Bell Beijing have to make necessary relevant forward and futures contract in order
to mitigate the risk associated with forex risk. The company can enter into put option, short
future contract or forward contract on Yuan currency where if the Yuan currency falls below
a substantial level or a point the company will be benefited from the derivative contract. The
derivatives instrument like futures contract is a key financial derivative instrument which
derives its value from the underlying assets and any changes in the underlying asset affect the
value and the pricing of the financial security.
Question 7
Debt financing, Equity borrowings and private equity investments are some of the
common form of initial investment forms for the company from which the company can seek

5INTERNATIONAL FINANCE
financing. The company also grow their business services by offering various other services
and different types of products so that it can attract a large base of customers and create
demand driven strategy for the company. Bringing technological efficiency and management
are some of the key internal growth driven strategies that can be followed by the company for
the growth of the business. The key advantage of debt financing will be the lower interest rate
and the demerit will be the increasing financial risk of the company in contrast to the business
and forex risk associated with the company (Zhang et al. 2014).

6INTERNATIONAL FINANCE
Reference
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L.,
2014. International business. Pearson Australia.
Chkili, W. and Nguyen, D.K., 2014. Exchange rate movements and stock market returns in a
regime-switching environment: Evidence for BRICS countries. Research in International
Business and Finance, 31, pp.46-56.
Fratzscher, M. and Mehl, A., 2014. China's dominance hypothesis and the emergence of a tri‐
polar global currency system. The Economic Journal, 124(581), pp.1343-1370.
Gay, R.D., 2016. Effect of macroeconomic variables on stock market returns for four
emerging economies: Brazil, Russia, India, and China. The International Business &
Economics Research Journal (Online), 15(3), p.119.
Lardy, N.R., 2016. China: Toward a consumption-driven growth path. In SEEKING
CHANGES: The Economic Development in Contemporary China (pp. 85-111).
McKinnon, R. and Schnabl, G., 2014. China's exchange rate and financial repression: The
conflicted emergence of the RMB as an international currency. China & World
Economy, 22(3), pp.1-35.
Tang, B., 2015. Real exchange rate and economic growth in China: A cointegrated VAR
approach. China Economic Review, 34, pp.293-310.
Zhang, D., Karplus, V.J., Cassisa, C. and Zhang, X., 2014. Emissions trading in China:
Progress and prospects. Energy policy, 75, pp.9-16.