FINC20023 Assignment: Analysis of Forex, Governance and Trade Theories

This FINC20023 assignment delves into core concepts of international finance. It begins by discussing the theory of comparative advantage and its modern applicability, followed by an analysis of different corporate governance regimes and their impact on stakeholders. The assignment then classifies various financial transactions, explores the interest rate parity theory, and calculates Australian dollar cash outlays for a hypothetical company. It also determines annual forward rate premiums, calculates the future Australian dollar price of a car, and analyzes the use of put or call options, including net profit calculations. Finally, it covers different ways of interventions in the foreign exchange market and concludes with a hedge position recommendation.

Running head: FINC20023
Finc20023
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Question 1: Discussing the theory of comparative advantage, while detecting the applicability
in modern context.......................................................................................................................2
Question 2: Differentiating between the corporate governance regimes, while detecting its
impact on stakeholders of the corporation.................................................................................3
Question 3: Classifying the Following transactions...................................................................4
Question 4: Discussing about the interest rate parity theory, while detecting the practical
value or implication of the theory..............................................................................................5
Question 5:.................................................................................................................................6
i) Determining the Australian dollar cash outlay for ABM Ltd for the following actions:.......6
ii) Indicating the manufacturers that ABM should choose solely based on required Australian
dollar cash outlay:......................................................................................................................7
iii) Identifying the changes in the purchase decision for ABM Ltd:..........................................7
Question 6: Determining the annual forward rate premium for GBP and JPY for the stated
maturity......................................................................................................................................7
Question 7: Detecting the Australian dollar price for the car 1 year from now.........................8
Question 8: Discussing whether a put or call option should be purchased, while detecting the
net profit.....................................................................................................................................8
Question 9: Discussing the different ways of interventions that might occur in foreign
exchange market.........................................................................................................................9
Question 10: Detecting which of the hedge position should the organisation adopt...............10
References and Bibliography:..................................................................................................12

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Question 1: Discussing the theory of comparative advantage, while detecting the
applicability in modern context
The comparative advantage theory mainly states an increment in the economic
welfare of the organisation would be conducted, if countries specialise in producing goods
whether they have lower opportunity cost. During the year of 1817, David Ricardo mainly
introduced comparative method, which stated about the relevant advantages that refers to the
uncontested superiority of a country for producing a particular good. The method would
ensure that the company would emphasis on the production method that could improve their
productivity and reduce the negative impact on opportunity cost. However, the measure
mainly falls under free trade method, as it requires the country to follow the free method
criteria for the implementing the comparative advantage theory. Laursen (2015) mentioned
that with the presence of free trade conditions companies are mainly able to minimise the
level of expenses that is conducted on tariff set by different countries.
The comparative advantage can be used in the modern context, where one country
could specialise in one manufacturing process, which could allow them to improve their
productivity, where free trade would increase in value over the period of time. Therefore, the
world output would increase when the overall principle of comparative advantage is
implemented by countries. This would mainly help the countries to allocate their scare
resources for producing relevant goods and services, which they should specialise in
producing. The use of comparative advantage would mainly ensure the countries to improve
the comparative cost associated with operations (Demirag, 2018). The calculation would
mainly help to detect how much productive or cost effective one country is than another.
For example:

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Maximum
outputs
Country A Country B
CARS 29 m 34 m
TRUCKS 5 m 20 m
The above example provides explanation regarding the manufacturing process of two
countries. The information directly states that the Country A should focus on producing Cars,
while Country B should be focusing on only manufacturing Trucks, as it would improve their
cost benefits and generate high level of income from their operations.
Question 2: Differentiating between the corporate governance regimes, while detecting
its impact on stakeholders of the corporation
The comparative corporate governance regimes mainly comprise of market-based,
family-based, bank-based and government affiliated. The different type of corporate
governance regimes have adequate impact on the stakeholders of the corporation, which are
depicted as follows.
Market-based:
Corporate governance resumes that are based on market have direct characteristics of
efficient equity market where dispersed ownership is required. This kind of comparative
corporate governance regimens can be found in United States United Kingdom Canada
Australia. Market best resumes directly help the stakeholders to identify the actual interest of
the company, which could allow the stakeholders to identify the current trajectory and
positions of the organisation (Barkemeyer, Preuss & Lee, 2015).
Family-based:

