International Finance Paper

International Finance Paper

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I. INTRODUCTION:

 

[A] Discuss the financial and economic environment during the semester with a focus on its relevance to your business and the AUSTRALIAN economy and business environment.

[B] You should include your overview of analyses of this environment appearing in the popular press (primarily business periodicals such as WSJ, BW, Forbes, Fortune, Barrons, and web sites devoted to the global financial marketplace).  Feel free to agree or disagree with what the “experts” are saying.

[C] Your analysis should include how you and other U.S. businesspeople will/could/might be impacted by events that occurred during the semester in the economies of Australian and the U.S. economy.

II. RESPONSES TO CHAPTERS 1-10 (Real Time Web Project) QUESTIONS:

The business that you are starting is a website designed to provide specific information to young persons (in your foreign country only) interested in coming to the U.S. to study at a university or college.  You may want to briefly explain your business model (i.e. how you will make money) and any relevant information about your Product, Promotion, or the Price you will charge your target group of customers (parents? Students? In the foreign country).

[A] You will be required to turn in typed, written responses to all questions listed below representing the first ten chapters of your text.  Please label each chapter’s responses and number them clearly. 

[B] Remember that the primary purpose of this project if to have you apply the theories and concepts that we have covered in class during the semester.  This means that you should take every opportunity in answering these questions to show that you understand the course material and are able to apply it.  This also means that you should always discuss the specific impact of any events and trends on your particular business.  That is, for your answers in each chapter, make sure you explain the relevance to your business of the answers you provide!!

[C] You should reference any material that you use that is not your own (for example, quotes/ideas from your text, articles from the popular financial press, internet sources).  In doing so, please include a list of references/sources cited at the end of your report in a Bibliography.

Format for Quotes: (LAST NAME, YEAR) citation in the body of the paper where the idea is used.

****YOU WILL BE REQUIRED TO PROVIDE THE SPECIFIC SOURCE AND DATE FOR ALL OF THE DATA YOU COLLECT (HENCE, ALL NUMBERS YOU INCLUDE)!!

Chapter 1:

The return on your business is highly dependent on the potential demand for the services you offer. The risk of your business is the uncertainty surrounding the demand for your services (which affects your revenue) and the expenses associated with your business.

A starting point for assessing the potential return and risk of your business is to review general background information about the potential customers that may someday purchase your services.

Go to www.cia.gov and review the information provided in the “World Factbook” Country Profile for Australia.

1.         Identify the type of information (such as demographics, education or income statistics) listed here that may have some influence on the return and the risk of this business (of course, always explain WHY this information is relevant for your firm)

2.         Identify any other information not listed here that could affect the return and risk of this business.  Explain the relevance.

Chapter 2:

Go to www.census.gov/foreign-trade/balance  assess the recent flow of trade (merchandise and services) between your country and the U. S. Assess the change in the volume of trade between the U. S. and your country. You will also find the additional websites listed in Chapter 2 of your text useful here (such as www.ita.doc.gov ).

1. Does it appear that business relations between the two countries are increasing or decreasing based on this information? Show trends in the VOLUME of trade rather than the trade surplus or deficit between the U.S. and your country.
2. What does the trend in the volume of trade indicate about the potential number of Australian students that would consider enrolling in U. S. universities? Explain the rationale for your conclusion.

Chapter 3:

Go to the websites found in Chapter 3 to assess updated economic information about Australia’s financial markets.

1. What is the prevailing interest rate in Australia? Has the interest rate increased or decreased in recent years (find data for at least the last three years)? ** Try to find a benchmark rate for your country (like the one-year federal government rate) and compare that to our one-year U.S. Treasury rate: Make sure you are comparing “like” rates for the two countries.
2. How could this base interest rate affect the number of Australian students that are able to pursue a college degree?
3. The stock market is sometimes used as an indicator of expected business conditions in Australia, which could affect the number of students who can afford a college education in the U. S. Based on recent stock market conditions, is the outlook favorable or unfavorable for your business? Explain how and why this information is/might be relevant to your business (www.stockmarkets.com).

Chapter 4:

Your business is exposed to potential movements in the exchange rate of the Australian Dollar, (abbreviated as “AUD”) as is explained in several of the following websites:

www.oanda.com

www.finance.yahoo.com

www.bloomberg.com

Go to one of the websites to obtain exchange rate information and assess recent exchange rate movements of the AUD:

1. How has the exchange rate of your country’s currency changed over the last year (appreciating or depreciating as determined by the equation on p. 99 in your text)?
2. Notice how the inflation rate for your country has changed over time. Has it increased or decreased in recent years?
3. Do you think the prevailing inflation rate will place much downward pressure on the value of the AUD? Explain why or why not: this requires that you compare the inflation rate for your country to the U.S. inflation rate.

