BUS330 - International Finance: Individual Assignment Solution

This assignment solution addresses key concepts in international finance through the analysis of several case studies. Chapter 3 focuses on BHP Billiton, examining how Citigroup facilitates the flow of funds across international financial markets, including spot, money, and bond markets, as well as foreign branch banking and trade finance. It also explores factors influencing a British subsidiary's decision on foreign currency borrowing. Chapter 5 delves into factors affecting exchange rates, specifically analyzing how various economic indicators influence the demand and supply of a currency, using Bruin Aircraft, Pty Ltd as a case study. Chapter 6 examines the impact of currency fluctuations and inflation on Beacon Lighting's cost savings when sourcing from Alibaba, highlighting the risks associated with international trade. Chapter 7 explores covered interest arbitrage using UniSuper as an example, evaluating the risks and potential benefits of investing in foreign markets while hedging against exchange rate fluctuations. The solution provides a comprehensive overview of these topics, offering insights into the practical application of international finance principles.

Running head: INTERNATIONAL FINANCE
INTERNATIONAL FINANCE
Name of the Student
Name of the University
Author Note

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Table of Contents
Chapter 3 BHP Billiton................................................................................................................3
Chapter 5 Bruin Aircraft, Pty Ltd................................................................................................4
Chapter 6 Beacon Lighting..........................................................................................................6
Chapter 7 UniSuper......................................................................................................................7
References....................................................................................................................................9

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Chapter 3 BHP Billiton
Flow of funds is the movement of funds to and from various sectors of an economy in a given
period of time (Errico et al., 2014). In a globalised world, international flow of funds has
become more significant than ever due to the dynamic nature of business (Cavusgil et al., 2014).
Commercial banks have become important sources of facilitating flow of funds across continents
(Cohen, 2018). They undertake a variety of options which benefits both their business and the
client. Some of them are foreign branch banking, financing trade, foreign exchange services and
corporate financing (Buch & Goldberg, 2015). The markets where transactions of these kind
happen are the spot market, international money market and bond markets.
With respect to spot market, the bank can utilise instruments called spots which are used to
convert currencies of one country to currency of another (Malloy, 2013). They can either be done
on a fixed rate basis or a floating rate basis. Any excess of funds obtained from a subsidiary are
remitted to the parent company (Butler, 2016). Eurocurrency market is a popular money market
which is used to fund the growth of subsidiaries when they are in need of funds. MNCs usually
borrow from these markets from the banks when they are in need of funds on a short term basis.
In this case, Citibank serves as the creditor to BHP Billiton. With regards to the bond market,
bonds are issued in markets like Eurobond market and other stock exchanges where funds are
obtained from investors and are used in the financing of the business operations of the
subsidiary. Funds generated from the operations are used to pay the interest on these bonds
(Miyajima & Mohanty, 2015). In this case, the bank acts as a facilitator of the flow of funds.
In case of foreign branch banking, large banks like Citigroup facilitate flow of funds by acting as
affiliates to smaller banks that do not have presence in foreign countries. They help BHP Billiton
by providing a mechanism to its subsidiaries for obtaining international loans. They merely act
as a facilitator in this case. Trade finance is an aspect in which banks facilitate transactions
between individual customers and companies existing in a foreign country (Casey, O’Toole,
2014). This is usually done by issuing Letter of Credit (LOCs) which are a source of guarantee to
the company that the amount has been deposited by the customer. LOCs play an important role
in a company obtaining loans from manufacturers and is helpful in the flow of funds with
minimum risk. In this situation, Citigroup acts as a creditor on behalf of BHP Billiton as it is