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The family based corporate governance regimes have characteristics of both
management and ownership, which mainly combines the family majority and minority
shareholders. This type of corporate governance regimes are mainly formed in Hong Kong,
Indonesia, Malaysia, Singapore, Taiwan and France. The family based corporate governance
resumes wood mainly have low corporate governance activities for different stakeholders of
the organisation, the focus of the business would be based on family earnings and reputation.
Bank-based:
The bank based corporate governance regimes are relatively formed with the single
characteristics, where Government influences the bank lending process, which directly gives
rise to the lack of transparency and family control within the business. This type of
organizations are mainly found in Korea and Germany where majority of the transparencies
are relatively lower due to the influence of the governments on the lending process of the
banks.
Government affiliated:
Government affiliated corporate governance regimes have different characteristics, as
the ownership is directly related to the government. The state ownership of enterprise directly
has low level of transparency and reduces the overall influences of the minority shareholders
of the organization. Furthermore, this type of organizations is mainly found in China and
Russia, where State owns the overall business and is run by the government officials. The
stakeholders of the organization have no say in such companies, as the State is responsible for
the business activities, where the main aim is not to improve their profits in the long run
(Barkemeyer, Preuss & Lee, 2015).
Question 3: Classifying the Following transactions
Transactions Action

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An Australian company imports vegetable
from a Chinese firm
Debit to Australian company goods part of
the current account
Credit to Chinese firm goods part of the
current account
An Australian resident pays Malaysia
Airlines for a flight to Kula Lumpur
Debit to Australian company goods part of
the current account
Credit to Chinese firm goods part of the
current account
A German investor buys some US treasury
bonds
Debit to German investor portfolio part of the
financial account
Credit to US treasury of the financial account
An Indian firm pays the salary of its
executive working for a subsidiary in
Australia
Debit to income receipt/payment of Australia
Credit to income receipt/payment of India
An Australian firm buys 2% share of a
Chinese company
Debit to Australian firm part of the financial
account
Credit to Chinese company part of the
financial account
Question 4: Discussing about the interest rate parity theory, while detecting the
practical value or implication of the theory
Interest rate parity theory is considered to be a powerful idea where real life
implications effect prices of currencies. Moreover, the theory directly argues that difference
between risk free rate and different types of currencies unswervingly help in determining the
actual conversion rate for each of the currencies for future years. In addition, the theory
nonstop helps in identifying the relationship between the interest rate differential of two
countries. Moreover, it also suggests that the differential between forward exchange rate and
spot exchange rate is considered to be equal to the interest rate differentiation of both the
countries. The theory also specifically identify that if an investor obtains a highest interest

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rate in one currency then the currency will exchange at most expensive future price than the
current price (Du, Tepper & Verdelhan, 2018).
The above figure provides information regarding the formula for interest rate parity.
The equation directly helps to understand the level of changes that would be conducted to the
forward rate of the current spot value of the currency. There is a practical implication of the
theory, where the economist and currency analyst directly uses the overall formula to
determine the actual level of forward rate for the current spot price. This information would
eventually help them to determine the trend and the price conditions of a particular currency
before making relevant trades in the forex market. Interest rate parity theory is a fundamental
equation that governs the overall relationship between currency exchange rate and interest
rate. This information would is considered to be a basic promises of the interest rate parity
that is used by investors to head returns from investing in different currencies. Forex traders
use this formula to find arbitrage opportunities that could provide them risk free returns and
generate high level of profits in the process (Lothian, 2016).
Question 5:
i) Determining the Australian dollar cash outlay for ABM Ltd for the following actions:
Particulars Value
Laptop price Japan (J) ¥50,000.00
Laptop price US (U) $400.00
USD/AUD (A) $0.67
YEN/USD (B) ¥110.00
YEN/AUD (C=AxB) ¥73.70

