International Financial Management Homework: Analysis and Solutions

This document offers a comprehensive solution to an International Financial Management assignment, addressing key concepts in international finance. The assignment explores comparative advantage within economic models, examining how specialization and trade create benefits. It delves into governance regimes, emphasizing their impact on multinational enterprises. The solution analyzes the current, capital, and financial accounts, illustrating how international transactions are classified. It explains the impossible trinity theory and its implications for monetary policy. Finally, it discusses purchasing power parity, evaluating its role in exchange rate estimation. The document provides detailed answers to questions, supported by relevant references, making it a valuable resource for students studying international finance.

International financial management

TABLE OF CONTENTS
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................3
Question 4........................................................................................................................................5
Question 8........................................................................................................................................5
References........................................................................................................................................6

Question 1
Within the economic model, competitive advantage is gained by agents over other competitions
while producing a specified commodity, if they can generate that commodity at a relatively
lower opportunity cost or an independent price that is at a relatively lower cost earlier than trade.
Under this theory, the benefits are brought by trade as well as specialization. Comparative cost
theory regardless of all related limitation; has still remained as a fundamental theory of
international trade (Laursen, 2015). In the present context, the world is chasing higher
liberalization as well as globalization. Countries are seeking to be specialized in productivity in
terms of comparative cost advantage with the emergence of international trade.
Question 2
Governance is engaged with all the governing procedures and management of specified procured
and people. It is inclusive of rules and regulations to conduct a given task while implying a
manner by which rules and process will be followed. It is based on the governance regimes,
which states that what authority, rules and administration are to be followed. There are four key
types of government regimes; market-based, family-based, bank based and government-affiliated
(Aguilera & Crespi-Cladera, 2016). Multination enterprises must consider these differences in
order to develop effective strategies while complying with rules and regulations to achieve a
competitive edge in an international market.
Question 3
In the present financial period, the current account is inclusive of global economic transactions
with income-related payment flows.
The capital account includes disposable non-produced assets as well as non-financial assets and
the transferred financial assets plus acquisitions/
The financial account includes three key components, which are portfolio investments, direct
investment and another asset related investment. These financial assets can be categorized into
several ways including the asset life and the ownership nature.

Transaction description Type of account
Transaction 1 An Australian firm purchases
a web hosting service from a
US firm
Current account
Transaction 2 Singaporean parents pay for
their son’s study at an
Australian university
Capital account
Transaction 3 A German company buys an
insurance policy from a US
insurer.
Current account
Transaction 4 An Indian firm pays the
salary of its executive
working for a subsidiary in
Australia
Current account
Transaction 5 An Australian firm buys 100%
shares of a Malaysian company
Financial account
Question 4
The impossible trinity is a theory in global economics stating that it is not possible to conduct
these three aspects at the same time which are free capital movement; free monetary policy; and
fixed foreign exchange. It is not possible for a nation to achieve all these three things
concurrently. It states the restricted choices accessible to nations while placing monetary policy
(Bosupeng, 2015). Impossible Trinity depicts that a country is required to select among two of
these three; free capital movement; free monetary policy; and fixed foreign exchange.
Question 8
Purchasing Power Parity is based on the theory which depicts that high domestic rates of
inflation will lead to expensive exports to foreign countries while making tourism and

investment expensive alongside. On the other hand, several factor impact short-term exchange
rates as well as differential inflation rates. Hence, PP is not essentially a good estimator of short-
term exchange rate (Deaton & Aten, 2017). However, it is a good predictor of general exchange
rate against the longer term. Further, it can be said that there is a complicated estimation of PPP,
there most of the studies have not succeeded in establishing the relevance of this notion, so it
must not use alone rather it must be used in combination with other methods.