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responsible for collecting the funds from the customer and is responsible for the smooth flow of
business.
In terms of foreign exchange services, payments are done in the currency of a foreign
country. The currency differences are managed by the bank by making necessary payments in
the foreign country in its currency and converting the balance amount to pay to the parent
company. The bank is a facilitator here.
The other services that are provided by Citigroup include lock box system, corporate
checking accounts and currency specific credit cards. These are mainly useful in collecting the
payments from customers on a timely basis and keeping the company informed about the results.
In this case, the bank plays the role of a creditor on behalf of the company.
b) Foreign currency borrowing is a modern global phenomenon where a company borrows
funds in a currency different from that of its home currency. The main reason for taking such
loans is to benefit from the fluctuations in foreign exchange rates and a reduced cost of
borrowing due to the regulations prevailing domestically.
The factors that the British subsidiary should consider before deciding on the currency to borrow
in are the cost of the borrowing, time required to obtain the loan, size of the loan and the existing
regulations in a particular country. In case of many developing countries, the central bank aims
to reduce the foreign exchange variability which leads to the reduction in risk associated with
investing in a particular currency.
Chapter 5 Bruin Aircraft, Pty Ltd
In any given market, under normal circumstances, the demand for a foreign currency
increases when the customers of the home country realise that they can purchase a product for a
lower amount in the foreign currency than in their home currency (Twarowska & Kakol, 2014).
However, to determine the level of demand and supply for a particular currency, there are
various factors which need to be considered and their impact also needs to be measured. These
include inflation rates, interest rates, balance of payments, government’s debt, recession, political
stability and the level of speculation in the market. The demand and supply function in a manner
that maintains the equilibrium in the market.

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Factors that can affect the value
of the pound
Check (✓ ) here if the factor
influences the Australian
demand for pounds
Check (✓ ) here if the factor
influences the supply of
pounds for sale
iAUS – iUK ✓ ✓
INFAUS – INFUK ✓ ✓
Income Growth Differential ✓
New Australian Quotas on
Imports from UK
✓ ✓
Australian Tariffs on Imports
from UK
✓
New UK Quotas on Imports
from Australia
New UK Tariffs on Imports
from Australia
✓
Government Intervention to
Purchase $A with Pounds
✓ ✓
Government Intervention to
Purchase Pounds with A$
✓ ✓
Government Tax to be Imposed
on Interest Income Earned by
UK Investors from Future
Australian Investments
✓
In the given case, inflation has an influence on both demand and supply of the pound as increase
or decrease in price levels changes the terms of exchange of the currency (Magud & Sosa, 2013).
Other factors also have an impact on the Australian demand.

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Chapter 6 Beacon Lighting
It has been mentioned that the price paid by Beacon to Alibaba will be in Chinese Yuan.
Beacon also estimates a saving of around 20 percent on the cost of production. However, there
are a few conditions which are to be satisfied for this to happen (Yin & Li, 2014). It is expected
that the cost to Alibaba will increase over time due to the inflation in China. Hence, there is a
risk of savings being lower than that expected by Beacon.
a) For Beacon to be able to manage to save more than 20 percent on its cost of production,
the value of Yuan should decrease in value more than the differences in inflation of both
the countries (Gelb & Diofasi, 2016). Another situation would be the lack of increase in
the cost of production of Alibaba in proportion to the increase in the rate of inflation.
This would help Beacon to save more than 20 percent on its cost of production.
b) In order for Beacon to pay more costs than it currently does, the inflation in Australia
should increase on an uncontrolled rate and result in the depreciation of the Australian
dollar against the Chinese Yuan to a great extent. This would substantially increase the
payments made by Beacon to Alibaba. The strengthening of the Yuan due to the
improvement of the condition of the Chinese economy would also decrease the savings
made by Beacon.
c) It is not expected that Beacon would experience stable payments over time to Alibaba
because of the high inflation rate prevalent in China during recent years. Australia has a
stronger currency than Yuan and due to the inflation in China, it is expected that there
would be significant changes in the payments made by Beacon to Alibaba (Lothian,
2016). The most probable situation is a decrease in the value of the payments over years.
But a payment of stable dollar outflows does not seem possible.
d) There is a significant chance for Beacon’s risk to change due to the concept of
Purchasing Power Parity ((Joliffe & Prydz, 2015). As it is estimated that the inflation and
market conditions in China are unstable, it is a risky proposition for Beacon to enter into.
Any situation which is not favourable to Beacon will increase the pressure on it due to the
shortage of cash available. Hence, for Beacon to benefit from the current deal, the market
conditions should remain the way they currently are (Beckmann & Stix, 2015). It can be
interpreted that the risk of Beacon has increased more than what it previously faced.

