FINC20023 International Financial Management Assignment

Question 1

(a) How do you think the twin agency problem affects the globalization of a multinational enterprise (MNE)? What are the measures that can reduce the problem? Explain. 

(b) Classify the following as a transaction reported in a sub-component of the current account, or the capital and financial accounts of the two countries involved:

1. An Australian company purchases policies from a U.S.-based insurance company.
2. An Australian company acquires 100% of corporate bonds issued by a U.S. firm.

• A Japanese student residing in Australia buys a laptop manufactured in the U.S. from an Australian retailer.

1. An Indian company imports milk powder from an Australian firm.
2. An Australian investor receives dividends for investments into a Chinese company.

Question 2 

(a) What is the implication or usefulness, if any, of the interest rate parity theory in the international finance context? Explain.

(b) Why do you think a country may opt to institute dollarization or a currency board arrangement? Based on relevant research and past examples, do you think either of the strategies are effective? Explain. (5 marks)

Question 3 

• Compare two arguments that favour currency risk hedging against two arguments that opposes currency risk hedging. If you are a manager of a MNE, which option will you choose – hedge or no hedge? Why? Explain. 
• Do MNEs have a higher or lower cost of capital than domestic firms? Explain.

Question 4

Suppose a foreign MNE is planning to start a subsidiary in Australia. Discuss any two political risks the MNE is likely to face. What strategies can the MNE undertake to reduce the risks? Explain. (4 marks)

Note the Questions 1-4 in the Microsoft Excel Question Generator. Depending on your student ID, numerical and other information in the math problem is likely to vary. Notably, this part has been designed to ensure individualized question. Please, hence, remember to insert your student ID in the Student Information sheet of the generator.

Please also upload the Question generator Excel file with the student id inserted along with your response.

Notably, the Question generator file is locked for editing. Thus, consider using a Microsoft Word file (the same one you are using for discussion questions or a separate one) or a separate Microsoft Excel file to respond to the math questions.

A formula sheet is attached in the next page for your convenience.

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 Further Instructions:

For the theory questions there is no word limit, and no penalty applies regarding word length. However, depending on marks, a response with a maximum of 350/400 words on average may be reasonable -in some cases the response can even be much shorter, while it may also be a bit longer in other cases. For each question, please note the relevant details from the book, workshop documents, and slides. Please also note relevant outside resources (journals, books, conferences, grey literature) and cite if appropriate. Also, think about the questions asked and write in your own style.

 For all calculations, please show all relevant calculation steps (and formulae where applicable). Please indicate the explanation of steps, even if you use Microsoft Excel. For example, I show below a hypothetical math solution using Microsoft Excel.

In other words, if you use Microsoft Excel, that’s fine. However, please ensure that you indicate an explanation of the steps (the Excel files on Moodle, especially those based on publisher resources, do not provide detailed explanation steps).

If you are using Microsoft Word (which is the preferred format), the same aspect – please show calculation steps. You do not need to show steps in the form of a table and can just show these line by line. As an example (for the same math as above):

Exchange Rate on a day = $0.77/A$

Price of a product in Australia = A$200.00

Price of that product in the U.S. = A$200.00 x $0.77/A$ = $154.00

List of Formula

[here, is the correlation coefficient between the return of a security and return of a market,is the standard deviation of return for the security, is the standard deviation of return for the market]

Big Mac Index Undervalue/Overvalue Calculation:

Forward Rate Calculation: