International Finance: Risk Mitigation, Ethics, and Case Analysis

This assignment delves into various aspects of international finance, starting with an analysis of true/false and multiple-choice questions related to options and futures contracts. It explores the Foreign Corrupt Practices Act and its impact on ethical behavior in international business, addressing challenges like animal cruelty, environmental degradation, and labor-related issues in the footwear and clothing industries. The assignment also defines the LIBOR rate and its significance. Furthermore, it includes a case study involving PCC, computing future dollar costs using money market and forward hedges, and analyzing the effectiveness of option hedges under different scenarios. The analysis concludes by determining the indifference point between option and forward hedges for PCC, providing a comprehensive overview of risk management and ethical considerations in international finance.

Business enterprises
Financing Entrepreneurial Ventures
Entrepreneurial Ventures
Name of the author
University Name

Table of Contents
Answer to question no-1..............................................................................................................................2
TRUE OR FALSE.......................................................................................................................................2
Answer to question no-2..............................................................................................................................3
MULTIPLE CHOICE QUESTIONS...........................................................................................................3
Answer to question no-3..............................................................................................................................4
OPEN ENDED QUESTIONS.....................................................................................................................4
What is the Foreign Corrupt Practices Act? How has this law affected ethical behavior among
international businesses?.........................................................................................................................4
What ethical and labor-related issues are a major challenge to footwear and clothing in the International
Market?...................................................................................................................................................4
What is LIBOR rate?...............................................................................................................................5
Answer to question no-4..............................................................................................................................5
CASE STUDY............................................................................................................................................5
Compute the future dollar costs of meeting this obligation using the money market hedge and the
forward hedges........................................................................................................................................6
Assuming that the forward exchange rate is the best predictor of the future spot rate, compute the
expected future dollar cost of meeting this obligation when the option hedge is used.............................6
At what future spot rate do you think PCC may be indifferent between the option and forward hedge?. 6
REFERENCES............................................................................................................................................7

Answer to question no-1
TRUE OR FALSE
QUESTION TRUE/FALSE JUSTIFICATION
1. True In a bullish phase, the
maximum loss would be the
premium paid and the loss of
interest on it. But the potential
for gain is higher because the
stock may command any price
on the higher side. The higher
the stock price, higher would
be the difference between
stock price and exercise price
and ultimately the profit
would be higher.
2. False With a shorter period of
maturity, the stock price is less
likely to change and hence the
scope of possible profits is
smaller in this. It is true
conversely as, for a given
stock price the longer a short
call is maintained, the more
time value it loses and the
greater the profit (Boyer,. and
Vorkink, 2014).

3. False There are several other
methods like requesting
performance guarantees,
buying and selling in same
currency, ensuring sufficient
insurance coverage, dealing
with reputed buyers and
sellers etc.
Answer to question no-2
MULTIPLE CHOICE QUESTIONS
1. Who from the following list would be considered a speculator by entering into a futures or
options contract on commodities?
Answer: Corn delivery truck driver
2. All of the following are financially engineered products, except:
Answer: Mortgage
3. A mutual fund is engaged in the short term and temporary purchase of index futures, for
purposes of minimizing its cash exposures. Which "use" most closely explains their actions?
Answer: Reduced transaction costs

Answer to question no-3
OPEN ENDED QUESTIONS
What is the Foreign Corrupt Practices Act? How has this law affected ethical behavior
among international businesses?
FOREIGN CORRUPT PRACTICES ACT: this act stands as a strong enactment that promotes
ethical behavior among international business practices. This act prevents business houses which
tempt the foreign officials, for grabbing or retaining business proposals, by offering them bribes.
This act extends to all the parties involved in a business proposal being the publically traded
companies and their directors, officials, employees, agents (distributers, joint ventures etc.) and
stockholders. Certain anti-bribery and accounting provisions are being laid by this act (Kumar,
Tripathi, and Kadalbajoo, 2015).
AFFECT ON ETHICAL BEHAVIOUR: this act has promoted transparency and accountability
in the business practices. Strict actions are taken against any party that contradicts the anti-
bribery and/or the accounting provisions laid. Companies are asked to maintain proper books and
records. Any party that violates the guideline of this act has to disgorge the ill-gotten profits as
well as the interest thereon with other significant civil penalties (Shipley, 2016).
What ethical and labor-related issues are a major challenge to footwear and clothing in the
International Market?
 Cruelty towards animals on account of obtaining leather, wool etc. by directly harnessing its fur,
skin or its hide, for using the same in making of shoes, handbags, jackets etc.
 Environmental degradation, e.g. release of toxic waste being discharged directly in water bodies
on account of cotton farming (Hu, 2014).
 Health and safety hazards like depression, vomiting, headaches, faced by the workers in these
industries due to long working hours, direct exposure to poisonous chemicals etc.
 Due to the use of cost cutting techniques by several brands very low wages are being paid to the
workers as compared to the average (Ji, and Zhou, 2015).
 Further, in order to reduce costs by working in non-developed areas, child labor is also being
promoted.

What is LIBOR rate?
LIBOR rate stands for London Inter Bank Offer Rate. This rate stands as an average rate at
which the selected banks on the London money market are ready to lend to each other. The
maturities offered are seven in number ranging from overnight to twelve months and the same is
in five different currencies. This rate is used as a standard benchmark by banks and financial
institutions on all sort of banking products being savings account, mortgages and loans
(Vazquez, and Federico, 2015).
Answer to question no-4
CASE STUDY
Given,
Spot rate : 124 yen per dollar
1 year forward : 110 yen per dollar
Borrowed amount by PCC : 500 million yen
Interest rate in Japan : 5%p.a.
Interest rate in US. : 8%p.a.
Call option strike price : $.0081 per yen
Premium : .014 cents per yen
Compute the future dollar costs of meeting this obligation using the money market hedge
and the forward hedges.
USING MONEY MARKET HEDGE: Since payables are hedged, therefore $ that is home
currency is borrowed, which will be converted into Yen and Yen will be invested in such a way
that Yen received after one year is equal to 500 million Yen (Vogel, 2014).
As per excel calculation, future dollar cost = $ 4.147465438 million (Hull, and Basu, 2016).

USING FORWARD HEDGE:
As per excel calculation, future dollar cost = $ 4.545454545 million
Assuming that the forward exchange rate is the best predictor of the future spot rate,
compute the expected future dollar cost of meeting this obligation when the option hedge is
used.
As per excel calculation, future dollar cost = $ 4.1256 million
At what future spot rate do you think PCC may be indifferent between the option and
forward hedge?
As seen above, the option hedge dominates among the two options. PCC have to pay $
4.545454545 million in future hedge irrespective of the future spot rate. Hence at no future spot
rate PCC will be indifferent (Zietlow, et al. 2018).

REFERENCES
Boyer, B.H. and Vorkink, K., 2014. Stock options as lotteries. The Journal of Finance, 69(4),
pp.1485-1527.
Hu, J., 2014. Does option trading convey stock price information?. Journal of Financial
Economics, 111(3), pp.625-645.
Hull, J.C. and Basu, S., 2016. Options, futures, and other derivatives. Pearson Education India.
Ji, X. and Zhou, J., 2015. Option pricing for an uncertain stock model with jumps. Soft
Computing, 19(11), pp.3323-3329.
Kumar, A., Tripathi, L.P. and Kadalbajoo, M.K., 2015. A numerical study of Asian option with
radial basis functions based finite differences method. Engineering Analysis with Boundary
Elements, 50, pp.1-7.
Shipley, B., 2016. Cause and correlation in biology: a user's guide to path analysis, structural
equations and causal inference with R. Cambridge University Press.
Vazquez, F. and Federico, P., 2015. Bank funding structures and risk: Evidence from the global
financial crisis. Journal of banking & finance, 61, pp.1-14.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge
University Press.
Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for nonprofit
organizations: Policies and practices. John Wiley & Sons.