International Financial Management Homework 1: FIN3IFM Analysis

This document presents a comprehensive solution to a FIN3IFM International Financial Management homework assignment. The assignment covers a range of topics, including the socioeconomic and political implications of the 2009 Greek economic crisis, the country's relationship with the Eurozone, and the potential consequences of Grexit. The solution analyzes the impact of the crisis on Greece's economy, healthcare, and social systems. Furthermore, the assignment delves into the complexities of currency exchange, specifically examining the AUD/NZD exchange rate, the concept of forex exposure, and hedging strategies using forward contracts. It calculates cross-currency exchange rates, assesses the financial implications of currency appreciation, and provides insights into mitigating currency risk. The solution provides a detailed analysis of the financial concepts and provides practical examples to help students understand the concepts.

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
INTERNATIONAL FINANCIAL MANAGEMENT
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1INTERNATIONAL FINANCIAL MANAGEMENT
Table of Contents
Chapter 2: Eun and Resnick (Textbook)....................................................................................2
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................3
Question 4..................................................................................................................................4
Chapters 5, Eun and Resnick.....................................................................................................5
Question 1..................................................................................................................................5
Question 2..................................................................................................................................5
Question 3..................................................................................................................................6
References..................................................................................................................................7

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Chapter 2: Eun and Resnick (Textbook)
Question 1
In 2009, Greece had to face a long-lasting recession because of the socioeconomic,
demographic, and political implications. The demographic issues arise mainly due to lower
birth rates, leading to adverse natural population change, and even migration is one of the
significant reason for the issues. There is a lack of structural weakness in the Greek economy
and even absence of flexibility in the monetary policy as a member of the Eurozone. In 2009,
there was a turmoil of great worldwide recession in Greece that leads to an economic crisis in
the country (Art 2015). The socioeconomics crisis affected the mental health of the
population in the country. The crisis results in unemployment, income loss, and financial
hardship in the entire country. The economic crisis paved the way for income inequality, raise
in the poverty level, political instability, refugee issues, and many more problems that are not
controllable by the government of the country (Butler, Jensen and Snaith 2016). The
unemployment rates increased rapidly and lead to income inequality in the country. Due to
the crisis, the sustainability of social health insurance and various system related to pension
was at stake. The economic downturn mainly affected the national health system of the
country. If the public health perspective is taken into consideration, then structural issues
related to legal, administrative, and financial issues are the barriers to access to healthcare. It
can be conveyed that socioeconomic crisis has led to an adverse impact on the health of
Greek population, and ultimately this leads to mental distress of the population of Greece.
Question 2
The policymakers of the European trying to frame specific deal by which the country
can come out of the crisis and can become safe from bankruptcy. Even the experts are trying
to evaluate specific potential costs of failure. Greece government assumes that long-lasting

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recession reflects that the specification to restrain spending is suppressing the economy. Due
to the economic crisis, Eurozone creditor’s countries are not interested in lending any
financial help to Greece without any strict conditions. Without financial help, Greece may
become default on debts (Galenianos 2014). The default could ultimately lead to collapsing
of the Greece banks. This situation might compel the country to print its currency to
overcome the turmoil. Researchers propounded that Greek exit from Eurozone could be
extremely complex. The government can implement a strategy by shutting banks and ATMs.
Thus, preventing people from withdrawing money before the money can be translated into
cheaper currency. A depreciation in the currency value will lower the standard of living of the
population of Greece. There are specific benefits of staying in the Eurozone for Greece, such
as more price transparency as it becomes easier to evaluate various prices in same currency. It
is evident that foreign firms are extremely interested in investing in Eurozone, and this will
lead to encouragement in inward investment (Clements, Nanou and Verney 2014). There will
be more pressure to raise the productivity level and to maintain the rate of inflation low to
become competitive in the market. Even by staying in the Eurozone, Greece will have to
incur low transaction costs for firms and customers.
Question 3
The economic crisis in Greek is one of the significant financial issues in Europe. The
Eurozone propounded specific measures by which Greece can stay in the zone for an
extended period. The government is trying to measures and create more stimulus related to
economic. The European Union is headed by Germany and France; these countries have been
trying to support the member countries. Initiation of bailout from the European Central Bank
and International Monetary Fund has been implemented, however; the initiation did not give
fruitful results as the viability of the euro is still being questioned (Ioannides and Pissarides
2015). It has been decided that to overcome the economic and financial crisis proposal

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regarding creation of Eurobonds has been suggested. Launching quick startup programs to
help business startups companies. Introducing mini-jobs with lower tax rates, thus, reducing
the unemployment rate in the country. Special funds and tax benefits schemes are being
created to privatize state-owned business (Glencross 2014). Acquiring projects related to
investment opportunities in renewable energy. Implementing innovative strategies by which a
special economic zone can be formed, such as China. Try to reduce the unemployment rate
by combining apprenticeships with vocational education and focusing on youth
unemployment.
Question 4
The economist is still in confusion for deciding whether the Grexit will be beneficial
for the country or not. Many of the economists claimed that if Greece made its exit from
Eurozone, then it would be a major issue for the country. They claimed that the financial
crisis would increase as the European Central Bank propped up will be collapsed, and again
the country will have to face long-lasting recession. Even the inflation rate will be impacted
because of the introduction of new currency in value (Schimmelfennig 2017). However, some
economists believe that Greece needs a devaluation and thus, leading the Greek people to
poverty that will likely allow the country to inflate away dents and make the country more
competitive. A weaker currency would make exports cheaper in foreign countries. Few
economists claimed that it would be painful for Greece to stay in Eurozone, however; if it
continues to stay there, the country will have to face the worst situation in the coming future
(Woods 2014). Before heading towards any decision, one must clearly understand that a
strong, established currency has one merit and one demerit. There are always two sides of the
coin, and one needs to evaluate both sides before reaching a final decision. The limitation
will be the exported goods of the country becomes more expensive; thus, leading to a