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Chapter 7 UniSuper
Covered interest arbitrage is a safety measure where an investor undertakes a forward contract to
protect himself against the risk of exchange rate fluctuations ((Wong, Leung & Ng, 2017). It is
generally advisable in many situations as it protects the investor against any unforeseen
circumstances which are directly against the terms of the investment made by him.
a) In the given scenario, the interest rate being provided in Poland at 14% is much higher
than the 9% being provided in Australia. However, the fluctuations in Zloty is as high as
up to 40%. This is a significant amount and any movement towards the downward
direction will make the investment a big loss ((Ross, 2013). Hence it would be a massive
risk to invest funds in Poland without covering one’s position (Du, Tepper & Verdelhan,
2018). So, as an investor, I would not invest in the Poland market without covering my
position and hence the loss of $0.01 would still be feasible to maintain the safety of the
investment.
b) The interest arbitrage is done by investing the A$10 million by converting it into Zloty
and investing it in the Polish market. The forward contract is entered into with the bank
to cover the risks of fluctuations in the currency value ((Rime, Schrimpf & Syrstad,
2017). After the completion of one year, the amount earned by UniSuper is expected to
be A$11.1 million approximately. This is a safe situation for UniSuper as it is earning a
profit of more than 11 percent on its investment. Making the investment without interest
arbitrage would leave the investment vulnerable to the market fluctuations and significant
losses may be incurred on the investment.
c) The major risks involved in using covered interest arbitrage in this case is the chance to
earn additional profits that is not being taken up by UniSuper by leaving the investment
uncovered by arbitrage (Van Deventer, Imai & Mesler, 2013). As per the expected values
in changes in the currency, the company could have earned additional profits of 5 million
due to an increase in the value of the currency. However, by entering into the covered
interest agreement, the company is limiting its profits to the amount of A$11.1 million
only. Another risk that the company faces is not taking up the benefits which can be
earned by using speculation to gain short term benefits on an investment. This is the
opportunity cost of the company to the safety of the returns that it has opted for.

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a) In the given situation, taking up covered interest arbitrage earns the company a total
return of A$11.1. Investing the same amount in Australian Treasury Bills would limit the
profit to A$10.9 million. Hence to earn a higher profit, the company should invest its
funds in the Polish market. This would help in increasing the overall value of the
company in the long run.

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References
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rate risk. Journal of Economic Behavior & Organization, 112, 1-16.
Buch, C. M., & Goldberg, L. S. (2015). International banking and liquidity risk transmission:
Lessons from across countries. IMF Economic Review, 63(3), 377-410.
Butler, K. C. (2016). Multinational Finance: Evaluating the Opportunities, Costs, and Risks of
Multinational Operations. John Wiley & Sons.
Casey, E., & O'Toole, C. M. (2014). Bank lending constraints, trade credit and alternative
financing during the financial crisis: Evidence from European SMEs. Journal of
Corporate Finance, 27, 173-193.
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L.
(2014). International business. Pearson Australia.
Cohen, R. B. (2018). 12 The new international division of labor, multinational corporations and
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H., & Shin, M. H. S. (2014). Mapping the shadow banking system through a global flow
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Rates?. Revue d’économie du développement, 24(2), 93-141.
Jolliffe, D., & Prydz, E. B. (2015). Global poverty goals and prices: how purchasing power
parity matters. The World Bank.
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Miyajima, K., Mohanty, M. S., & Chan, T. (2015). Emerging market local currency bonds:
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Rime, D., Schrimpf, A., & Syrstad, O. (2017). Segmented money markets and covered interest
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