International Finance Assignment - Finance 101, University Name, 2024

This international finance assignment solution covers a range of topics, starting with the theory of comparative advantage and its relevance in the current economic context. It then delves into the comparison of corporate governance regimes, including market-based, family-based, bank-based, and government-affiliated models. The assignment also explores the balance of payments through various transactions, the impossible trinity and its implications, and calculations of currency exchange rates and hedging strategies. Several questions analyze scenarios involving currency conversions, option trading, and the application of purchasing power parity. Furthermore, the assignment compares the effectiveness of forward rate, no hedge, and money market hedging techniques, with a recommendation on the most viable hedging option for an Australian-based company. The provided solution is designed to assist students with their understanding of key concepts in international finance.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1:.................................................................................................................................2
Question 2:.................................................................................................................................2
Question 3:.................................................................................................................................4
Question 4:.................................................................................................................................4
Question 5:.................................................................................................................................5
Question 6:.................................................................................................................................6
Question 7:.................................................................................................................................7
Question 8:.................................................................................................................................8
Question 9:.................................................................................................................................9
Question 10:...............................................................................................................................9
Reference and Bibliography:....................................................................................................12

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Question 1:
The theory of comparative advantage relevantly indicates the ability of a producer to
provide goods and services at lower opportunity cost in comparisons to other producers. In
addition, the principle of comparative advantage relevantly indicates the positive attribute,
where agents are willing to produce more and consume less of the goods, who have a
comparative advantage in the economic reality. Furthermore, the comparative advantage can
be identified as the overall progress obtained by industry such as technological progress,
endowments, and economic model, who increases the opportunity cost of the company or
producer.
In addition, David Ricardo developed the comparative advantage theory, where he
explained the efficiency of workers of developing an edge for the industry in the country. The
theory is effectively applicable in the current context, where the with the competitive hedge
companies can minimise the opportunity cost of goods and services. This increases their
competitive edge in the market and improves the level of profits that could be generated from
operations. The companies with competitive advantages are able to improve the level of
revenues, while reducing nay kind of extra expenses incurred from operations. In this context,
Borio, Gambacorta & Hofmann (2017) stated that with the use of skilled labour organisations
can reduce opportunity cost of production and maximise the profits from operations.
Question 2:
There are four corporate governance regimes such as Market-based, Family-based,
Bank-based and Government Affiliated, which has adequate difference and comparison for
the companies. The difference between the corporate regimes are depicted as follows.
.

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Regimes Difference
Market based The characteristics of the regime relevantly
indicates the efficient market and dispersed
ownership of the regime
Family based This regime mainly combines both family
ownership and minority shareholders
Bank based The bank-based regimes are controlled by
governments and have lack of transparency
Government affiliated There are state ownership enterprises, where there
is lack of transparency
The major comparison between the overall regimes is the rule of corporate
governance, which needs to be followed by the companies operating in the region. In
addition, the laws and situations in the regimes could be conducted for improving the level of
returns that could be generated from operations. In addition, the regimes are a function of
financial market developments, with a degree of separation of owners and managers. In
addition, the regimes also have disclosure and transparency condition with a historical
development of legal system.
MNCs needs to be concerned regarding the difference in corporate governance
regimes, as it will affect their operational capability. In addition, the subsidiary in that region
will have to follow the rules and regulations of that country, while the actual mother company
will have different set of rules and corporate governance regimes. This increases the
difficulty for the company for effectively conducting its operations in all its companies
situated in different regimes (Frieden, 2015).

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Question 3:
An Australian firm purchases a web hosting service from a US firm: Debt to the Australian
firm current account, while credit to the US firm current account.
Singaporean parents pay for their son’s study at an Australian university: Debit to the
Singaporean parents in the current account, while credit to the Australian university current
account.
A German company buys an insurance policy from a US insurer: Debit to the German
company financial account, while credit to the US insurer balance of payment.
An Indian firm pays the salary of its executive working for a subsidiary in Australia: Debit
to the current account of Indian firm, while credit to the executive working in subsidiary
Australian subsidiary.
An Australian firm buys 100% shares of a Malaysian company: Debt to the Australian
financial account, while credit to the financial account of the Malaysian company.
Question 4:
The impossible trinity is considered one of the unholy trinity, which is not possible by
the government to comply with all the three symptoms. The counties that have broken the
rules set by the impossible trinity has faced financial crisis, where the country faced cash
stagnation and investment problems. In addition, the impossible trinity relevantly indicates
that the government cannot implement a fixed foreign exchange rate, free capital movement
and an independent monetary policy at the same time, as it will directly have a negative
impact on its fiscal position. Moreover, it is also understood that impossible trinity hypothesis
is not possible theoretically and in real world practices, where the countries ignoring the
negative impact of impossible trinity has failed (Moffett, Stonehill & Eiteman, 2014).

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In addition, the impossible trinity is considered to be one of the dilemmas, which
cannot be followed by governments in improving their economic growth. From the
experience of government, it could be identified that any two of impossible trinity could be
conducted for improving economic growth of the country. The violation of impossible trinity
measure was conducted by the Asian countries during the Asian crisis, which involved
Singapore, Thailand, Hong Kong, Malaysia, South Korea, Indonesia, and Philippines.
Moreover, the violation of impossible trinity has affected the Debt to GDP ratio of the
country, which substantially rose from 100% to 167%. This relevantly indicates that ignoring
the impossible trinity factors would lead to cash crunch and liquidity problems for the
government.
Therefore, from the evaluation of impossible trinity factors it could be identified that
the government and central banks needs to follow the measure of impossible trinity and
should not violate the factors. However, any violation of The Impossible Trinity would result
in economic crisis which was previously seen by the Asian countries (Avdjiev, McCauley &
Shin, 2016).
Question 5:
Supplier in Japan Value
Machine ¥ 2,500,000.00
shipment cost ¥ 100,000.00
Total cost ¥ 2,600,000.00
Price in AUD AUD 31,557.23
AUD/USD 0.77
USD/AUD 1.30

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USD/Japan Yen 107.00
Japan Yen/USD 0.01
Japan Yen/AUD 0.01
Supplier in Germany Value
Machine € 20,000.00
shipment cost € 350.00
Total cost € 20,350.00
Price in AUD AUD 32,242.86
AUD/USD 0.77
Euro/USD $ 1.22
Euro/AUD AUD 1.58
From the overall evaluation of the above calculations, the actual cost of the machine
on from German and Japan supplies could be identified. From the overall evaluation it could
be identified that buying the machine from Japanese supplier will be fruitful for the Australia
company, as the total cost of the machine will be AUD 31,557.23, where the company will
obtain savings of AUD 867.65.
Question 6:
Particulars Germany Australia
Pass Through 100%
spot exchange rate € 0.67
German car Price € 50,000.00 AUD 74,626.87

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Inflation rate 0% 2.50%
One-year price € 0.65
Price of the car after 1 year 100% pass through AUD 76,492.54
Particulars Germany Australia
Pass Through 65%
spot exchange rate € 0.67
German car Price € 50,000.00 AUD 74,626.87
Inflation rate 0% 2.50%
One-year price € 0.66
Price of the car after 1 year 65% pass through AUD 75,839.55
Question 7:
Particulars Value
Current spot rate $ 0.76000
Spot price in 1 year $ 0.92000
Strike price (Call Option) $ 0.86000
Premium (Call Option) $ 0.00017
Total price $ 0.86017
Profit $ 0.05983

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From the overall evaluation it could be identified that using the call option will be
better for the forex trader, as increment in price is anticipated. Therefore, using the call option
could allow the forex trader to maximise the profits from investment. In addition, the net
profit that will be generated from trade is $ 0.05983.
Question 8:
The purchasing power parity is not an accurate estimator of future exchange rates, as
it is a theoretical measure, which is not possible in the real-world process. The purchasing
power parity only focuses on the exchange rate value, which aims in bringing parity towards
products sold between different nations. The currency exchange rate directly plays a vital role
in nullifying the purchasing power parity theory, as the demand for currency increases the
purchasing power conferred position of the currency relatively decline. In addition, the
purchasing power parity is also not able to comprehend the export and transportation charges
that is incurred by the importing country and is charged to the product. Therefore, it could be
assumed that the purchasing power parity is not able to estimate the actual future exchange
rates of country due to the lack of incorporating different factors affecting the prices of a
particular product (Titman, Keown & Martin, 2017).
The other reason that could be identified for the negative impact of purchasing power
parity is the use of derivatives, which allows the organization to minimize the negative
impact from rising currency value. Due to the presence of complicated financial instruments
the purchasing power parity is not able to subdue the actual theoretical value of a particular
currency. the presence of continuous hedging measure used by companies to reduce there is
from volatile currency market is directly affecting the accurateness of the purchasing power
parity theory. In the modern world the inflation rate does not accurately affect the currency
value of a country was different factors such as interest rates, demand, and supply of the

