Exploring International Financial Markets: Analysis and Hedging

This assignment solution delves into various aspects of the international financial market, beginning with true/false questions on call options and hedging, followed by multiple-choice questions focused on speculators and risk management tools. It further explores the Foreign Corrupt Practices Act (FCPA) and its impact on US corporations, emphasizing the importance of ethical conduct in international business, particularly within the clothing and footwear manufacturing industries. The solution also discusses the London Interbank Offered Rate (LIBOR) and its role as a global reference rate. Finally, it provides a practical analysis of foreign exchange payables and hedging strategies, including money market hedges, forward hedges, and option hedging, offering a comprehensive overview of key concepts in international finance. Desklib provides a platform for students to access similar solved assignments and study resources.

Running Head: International Financial Market
International Business

International Financial Market 1
Part 1
1. Buying a call with a lower exercise price has a greater maximum loss but greater
upside gain: True
2. For a given stock price, the shorter a short call is maintained, the more time value it
loses and the greater the profit: False
3. The use of financial derivative products is the only way to hedge risk in International
Trading: True
Part 2
1. Farmers
2. Mortgage
3. Risk Management
Part 3
Question 1
Foreign corrupt practices act was enacted in year 1977 to impose penalties on the US
corporations and their employees whenever they enter into practices of making bribe
payments to the officials of foreign government. The corruption takes place when the
government officials are ready to offer their services to the companies by taking their unfair
advantages. The said act was passed as an ultimate consequence of Watergate scandal when
various US organisations were involved in making illegal payments to the government
officers (Huskins, 2008). The act requires maintenance of sound internal control system so as
to keep a close check on illicit practices like making of illegal payments or taking bribe.
FCPA mainly consists of two provisions i.e. anti-bribery provision and accounting standard
provision (Harris, A., 2011). The first provision restricts an organisation to knowingly funnel

International Financial Trading 2
a bribe through the third party agent and the second provisions demands the proper
maintenance of books and records of the business of the organisation. The said act was
introduced to improve the accuracy and transparency of financial reports of an entity which
are prepared in accordance with generally accepted accounting principles so as to prevent the
secreting of illegal or corrupt practices of making bribe payments. The enactment of FCPA
has prevented the use of illegal practices of bribe payments to the governments in the foreign
business by imposing heavy penalties and fines on the defaulters of the act.
Question 2
As the globalisation has allowed the companies to take their businesses to the international
borders. With global reach the companies have achieved global recognition of their
businesses and hence they require staying more concerned about their ethical values and
principles of business. The cloth and footwear manufacturers, who have expanded their
business to the overseas markets, are required to establish and follow a strict set of code of
conduct so as to remain successful in the global market where intense competition is present.
The pursuance of ethical codes in the business shows the responsiveness of the companies
towards its social responsibility. As per the general labour and ethical business codes, the
business managers must not use the child labourers for the performance of basic business
operations and also they must not exploit the labour force of the company beyond the
tolerable and acceptable limits (Sajhau, 2000). Subcontracting agreements are the general
part of almost every entity involved in the business of manufacturing of clothes and footwear.
However, the corporations of developing countries have not made any significant efforts to
protect the interest of their workforce. Further, the labour laws have also incorporated the
concept of minimum wages compensation to be paid to the employees of the company and
hence it has affected the profitability position of the company (Dunning, 2013).

International Financial Trading 3
Question 3:
Libor is a global reference rate used in the interbank market of London for the purpose of
borrowing of short term unsecured loans by one bank to another. The full form of LIBOR is
London Interbank Market rate. The administration of Libor is undertaken by the
intercontinental exchange. It functions as the benchmark interest rate of short term nature as
it forms the first step to calculate the overall interest on different loans across the world. The
most prominent characteristic Libor is that it facilitates in evaluating the existing state of
system of world banking and also it given an idea about the central bank’s interest rates in the
upcoming period. The rate is determined for five major currencies of the world i.e. U.S.
dollar (USD), pound sterling (GBP), Japanese yen (JPY), Swiss franc (CHF) and Euro
(EUR). Also, the rates different maturities i.e. overnight, one week, one month, two months,
three month, six months and 12 months. Therefore in all there are 35 Libor rates operated in a
single day. However, the most commonly traded Libor rate is 3 months USD rate. The rate is
primarily used to identify the value of various mortgages loans, corporate bonds, derivatives
like interest or currency rate swaps and other financial instruments (Rebonato, 2002).
Presently there are 11-18 banks that participate in determination of final Libor to be used in
the entire interbank London market (Brigo & Mercurio, 2007).
Part 4:
PCC has foreign exchange payables
Transactions
Amounts

International Financial Trading 4
Creation of a foreign exchange receivables @
5% in Japan (500/1.05) ¥ 476.19
Spot Rate 1$ = yen 124, Convert yen in $ ¥ 124.00
Borrow $ 3.84 in from US market @ 8% $ 3.84
108%
Total payment in dollars to be made to cover
the foreign payables $ 4.15
The Future dollar costs of money market
hedge $ 4.15
The Future dollar costs of forward hedge (500/110) $ 4.55
The Future dollar costs using option hedging (500*(.0081+.00014) $ 4.12

International Financial Trading 5
References:
Brigo, D. and Mercurio, F., 2007. Interest rate models-theory and practice: with smile,
inflation and credit. Springer Science & Business Media.
Dunning, J. H. (2013). International Production and the Multinational Enterprise (RLE
International Business). Routledge.
Harris, A., 2011. The Impact of the Foreign Corrupt Practices Act on American Business
from 1977-2010. Accessed on :< http://scholarship.claremont.edu/cgi/viewcontent.cgi?
article=1177&context=cmc_theses> accessed on 16.06.2018.
Huskins, P.C., 2008. FCPA Prosecutions: Liability Trend to Watch. Stanford Law Review,
pp.1447-1457.
Rebonato, R., 2002. Modern pricing of interest-rate derivatives: The LIBOR market model
and beyond. Princeton University Press.
Sajhau, J. P. (2000). Business Ethics in the Textile, Clothing and Footwear (TCF) Industries.
Available on< https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?
article=1008&context=codes> accessed on 16.06.2018.