International Finance

This document provides insights into international finance, focusing on exchange rate policies, taxation, financial market strategies, currency funding, and growth strategies. It discusses the semi-fixed exchange rate followed by China and the floating exchange rate followed in Australia. It also explores the taxation of profits earned by Bell Beijing in China and the impact of currency depreciation on the company's financial position. Additionally, it covers the use of financial derivatives for mitigating forex risk and strategies for growing the operations of Bell Beijing.

Running head: INTERNATIONAL FINANCE
International Finance
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Table of Contents
In Response to Question 1..........................................................................................................2
In Response to Question 2..........................................................................................................3
In Response to Question 3..........................................................................................................4
In Response to Question 4..........................................................................................................5
In Response to Question 5..........................................................................................................6
In Response to Question 6..........................................................................................................7
In Response to Question 7..........................................................................................................7
Reference....................................................................................................................................9

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In Response to Question 1
The exchange rate followed by China is a Semi-Fixed Exchange rate where the
movement of the currency is limited as the movement of the Yuan Currency is primarily
fixed and the movement if the currency is limited to about 2% price range movement. The
value of the Chinese Yuan Currency is pegged to various other basket of currencies in the
international global market and the movement of the currency is limited on a daily basis. It is
the Central Bank of China which decides upon the movement of these currency. The key
advantage of having such a exchange rate is that there is a price stability maintained in the
market. The key drawback of having such a policy is that the government would have
restrictions on the policy followed by them (Chaboud et al. 2014).
The exchange rate followed in Australia is the floating exchange rate where the value
of the exchange rate is significantly dependent on the daily demand and supply and the
market forces acting in the forex market. The key advantage of having such a floating
exchange rate is that it reflects the current macroeconomic condition of the economy. The
key demerit of having such a exchange rate policy is that the exchange rate becomes very
volatile in the economy whereby investors can suffer from major forex risk associated with

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depreciating of the currency. The exchange rate followed by the China may affect the
business both either positively or negatively as large changes in the currency would only be
possible when the Central Bank of China let the same. The appreciation of Yuan Currency in
respect to the AUD dollar would positively improve the financial condition of the company
but the same would not be very frequent because of the fixed peg system followed by the
Chinese Central Bank.
In Response to Question 2
The profit earned from Bell Beijing from the operations in the Australia will be taxed
in the China and will further be not taxable in the Australian Economy because of the tax

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treaty between these two major economies (Hodrick 2014). The profit earned in China will be
taxed at 25% CIT rate which is the corporate income tax rate and the profit earned by the
company will be taxed. The company will earn the profits in the Chinese Yuan Currency,
which is the functional currency of the company and the same needs to be converted into the
reporting currency of the company that is the Australian Dollar of the company. The income
can be transferred from the functional to reporting currency by converting the profits of the
company at the current exchange rate (Cooper 2014).
In Response to Question 3
A) The Central Bank of China follows a semi fixed exchange rate policy where the
Central Bank of China has limited the movement of the Yuan Currency in
correspondence to other global currencies in the international market. The key factors
which helps the Central Bank of China in following the same is the reserves held by
them and the depreciation or devaluation of the Chinese Yuan currency is dependent
on the Central Bank (Rout et al. 2014).

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The rapid depreciation of the Chinese Yuan currency will significantly influence the
level of profitability and the financial condition of the Bell Beijing company where
the company will be exposed to forex risk affecting the overall financial position of
the company (Ilzetzki, Reinhart and Rogoff 2017).
B) The Central bank of China will evaluate various factors and conditions before
devaluating the Chinese Yuan Currency and the same is dependent on the course of
action taken by the Central Bank. The Central Bank of China will buy more of the
Yuan currency by Open Market Operation thereby selling the Australian Dollar so
that the price stability is maintained. The Reserve Bank of Australia will definitely be
worried about the payment that are due from the Chinese government and the
payment of the same as the Central bank of China is not allowing the AUD Dollar to
strengthen in the market. The same would affect the operations of the company by
affecting the financial position of the company as the forex risk for the Bell Beijing
Company would increase making the company report less amount of profitability.
In Response to Question 4
The financial market can help the Bell Beijing Company in various aspect which
would be helpful for the company for carrying on the operations of the company and for
seeking financial capital options available for the company. The company can access to
various financial products and services for increasing the product portfolio of the company.
The company can also access to various financial derivatives instruments for mitigating the
forex risk associated with the company so that the financial position of the company becomes
stable. The most common financial derivatives instruments which are accessible are call and
put options and financial derivative contracts like futures and forwards (Ghosh, Ostry and
Chamon 2016).

