International Financial Management: A Comprehensive Analysis Report

This comprehensive report delves into the core concepts of International Financial Management (IFM). It begins by defining competitive advantage and its relevance in the global market. The report then examines various governance regimes, including market-based, bank-based, family-based, and government-affiliated models, comparing and contrasting their key features. It proceeds to analyze balance of payments transactions, illustrating how different international financial activities impact the current and financial accounts. The report explores the impossible trinity, discussing its implications for monetary policy. It then presents calculations for currency exchange, analyzing the cost of importing goods from Japan and Germany and determining the most cost-effective option. The report further examines the impact of pass-through rates and inflation on currency values. It analyzes call options and their potential for profit in currency trading. The concept of purchasing power parity (PPP) is explained, and its limitations as a predictor of future inflation are discussed. Currency value fluctuations between the Australian dollar, the pound, and the Euro are also assessed. Finally, the report concludes with a comparison of forward rate hedging, no hedge, and money market hedge strategies, determining the most advantageous hedging method for an Australian company to mitigate currency risk.

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................2
Answer to Question 3:................................................................................................................3
Answer to Question 4:................................................................................................................4
Answer to Question 5:................................................................................................................4
Answer to Question 6:................................................................................................................6
Answer to Question 7:................................................................................................................6
Answer to Question 8:................................................................................................................7
Question 9:.................................................................................................................................8
Answer to Question 10:..............................................................................................................8
Reference List:.........................................................................................................................11

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Answer to Question 1:
Competitive advantage is defined as the capability of a nation or an economy or a
company to produce goods and services of equal amount at a lower cost or in an efficient
manner compared to its competitors (Laursen, 2015). This in turn allows the producer to
generate improved sales and maintain effective margins in comparison to its market rivals.
The competitive advantage may arise because of various factors such as the cost structure of
the organization, quality of the offered products as well as the distribution network
(Levchenko & Zhang, 2016).
The theory of competitive advantage will certainly be valid in this context as the
organizations operating in the competitive environment are always eager to grab a
competitive edge and hence are always looking to produce at an efficient manner so as to
gain a competitive advantage over their rivals and thereby accruing a greater market share.
Answer to Question 2:
The governance activities incorporates the process of managing or governing the
particular processes associated to people. It involves maintaining the legal compliances while
performing a specific work. In other words it implements the way through which the policies,
procedures and rules are being enacted or followed (Tricker & Tricker, 2015).
The Governance Regime in turn determines whose authority or administrative
guidelines will be followed, and certainly in accordance with that the different governance
regimes are designed,
There are mainly four type of government regimes, which are namely, Market Based,
Bank Based, Family Based and Government Affiliated.

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The market based corporate governance regime emphasises on the responsibilities of
all the stakeholders of the organization. This may include the shareholders, management,
board of directors, suppliers, customers and employees (McCahery et al., 2016).
In a bank based corporate governance the supervisory board of an organisation is
designed in such a way that the board is majorly dominated by the corporate insiders or the
bankers.
If an organisation is owned and controlled by a family then it can be regarded that the
organisation is being controlled by the family and hence the system will be characterised as a
family based corporate governance.
Under the government based corporate governance, an organization’s functions and
decisions are controlled by the government.
The key aspect of these four types of corporate governance can be compared and
contrasted. It would certainly be observed that these types of corporate governances are only
different from the aspect of the controlling authority, the efficiency of these systems would
also depend on the efficacy of the controlling authorities as well (McCahery et al., 2016).
Answer to Question 3:
An Australian firm purchases a web hosting service from a US firm:
This can be regarded as the debit to the current account of the Australian firm, while
credit to the current account of the US firm.
Singaporean parents pay for their son’s study at an Australian University:
Debit to the current account of the Singaporean parents and credit to the current
account of the Australian University.

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A German Company buys an insurance policy from an US insurer:
Debit to the financial account of the German company and credit to the balance of
payments of the US insurer.
An Indian firm pays the salary of its executives working for a subsidiary in Australia:
Debit to the current account of the Indian firm while at the same time credit to the
executive working in subsidiary in Australia.
An Australian firm buys 100% shares of a Malaysian company:
Debt to the financial account of the Australian firm and credit to the financial account
of the Malaysian company.
Answer to Question 4:
The impossible trinity is also known as the trilemma or Mundell Fleming trilema.
This clearly depicts the limitedness of the options through which the countries can implement
monetary policies. As per the proponents of this theory a country will never be able to
achieve a free flow of capital, fixed exchange rate as well as the independent monetary policy
simultaneously (Majumder et al., 2015). If it practices any of the two options the third option
will automatically be eradicated.
Answer to 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

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AUD/USD 0.77
USD/AUD 1.30
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 examination and evaluation as presented above the actual cost that
would be accrued while importing the machine from Japan and German could be obtained.
However, the results depicted in the above table signifies that purchasing the machine from
the Japanese supplier would be more beneficial for the Australian company. This is because I
such a case the company will have to pay 31,557.23 AUD and will also ensure a savings of
867.65 AUD.

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Answer to Question 6:
Particulars Germany Australia
Pass Through 100%
spot exchange rate € 0.67
German car Price € 50,000.00 AUD 74,626.87
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
Answer to 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

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Profit $ 0.05983
As per the results of the table above it can be stated that practicing the call option
would certainly be better for the forex trader as it is anticipated that there would be an
increase in the price. Hence it can be stated that the call option would in turn allow the forex
trader to derive the maximum profits from investments. In such a context the net profit that
would be generated is calculated to be $0.05983.
Answer to Question 8:
The Purchasing power parity signifies the changes in the expected inflation rates of
two countries in response to the changes in their exchange rates. Inflation is responsible for
reducing the real purchasing power of the currency of a nation (Gelb & Diofasi, 2015). For
instance if a country possesses 10% rate of inflation then the currency of the country would
be able to purchase 10% of less the real goods by the ned of the year. Hence it can be stated
that the relative purchasing power parity between two countries examines the changes in the
relative price levels of the two countries and ensures that the exchange rates would fluctuate
to compromise the differentials in inflation.
Hence it can be stated that the purchasing power parity mainly emphasises over the
exchange rate adjustments on the basis of the level of inflation prevailing in the countries.
Therefore, purchasing power parity could not be regarded as a geed predictor of future
inflation rate (Majumder et al., 2017).

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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 results obtained in the above table it can be stated that the Australian Dollar
have appreciated against pound by 5.48%. on an added n otion, the devaluation of the
Australian currency has also been observed from the dates, while the value of the currency
declined 2.5% against the value of Euro. Hence it can easily be stated that the Australian
Dollar have appreciated against Euro while previously 1 Australian Dollar was providing
higher amount of pound sterling in exchange of the currency. A depreciation in the value of
Euro hve been observed as more of the AUD is required to purchase 1 Euro.
Answer to 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
PV value AUD 12,149.87
No Hedge Value
Expected spot rate ¥ 95.45

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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
PV Value AUD 34,573.19
The overall evaluation as presented in the above table it can be stated from the
evaluation of the three different hedging methods the money market hedge would be the most

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fruitful option for the Australian economy. The implementation of money market hedge
would allow the company to accrue a profit of 38030.51 AUD. On the other hand the forward
rate hedging or the overall hedging measure would provide a profit of only 13364.86 AUD.
This is substantially lower than that of the money market hedge profit. On as added notion,
the overall no hedge policy in turn is increasing the amount of loss to the Australian
company, as the currency conversion is reducing the value of payment to the company.
Therefore, using the money market hedge is considered as the most efficient measure for the
Australia based companies.