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decrease in the export trade of the country. Similarly, imported goods become cheaper for the
country because of a strong currency, even consumption of imported products increases.
Chapters 5, Eun and Resnick
Question 1
In order to well determine the AUD equivalent amount we well need to determine the
cross currency exchange rate that is well determined with the help of the AUD/USD and
NZD/USD and the sport rate for the both the currency needs to be well taken for the puroose
of determining the exchange rate of AUD/NZD. The currency exchange rate for the currency
of AUD/NZD is well deternmined as shown below in which the payment amount of
NZD1,500,000 was well taken for getting the amount that is due in AUD terms as shown
below:
Cross Exchange Rate Payment Amount
AUD
0.728
9
US
D
1.479
5 Particulars Amount
USD
NZ
D Payment Amount in NZD
1,500,00
0
(AUD/NZD) Exchange Rate 1.078
AUD/
NZD 1.078 Payment Amount in AUD
1,390,94
0
Question 2
The forex exchange rate exposure with which the company is well exposed with is the
changes that would be observed with the changes in the NZD Currency which can well
appreciate over a time being that is for a sum of six-months. The currency payment in which
the A2 Company needs to well make the invoiced amount is the form of NZD Currency and
the principal or home currency for the company is AZD Currency. Changes in the currency
from the level of current level to another level can well affect the overall forex exposure or
the net cash payments that well needs to be made. Now if the NZD Currency well appreciates

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considerably in respect to the AUD Currency than the A2 Milk company had to considerably
shell out more money by paying out more money and the extra amount would be recorded by
the company in the form of forex risk and exchange loss.
Question 3
It is important to well hedge the amount that would be opaid by the company wit the
help of various derivatives insytruments like options, futures or by entering into a forward
contract. The key role and motive behind the same in particular would be to well limit down
the volatility or the movement that the company is well expecting from the currency with
which the company is exposed with.
In order to well hedge the amount payable with the help of the forward contract, it is
important for the compay to look at the current set of exchange rate and the forward exchange
rate, with which the company is exposed, the 6 month forward exchange rate for the
AUD/NZD has been well determined with the help of the cross currency exchange rate as
shown below. Now the set of currency goes or the six-month forward contract goes to well
show that the AUD Currency is expected to depreciate and NZD is expected to appreciate.
The current sport rate for the AUD/NZD Currency pair was determined to be 1.078 and if the
company well locks this rate it just has to pay down a sum of around AUD1,390,940. On the
other hand, if the company does not hedge the same then it has to pay a sum of
AUD1,408,439. So the loss can be well covered by the company by well entering into a
forward contract at todays sport rate and the current spot rate can be well locked by the
company.
Cross Exchange Rate (Spot) Particulars Amount
AUD 0.7289 USD 1.4795 Payment Amount in NZD 1,500,000
USD NZD (AUD/NZD) Exchange Rate 1.078
Payment Amount in AUD 1,390,940
AUD/NZD 1.078

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Cross Exchange Rate (6 Month Forward)
AUD 0.7242 USD 1.4706 Particulars Amount
USD NZD Payment Amount in NZD 1,500,000
(AUD/NZD) Exchange Rate 1.065
AUD/NZD 1.065 Payment Amount in AUD 1,408,439

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References
Art, D., 2015. The German rescue of the Eurozone: How Germany is getting the Europe it
always wanted. Political Science Quarterly, 130(2), pp.181-212.
Butler, G., Jensen, M.D. and Snaith, H., 2016. ‘Slow change may pull us apart’: Debating a
British Exit from the European Union. Journal of European Public Policy, 23(9), pp.1278-
1284.
Clements, B., Nanou, K. and Verney, S., 2014. ‘We no longer love you, but we don’t want to
leave you’: the Eurozone crisis and popular Euroscepticism in Greece. Journal of European
Integration, 36(3), pp.247-265.
Galenianos, M., 2014. The Greek crisis: origins and implications. Available at SSRN
2505455.
Glencross, A., 2014. The Eurozone crisis as a challenge to democracy and integration in
Europe. Orbis, 58(1), pp.55-68.
Ioannides, Y.M. and Pissarides, C.A., 2015. Is the Greek crisis one of supply or
demand?. Brookings Papers on Economic Activity, pp.349-383.
Schimmelfennig, F., 2017. Theorizing crisis in European integration. The European Union in
Crisis, pp.316-335.
Woods, S., 2014. The Greek sovereign debt crisis: Politics and economics in the Eurozone.