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currency in the currency market is used to determine the actual value of a particular currency.
Hence, the purchasing power parity is not able to accurately define the actual currency rate of
a country due to the lack of accommodating different external factors in evaluating the
currency value (Chinn & Kucko, 2015).
Question 9:
Currency Value 1st day 2nd day Percentage change
Pound to AUD £ 0.52 £ 0.55 5.48%
AUD to Euro AUD 1.60 AUD 1.64 2.50%
From the overall evaluation it could be identified that appreciation of AUD can be
seen against pound by 5.48%. In addition, the devaluation of AUD was seen from the dates,
where the currency value declined against Euro by 2.50%. Hence, from the valuation it could
be identified that AUD currency mainly appreciated against Euro, where with 1 AUD was
providing a higher amount of Pound Sterling in the currency exchange. Furthermore, AUD
declined the decline in Euro value is seen, where with 1 Euro additional AUD is being paid
during the currency exchange.
Question 10:
Forward rate Hedge Value
Forward exchange rate ¥ 92.50
Value in AUD AUD 432,432.43
Expected spot rate ¥ 95.45
Value in AUD AUD 419,067.57
Profit from currency exchange AUD 13,364.86

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PV value AUD 12,149.87
No Hedge Value
Expected spot rate ¥ 95.45
Value in AUD AUD 419,067.57
spot exchange rate ¥ 88.35
Value in AUD AUD 452,744.77
Loss in currency exchange AUD (33,677.19)
PV Value AUD (30,615.63)
Money Market Hedge Value
Australia
3-month borrowing rate 8%
3-month investment rate 5%
Japan
3-month borrowing rate 4%
3-month investment rate 2%
WACC 10%
Borrowing in Japan ¥ 38,461,538.46
Convert AUD 435,331.50
Value in 1 year AUD 457,098.08
Expected spot rate ¥ 95.45
Expected exchange value AUD 419,067.57
Profit from hedge AUD 38,030.51

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PV Value AUD 34,573.19
From the overall evaluation of three different measures of hedging, the money market
hedge is identified to be the most viable option to the Australian based company. With the
implementation of money market n hedge the company can obtain an overall profit of AUD
38,030.51 from the transaction. The overall hedging measure such as forwards rate hedging
only provides a profit of AUD 13,364.86, which is relevantly lower than the money market
hedge that is calculated in the above table. In addition, the overall no hedge policy is mainly
increasing the losses for the Australian company, where the currency conversion directly
reduces the payment value for the company. Hence, the use of money market hedge is much
more beneficial for the Australian based company, which might nullify the loses that will
incur from currency transaction (Bech, Gambacorta & Kharroubi, 2014).

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Reference and Bibliography:
Avdjiev, S., McCauley, R. N., & Shin, H. S. (2016). Breaking free of the triple coincidence in
international finance. Economic Policy, 31(87), 409-451.
Bech, M. L., Gambacorta, L., & Kharroubi, E. (2014). Monetary policy in a downturn: are
financial crises special?. International Finance, 17(1), 99-119.
Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank
profitability. International Finance, 20(1), 48-63.
Cheung, Y. W., Chinn, M., & Nong, X. (2017). Estimating currency misalignment using the
Penn effect: It is not as simple as it looks. International Finance, 20(3), 222-242.
Chinn, M., & Kucko, K. (2015). The predictive power of the yield curve across countries and
time. International Finance, 18(2), 129-156.
Chwieroth, J. M. (2015). Managing and transforming policy stigmas in international finance:
Emerging markets and controlling capital inflows after the crisis. Review of
International Political Economy, 22(1), 44-76.
Frieden, J. (2015). Banking on the world: the politics of American international finance.
Routledge.
Frieden, J. (2016). The governance of international finance. Annual Review of Political
Science, 19.
Frieden, J. A., & Lake, D. A. (2015). World Politics: Interests, Interactions, Institutions:
Third International Student Edition. WW Norton & Company.