Chapter 5:

Go to a source that allows you to assess recent exchange rate movements (such as Yahoo.finance) of AUD/USD trends over the past year. Compare the forward/futures price of AUD (with respect to the USD) to the prevailing spot rate for your currency.  If there is more than one contract (maturity) available for your currency, choose the one that is approximately one year from the present.

1. Do the futures prices exhibit a premium or a discount (see p. 124-125 of your text and complete a similar calculation using the data you have collected)?
2. Would you pay a higher or lower rate when converting AUD into dollars than if you converted funds at the prevailing spot rate? (The decision to hedge with futures on the AUD will be discussed in Chapter 11).

Chapter 6:

Go to www.bis.org/ (or the foreign Central Bank’s own website) to learn about the Central Bank of Australia.

1. According to this website, is the exchange rate system used by the Central Bank of Australia a fixed-rate or floating-rate system?
2. Describe the Central Bank of Australia’s role of central bank intervention?
3. Explain how and why this information is/might be important for your business.

Chapter 7:

To recognize the relationship between interest rates and the forward (or futures) discount, review here your responses in Chapters 3 and 5. First, show the current interest rate in Australia and compare to the corresponding U. S. interest rate. Next, compare the futures price of AUD to the prevailing spot rate. Take the reciprocal of the Indirect exchange rate so that you can compare it to the futures price quoted in dollars.

1. What is the difference between the annualized interest rate of Australia versus the annual interest rate in the U. S.?
2. Does the futures price exhibit a premium or a discount when calculated using the formula on p. 222 of your text?
3. According to interest rate parity, a foreign currency with a high interest rate should have a discount in its futures price. Does that relationship exist here?
4.  Use the interest rate parity formula (p. 223) to determine the magnitude of a forward (or futures) premium or discount. Discuss your result and how it shows/does not show that interest rate parity holds here?
5. If not, do you think that the size of the discrepancy you found allows for covered interest arbitrage, or is it due to transactions costs and data limitations?

Chapter 8:

Find an online source (such as Yahoo finance or trading economics.com) to assess recent changes in inflation to compare to recent changes in the exchange rate of the AUD. Assume the U. S. inflation rate is relatively stable.

1. Based on the movements in Australia’s inflation rate, does it appear that the AUD exchange rate movements in recent years are partially attributed to purchasing power parity (PPP)?  Perform the PPP calculations found in the examples on p. 242-244 of your text.
2.  Explain the PPP theory and if it appears to hold true with your particular country at this particular time.
3. If any future depreciation of the AUD against the dollar is due to relatively high Australian inflation, could that possibly offset any adverse exchange rate effects on your cash flows? Explain.

Chapter 9:

Go to cmegroup.com under “FX” to assess AUD/USD futures contract prices on the AUD. Compare the futures price of your currency to the prevailing spot rate.

1. Do the futures prices exhibit a premium or a discount using Direct Quotes? If you used a futures contract to forecast the future value of the AUD, would you forecast appreciation or depreciation in the AUD?
2. Compare this forecast to if you had used the spot rate? Which forecast do you think will be more accurate? Why?

Chapter 10:

Consider how your business would be exposed to exchange rate risk. Explain your exchange rate risk by answering the following questions.

1. Is your business subject to transaction exposure? Explain how and why/why not.
2. Is your business subject to economic exposure? Explain how and why/why not.
3. Would your revenue increase or decrease in response to the depreciation in the AUD?
4. Would the dollar cost of your advertising expenses increase or decrease in response to the depreciation in the AUD?
5. Overall, do you think that the value of your business would be favorably or unfavorably affected if the AUD depreciated? Explain. Keep in mind that the value of your business is the present value of expected (U.S.) dollar cash flows as you answer this question.
6. Go to your data collected earlier to assess historical exchange rate movements (Yahoo.finance works for this) of the AUD. Consider how the dollar cash flows from your services may have changed each year if exchange rates changed over each of the last 3 years. Specifically, assume that your annual revenue will be 275,000 AUD and determine the value of that amount in dollars based on the exchange rate today, one year ago, two years ago, and three years ago. Does it appear that your dollar revenue would have changed significantly due to exchange rate movements had you been in business during the last three years? Show your calculations!
7. Assume that you expect the AUD will change over the next year by the same degree as it changed over the past year.  Given the futures price of the BRL/EUR, and the percentage change of the AUD over the past year, would it be wise to sell futures to hedge the AUD that will be converted to dollars one year from now? Explain why or why not.

III. SUMMARY AND CONCLUSIONS:

[A]Overall, what is your assessment of the viability

of this business and it’s potential as an on-going enterprise? Why?

[B] Discuss some of the things you learned about the global marketplace by completing this project and making managerial decisions when your customer base is comprised mostly of non-American consumers.

[C] Include summary comments about the international financial plan for your business (comment on source