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a) Laptop price US (U/A) AUD 597.01
b) Laptop price Japan
(J/C) AUD 678.43
ii) Indicating the manufacturers that ABM should choose solely based on required
Australian dollar cash outlay:
The calculations have indicated that manufactures of US should be accepted, as the
overall prices for the laptop is low in comparison to Japan laptop.
iii) Identifying the changes in the purchase decision for ABM Ltd:
Particulars Value
Laptop price Japan (J) ¥50,000.00
Laptop price US (U) $400.00
USD/AUD (A) $0.74
YEN/USD (B) ¥115.00
YEN/AUD (C=AxB) ¥85.10
Laptop price US (U/A) AUD 540.54
Laptop price Japan
(J/C) AUD 587.54
The calculations have indicated that manufacturers of US should be selected, as the
prices of the laptop are less than Japan. The calculations have mainly stated that the laptop
price for the Australian buyer is mainly derived by using the currency valuation system,
where the lowest price for the product is mainly used for the buying process.
Question 6: Determining the annual forward rate premium for GBP and JPY for the
stated maturity
Particulars Value
USD/GBP 1.3150
YEN/USD 114.5500
2-month forward rate

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USD/GBP 1.3255
YEN/USD 108.8500
Annual forward rate premium
(USD/GBP) 0.0479
Annual forward rate discount (YEN/USD) 31.4194
The above calculations mainly help to understand the level of annual forward rate
premium or discount for both USD.GBP and YEN/USD. The calculations have mainly
indicated that a forward rate premium has been witnessed for USD/GBP, where the values
that have increased is at the level of 0.0479. On the other hand, the annual forward rate
discount has been witnessed for YEN/USD method, where its values are at 31.4194.
Question 7: Detecting the Australian dollar price for the car 1 year from now
Particulars Value
German car cost (GER) 50,000.00
AUD/GER 1.4000
German car cost
(AUD) 70,000.00
Australia 1.60%
Germany 2.00%
AUD/GER in 1 year 1.4055
German car cost
(AUD) 70,275.59
The calculations have mainly indicated about the forward rate formula, which
utilising the inflation information for two countries for determining its overall value for a
given period of time. The calculation has stated that the values of AUD/GER would mainly
increase from the levels of 1.4000 to 1.4055, as the inflation rate in Australia is at the level of
1.60% and 2.00% for Germany. Hence, the difference in inflation rate between both the
countries would mainly alter their currency value in future. Thus, the price of German car
would increase from AUD70,000 to AUD70,275.59 in 1-year time.

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Question 8: Discussing whether a put or call option should be purchased, while
detecting the net profit
Particulars Value
Spot rate at the end of 180 days $1.49000
Strike price $1.46000
Premium $0.00041
Net profit on Call option $0.02959
The information in the above table states about the overall conditions of S$/$ over the
period of 180 days. The anticipation for the currency is to increase in value from S$1.40/$ to
S$1.49/$ within the period of 18 days. This anticipation has mainly stated to use the Call
option, as it would be beneficial for the US based forex trader. Therefore, the use of call
option would allot the forex trader to generate a profit of $0.02959 in 180 days. Thus,
companies can use option contract for improving their overall trading conditions and generate
high level of income from investment.
Question 9: Discussing the different ways of interventions that might occur in foreign
exchange market
The different types of interventions that could be conducted in foreign exchange
market by the governments of different countries. The foreign exchange in preventions is
mainly conducted by shooting monetary policies, which is monitored by the central bank of
the country. The central bank directly take parts in the overall influencing of the monetary
fund is transferred all around the world. The intervention of the Central Banks have direct
impact, which is why China is still able to reduce their overall currency value to make trade
more attractive for investors around the globe (Cavallino, 2019). There are four different
techniques that is used by the central banks to adequately intervene in the forex market which
are depicted as follows.
Jawboning:

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This method directly allows the central bank to intervene and reset the rates without
using any kind of actual actions or techniques.in this scenario the central bank directly
provides a range between which the currency should trade or else adequate measure of
monetary policies would be implemented to curb the fluctuating price actions.
Operational Intervention:
Under this method, the central bank directly steps into the market and start selling and
buying currencies, as its objective to drive the exchange rate to a particular point. This
increases the tensions in the currency market and traders start to lose money due to the
aggressive actions that is taken by the central bank. This method directly increases the chance
of forex reserve depletion that might be conducted due to the heavy losses in the ongoing
trade by the central bank.
Concerted Intervention:
The hybrid action between jawboning and operational intervention is the concentrated
intervention method. The Central Bank directly increases the overall activities for controlling
the current values of the currency by using the jawboning method where maximum of the
time investors are afraid to cross the price range that is provided by the central banks (Adler,
Lisack & Mano, 2015).
Sterilized Intervention:
The sterilized intervention is mainly conducted by the central banks when they want
to ensure that the overall currency market is influenced without entering the current trade and
commerce conditions of the home country. This method is relative be conducted with the
help of adequate policies which do not affect the actual trade and commerce conditions of the
country while controlling the overall currency fluctuations and price range.
Question 10: Detecting which of the hedge position should the organisation adopt
Particulars Value

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Account payable 40,000,000
Months 4.00
YEN/AUD Spot ¥87.35
YEN/AUD Spot in 4 months ¥81.45
4-month forward rate ¥84.50
4-month borrowing rate (AUD) 6.00%
4-month investment rate (AUD) 4.00%
4-month borrowing rate (YEN) 8.00%
4-month investment rate (YEN) 3.20%
WACC 10.00%
Current Value (40,000,000/87.35) AUD 457,927.88
Unhedged Value (40,000,000/81.45) AUD 491,098.83
Forward market hedge value
(40,000,000/84.50) AUD 473,372.78
Money market hedge value AUD 472,068.69
The Australian organisation could use the money market hedge conditions to support
the accounts payable, which could be conducted in next 4 months. The calculation has mainly
stated that the current value of the Payable is at the level of AUD 457,927.88, whereas the
lowest level of loss that might be conducted by the money market hedger, as the overall
values that would be paid is AUD 472,068.69. However, the use of unhedged measures
would mainly have the highest level of loss from the currency conversion rate, as the values
would increase to the level of AUD 491,098.83. The forward market hedge would mainly
allow the Australian company to have a valuation of AUD 473,372.78 over the period of 4
months. Thus, investments in the money market hedge would be beneficial for the company,
as it would reduce the level of loss from currency conversion.

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References and Bibliography:
Adler, G., Lisack, N., & Mano, R. (2015). Unveiling the effects of foreign exchange
intervention: a panel approach (No. 15-130). International Monetary Fund.
Barkemeyer, R., Preuss, L., & Lee, L. (2015). On the effectiveness of private transnational
governance regimes—Evaluating corporate sustainability reporting according to the
Global Reporting Initiative. Journal of World Business, 50(2), 312-325.
Cavallino, P. (2019). Capital flows and foreign exchange intervention. American Economic
Journal: Macroeconomics, 11(2), 127-70.
Demirag, I. (Ed.). (2018). Corporate social responsibility, accountability and governance:
Global perspectives. Routledge.
Du, W., Tepper, A., & Verdelhan, A. (2018). Deviations from covered interest rate
parity. The Journal of Finance, 73(3), 915-957.
Fratzscher, M., Gloede, O., Menkhoff, L., Sarno, L., & Stöhr, T. (2019). When is foreign
exchange intervention effective? Evidence from 33 countries. American Economic
Journal: Macroeconomics, 11(1), 132-56.
Fratzscher, M., Gloede, O., Menkhoff, L., Sarno, L., & Stöhr, T. (2019). When is foreign
exchange intervention effective? Evidence from 33 countries. American Economic
Journal: Macroeconomics, 11(1), 132-56.
Hacker, R. S., Karlsson, H. K., & Månsson, K. (2014). An investigation of the causal
relations between exchange rates and interest rate differentials using
wavelets. International Review of Economics & Finance, 29, 321-329.

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Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), 99-115.
Lothian, J. R. (2016). Uncovered interest parity: The long and the short of it. Journal of
Empirical Finance, 36, 1-7.