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In Response to Question 5
The currency in which the funding that should be raised for the purpose of initial
investment by the company is the Australian Dollar (AUD Dollar). The functional currency
of the company will be the Chinese Yuan Currency and the reporting currency for the
company will be Australian Dollar. It is beneficial for the company if the company raises the
initial investment in Australian Dollar as the company will be getting the loans, borrowing
comparatively easier in the home country (Lee 2014). The company can then change the
borrowed amount into Chinese Yuan Currency and pay the interest rate on the borrowed
Australian Dollar by the company. The key disadvantage will be the changing exchange rate
and the rising interest rate in the Australian economy may significantly influence the

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financial position of the company. The company should use relevant applicable financial
derivatives contract for mitigating the same.
In Response to Question 6
The company will be changing the borrowed amount into Chinese Yuan Currency and
pay the interest rate on the borrowed Australian Dollar by the company. The key
disadvantage will be the changing exchange rate and the interest rate level which will play a
dominating role in this condition. Financial derivatives instruments which are accessible are
call and put options and financial derivative contracts like futures and forwards for mitigating
the forex risk. The key concern which the local Australian Bank would be having is the
depreciating Yuan currency. The financial position of the company would be affected
significantly affected by the same if the Chinese Yuan Currency starts depreciating (Chkili
and Nguyen 2014). The reporting amount of profitability for the company would be
significantly low for the company reflecting the inability of the company in the payment of
the borrowed amount. The same will also increase the financial risk and the credit risk of the
company with overseas investment and various other business and macroeconomic factor
which can significantly influence the level of operations for the company (Ireland 2016). The
financial derivatives contracts acts as a hedging tool where investor can explore their price
belief for the underlying assets and take relevant exposure in regard to the same.
In Response to Question 7
Bell Beijing can grow the operations of the company by increasing the product
portfolio diversification so that the company has a wide variety of products and services
which drives the revenue of the company. The company can grow the operations of the
company in accordance with the debt financing which has the merit of having a lower interest
rate charged on he borrowed amount. The key demerit from such financing structure will be

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the increasing financial or credit risk of the company as the company is already associated
with the business risk and forex risk associated with the company (Sehgal, Ahmad and
Deisting 2015). The company can also grow the business operations by creating various
strategies which create a demand driven factor for the companies for increasing the product
portfolio of the company. Technological efficiency and optimum and efficient utilisation of
the key resources of the company are some of the crucial aspects which the company needs to
take into consideration while evaluating the growth or expansion of the business.

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Reference
Chaboud, A.P., Chiquoine, B., Hjalmarsson, E. and Vega, C., 2014. Rise of the machines:
Algorithmic trading in the foreign exchange market. The Journal of Finance, 69(5), pp.2045-
2084.
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.
Cooper, R.N., 2014. Exchange rate choices.
Ghosh, A.R., Ostry, J.D. and Chamon, M., 2016. Two targets, two instruments: monetary and
exchange rate policies in emerging market economies. Journal of International Money and
Finance, 60, pp.172-196.
Hodrick, R., 2014. The empirical evidence on the efficiency of forward and futures foreign
exchange markets. Routledge.
Ilzetzki, E., Reinhart, C.M. and Rogoff, K.S., 2017. The Country Chronologies to Exchange
Rate Arrangements into the 21st Century: will the anchor currency hold? (No. w23135).
National Bureau of Economic Research.
Ireland, P.N., 2016. Monetary transmission mechanism. The New Palgrave Dictionary of
Economics, pp.1-7.
Lee, J.W., 2014. Will the renminbi emerge as an international reserve currency?. The world
economy, 37(1), pp.42-62.

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Rout, M., Majhi, B., Majhi, R. and Panda, G., 2014. Forecasting of currency exchange rates
using an adaptive ARMA model with differential evolution based training. Journal of King
Saud University-Computer and Information Sciences, 26(1), pp.7-18.
Sehgal, S., Ahmad, W. and Deisting, F., 2015. An investigation of price discovery and
volatility spillovers in India’s foreign exchange market. Journal of Economic Studies, 42(2),
pp.261-284.