International Finance: Study Notes

1) Market seeker design st oldenuregy focuses on ongoing trade, and live consumers needs for quick return on enthronization. For award US automobile firms globeufacturing in Europe for local consumption argon an example of market-seeking motivation. 2) Raw Material seekers extract unfinished goods apply in the manufacture of a product. For example, a steelmaker uses iron ore and other metals in producing steel. A issue company uses paper and ink to create books, modernspapers, and magazines.Raw materials atomic number 18 carried on a companys equilibrium sheet as inventory in the current assets section. 3) political relational safety seekers acquire or establish new trading ope proportionalityns in countries that be considered un in tout ensemble likelihood to expropriate or interfere with clannish enterprise. For example, Hong Kong firms unvested heavily in the social unite States, united Kingdom, Canada, and Australia in anticipation of the consequences of Chinas 1997 takeover of the British colony. ) Production Efficiency seekers arrive at in countries w here(predicate) peerless or to a greater extent than(prenominal)(prenominal) of the factors of issue ar infra equipment casualtyd relative to their productivity. Labour-intensive production of electronic components in Taiwan, Malaysia, and Mexico is an example of this motivation. 5) Knowledge seekers ope score in exotic countries to pip access to applied science or managerial expertise. An example, German, Dutch, and Japanese firms impart purchased US located electronics firms for their technology. author Investopedia motility 2 Political try is a type of hazard confront by investors, corporations, and governments. It is a adventure that contri providede be understood and managed with reasoned foresight and investment. Broadly, governmental jeopardy refers to the complications businesses and governments may face as a issue of what are comm besides referred to as p olitical decisionsor any political change that alters the pass judgment outcome and measure out of a given frugal follow by by changing the probability of achieving business objectives. .Political risk faced by firms sewer be defined as the risk of a st appreciategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection). Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk.A low level of political risk in a given bucolic does not necessarily correspond to a high degree of political freedom. Indeed, some of the more stable states are excessively the intimately authoritarian. Long-term assess ments of political risk mustiness account for the danger that a politically tyrannic environment is solely stable as long as top-down control is maintained and citizens prevented from a free deputise of ideas and goods with the outside world. Understanding risk as part probability and part impact provides insight into political risk.For a business, the implication for political risk is that there is a measure of likeliness that political events may complicate its pursuit of earnings finished get up impacts (such as levyes or fees) or in target impacts (such as opportunity cost forgone). As a result, political risk is similar to an expected value such that the likelihood of a political event occurring may cut bum the desirability of that investment by cut its anticipated returns. There are some(prenominal) macro- and micro-level political risks. Macro-level political risks arouse similar impacts across all foreign actors in a given location.While these are let ind in cou ntry risk analysis, it would be incorrect to equate macro-level political risk analysis with country risk as country risk only looks at national-level risks and also allows financial and economic risks. Micro-level risks focus on sector, firm, or project specific risk. Political risks are classified as follows 1) Blocked Fund Term for reserving funds by one bank for the benefit of another bank. Blocking of funds is an often utilise banking procedure to ensure that the same funds are not used twice. lots more beneficial to an investor than a bank guarantee. ) Ownership Is the state or fact of exclusive in effect(p)s and control over property, which may be an object, land/ rattling estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be sepa setd and held by contrastive parties 3) Religion Heritage Is the organized religion in which a person was predominantly raised or the faith a persons parents or previous generati ons have traditionally held. 4)Terrorism Is the systematic use of terror especially as a federal agency of coercion. No universally agreed, legitimately binding, criminal law definition of terrorism currently exists.Common definitions of terrorism refer only to those violent acts which are intended to create fear (terror), are perpetrated for a religious, political or ideological goal, deliberately tar ride or disregard the safety of non-combatants (civilians), and are committed by non-government agencies. Some definitions also include acts of unlawful military force and war. The use of similar tactics by criminal organizations for protection rackets or to enforce a code of silence is usually not labeled terrorism though these same actions may be labeled terrorism when done by a politically motivated group.The word terrorism is politically and emotionally charged, and this greatly compounds the difficulty of providing a precise definition. Studies have found over 100 definitions of terrorism. The concept of terrorism may itself be controversial as it is often used by state authorities to delegitimize political or other opponents, and potentially legitimize the states own use of build up force against opponents (such use of force may itself be described as terror by opponents of the state). Terrorism has been practiced by a patient of set off of political organizations for furthering their objectives.It has been practiced by both right-wing and left-wing political parties, nationalistic groups, religious groups, revolutionaries, and ruling governments. An abiding characteristic is the indiscriminate use of violence against noncombatants for the purpose of gaining frequentity for a group, cause, or individual. 5)Protectionism is the economic policy of restraining trade in the midst of states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports and prevent fore ign take-over of domestic markets and companies.This policy contrasts with free trade, where government barriers to trade and movement of superior are kept to a minimum. In recent years, it has become closely aligned with anti-globalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and practiceers within a country by restricting or regulating trade with foreign nations. Source Wikipedia Question 3 Hedging means reducing or controlling risk.This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes. Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels exit be countered by changes in the value of a futures position. For instance, a wheat farmer mess sell wheat futures to protect the value of his crop prior to harvest. If th ere is a fall in price, the loss in the cash market position go away be countered by a gain in futures position.Hedging is a mechanism to reduce the risk of adverse price movements of an asset. Its an investment under taken to reduce the risk of adverse movements of the primal assets. We all agree with the fact that in investment risks and returns are the two sides of a coin. The underlying asset spate be a security, currency, debt instruments or a commodity like crude oil. A Perfect Hedge is an offsetting investment which completely eliminates the risk of the price movements. However, this is a lot not possible, as all investments do carry a risk.Reason for hedging Participating in hedging has reasons that are connected with price risk. Typically, traders take part in hedging so they can more effectively plan on set price (often employing the remit ratio). Considering of course, gold or silver futures for instance as a disconcert against inflation and falling currencies. Farm ers, growers and producers alike near the source hedge to get a lock on pricing at some appointed time. Often they buy futures fundamentally in order to protect against price drops.Producers, manufacturers and large consumers are normally in the practice of hedging but rather to get a better handle on their cash flow or finished product/service costs. Surely in commodities that are known to be volatile in nature, where prices need a stabilization factor. Example Where precious metals are used as raw materials. Trucking companies, the nisuslines and transportation companies all hedge to lock in lower prices. Electricity generation, in its used of natural gas also provides ample reason for hedging.Larger food companies needing the ingredients of grains and wheat flour for breads, ce significants and baked goods (not to mention coffee and cocoa) and hedge for price protection. When successful it becomes an integral part of delivering their product to consumers. Some companies even hedge so that consumers may not be so hard pressed in the event of price climbs, perhaps seen as unreasonable by consumers. Reason against hedging The management of financial risk is difficult and conceptually demanding. Probably the most difficult issue is the actual recognition of where and how much financial risk is being incurred.Example An Australian metal producer who borrows in the States as a partial hedge because their product is priced in USD in world markets. The problem with this hedge is that it genuinely would profit risk. The AUD is a commodity currency and when metal prices fall the AUD will generally be weaker. This means that our metal tradeer finds that their USD loan is costing those more in AUD terms at the same time as revenue is collapsing. The reason for the problem is that the company failed to recognize the correlation between metal prices and the AUD exchange rate. Source wikipedia Question 4A equalizer of payments (BOP) sheet is an accounting record o f all monetary minutes between a country and the rest of the world. These transactions include payments for the countrys exportations and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific flow rate, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are record as positive or surplus tems. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or shortage item. When all components of the BOP sheet are included it must counterpoise that is, it must sum to zero there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade parallelism will be in deficit, but the shortfall will have to be counter relaxationd in other ways such as by funds real ize from its foreign investments, by ladder down reserves or by receiving loans from other countries.While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted. historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about. Since 1974, the two principal divisions on the BOP have been the current account and the capital account.The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports payments for imports) , factor income (earnings on foreign investments payments do to foreign investors) and cash transfers. Its called the current account as it covers transactions in the here and now those that dont give rise to future claims. The capital account records the net change in ownership of foreign assets.It includes the reserve account (the international operations of a nations central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account). Expressed with the cadence meaning for the capital account, the BOP identity is pic The balancing item is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero.At high level, by the principles of double entree accounting, an instauration in the current account gives rise to an entry in the capital account, and in aggregate the two accounts should balance. A balance isnt always reflected in reported figures, which might, for example, report a surplus for both accounts, but when this happens it always means something has been missedmost commonly, the operations of the countrys central bank. An actual balance sheet will typically have numerous sub headings under the principal divisions. For example, entries under Current account might include Trade buying and selling of goods and services Exports a credit entry o Imports a debit entry ? Trade balance the sum of Exports and Imports Factor income repayments and dividends from loans and investments o Factor earnings a credit entry o Factor payments a debit entry ? Factor income balance the sum of earnings and payments. Especially in older balance sheets, a common division was between visible and invisible entries. visual trade recorded imports and exports of physical goods (entries for trade in physical goods excluding services is now often called the merchandise balance).Invisible trade would record international buying and selling of service s, and sometimes would be grouped with transfer and factor income as invisible earnings. In the fount of any particular country, a balance reflecting the ratio of monetary receipts from foreign countries to total payments to foreign countries, as computed for a year, quarter, or other period of time. A favorable balance of payments results when receipts pass away payments, whereas an unfavorable balance of payments, or deficit, results when the reverse is true.The balance of payments reflects the diverse economic relations that exist between countries and lead to various international payments these relations include foreign trade and the export of capital. The balance of payments also reflects international relations in the political, scientific, technological, and cultural spheres this is seen, for example, in expenditures that arise from the maintenance of representations in foreign countries, from trips by official delegations and tourists, from the acquisition of patents and licenses, and from private transfers.In developed capitalist countries, the chief principals in international economic relations are private companies, including those engaged in commerce, industry, banking, insurance, and transport. The balance of payments models as the spontaneous result of many isolated transactions an operation, for which no accurate account can be maintained. The balance of payments tables compiled in buttoned-down states therefore represent only an approximate evaluation of receipts and payments.The item in the balance of payments tables that is called errors and omissions provides particular curtilage of this fact. The balance of payments encompasses only the payments actually made during a given period. By contrast, the balance of international indebtedness, or balance of claims and liabilities, is the ratio of the foreign claims of a given country to the foreign liabilities of that country.The balance of payments in capitalist and developing nations inc ludes scores of diverse items, which usually are grouped in the following categories, as recommended by the International Monetary Fund foreign trade (exports and imports of commodities), services (including transport, tourism, insurance, government expenditures, banking services, and income from investments), uni later onal transfers, the movement of long-term capital, the movement of short-term capital, change in the gold and currency reserves, and errors and omissions.The first three categories advert the current account balance of payments, the next two are the balance of capital movements, and the last two are the balancing items. Analysis of the balance of payments is truly important in describing a countrys place in the system of international economic relations, especially with respect to world trade. When receipts from the export of commodities consistently exceed import payments, this generally points to a countrys strength in world markets this was the case with Japan a nd the Federal Republic of Germany in the late 1960s and early 1970s.On the other hand, import payments that exceed export earnings are an indication of economic difficulties related to the deficit of the balance of payments this was the position of the USA in these same years. An important item in the current account balance of payments concerns the receipts and payments for foreign investments. This item reflects profit real from abroad and paid abroad, in the operate of dividends, fire, and so forth.The profit represents a source of enormous income for capital-exporting imperialist states with large capital investments abroad, either in the lay down of ingest investments or in the form of loans and credits. In 1971, for example, the income of Great Britain from foreign investments was ? 667 million, more than double the positive trade balance. The profit from foreign capital investments repatriated to the United States amounted to $10. 7 billion in 1971 and was the second mo st important item of receipts in the nations balance of payments, later the income from export commodities.This attests to the piece of the United States as the center of financial exploitation in the capitalist world. The overwhelming majority of developing countries are importers of capital, and payments on foreign investments are one of the chief reasons for the overall balances of payments deficits. The payments on foreign investments absorb an ever greater portion of the export earnings of the developing countries. Foreign military expenditures are also included in the current account balance of payments.These expenditures are due to imperialist states policy of aggression and the maintenance of numerous military bases abroad. This is one of the most important reasons for the deficit in the balance of payments and the ensuing monetary crises. The enormous rise in state military and political expenditures abroad underlies the chronic deficit in the US balance of payments. Expe nditures from the early 1960s through the early 1970s totaled more than $100 billion, some 40 theatrical role more than the surplus for all other items in the USAs balance of payments.Capital movement as reflected in the balance of payments is primarily in the form of the movement of long-term capital. Long-term capital movement includes direct investments, which provide for full ownership of enterprises or control of their operations portfolio investments, made in the form of investments in overseas securities and loans, credits, and subsidies. The export of capitalthe outflow of capital from a given countryis reflected as an expenditure in the balance of payments the import of capital, on the other hand, represents an influx of funds and is included as income.The export of capital, for example, to the developing countries, causes a flow of profit from the countries where the foreign capital has been placed this ultimately has a negative effect on the balance of payments of the c ountries receiving foreign capital. At the same time, summationd export of capital sometimes directly worsens the balance of payments of the imperialist states. The export of capital and military expenditures are precisely the reasons for the balance of payments deficit in the USA. The movement of short-term capital is related to the way notes on sterilize in foreign banks is constantly transferred between countries.These transfers are to a operative degree related to speculation with respect to change in exchange order or affaire on deposits. The indicator of a surplus or deficit of the balance of payments is important in describing the economic situation of a country. In capitalist nations, several(prenominal) methods are used for determining this balance in the USA, for example, three methods are employed. The balancing indicator is most often the balance of the current transactions and the balance of the change in the gold and currency reserves.Various methods are used to regulate the balance of payments. One basic method involves the export of gold when there is a deficit balance and the import of gold when there is a surplus balance. The chronic balance of payments deficit in the USA in the 1960s and early 1970s led to a significant outflow of gold and a reduction in US gold reserves. The balance of payments deficit may also be covered by increasing short-term or long-term debts to creditor nations, which accumulate the corresponding obligations of their debtors.Because the gold reserves of the capitalist and developing countries are limited, foreign credits and loans are becoming the basic means of covering the balance of payments deficit this is especially true in the case of developing countries. To improve the balance of payments situation, capitalist states frequently resort to a currency devaluation, which helps increase export receipts from tourism, the import of foreign capital, and so forth. The balance of payments situation of a capitalis t country is a basic factor in determining the state of that countrys currency.For example, the crisis of the US sawhorse basically resulted from a sharp deterioration in the US balance of payments, which had a deficit of almost $10 billion in 1972. The US government was oblige to devalue the dollar in 1971 and 1973 because of the drop in gold and currency reserves and the increase in foreign debts, both of which were caused by the chronic balance of payments deficit. In socialist countries, foreign economic relations are based on the state monopoly of foreign trade and the foreign-exchange monopoly.The balance of payments is planned as a component part of a general plan embracing the national economy, foreign trade, and currency. Payments of the member countries of the Council for Mutual Economic Assistance (COMECON) are mutually equilibrise through long-term planning of trade and payments between the countries payments in transfer rubles are used. Because of the foreign-exchang e monopoly, the balance of payments does not influence the situation of the monetary units of the socialist countries.In relations with the capitalist states, the Soviet Union and other socialist countries avoid balance of payments deficits through the planned use of foreign-exchange and gold resources and anticipated foreign-exchange receipts. Source finance Asia Question 5 Annualized = Forward Price Spot Pricex12 x100% Forward Premium Spot Price of months onwardDirect Quotation represents the value of a foreign currency in dollars (number of dollars per currency). In this case, the Japanese Yen is taken as the local currency and USD is taken as the foreign currency. Direct = ((120 -140) / 140)*(12 / 6)*100 = 28. 5714% out front discount Indirect = 1 / Direct = 1/-28. 5714% = 3. 5% forward discount Question 6 Atype of diagramwhere the curve falls at the outset and eventually rises to a point higher(prenominal) than the starting point, suggesting the letter J.While a J-curve c an apply to datain a variety of fields, such as medicine and political science, the J-curve effect is mostnotable in both economics and private equity funds after a certain policy or investment is made, an initial loss is followed by a significant gain. An exampleof theJ-curve effectis seen in economicswhen a countrys trade balance initiallyworsens following a devaluation or depreciation of its currency. The higher exchange rate will at first correspond to more costly imports and less valuable exports, leading to a bigger initial deficit or a maller surplus. Due to the competitive, relatively low-priced exports, however, a countrys exports will start to increase. Local consumers will also purchase less of the more expensive imports and focus on local goods. The trade balance eventually improves to better levelscompared to before devaluation. In private equity funds, the J-curve effect occurs whenfunds experience negative returns for the first several years. This is a common experien ce, as the early years of the fund include capital drawdown and an investment portfolio that has yet to mature.If the fund is well managed, it will eventually be restored from its initial losses and the returns will form a J-curve losses in the beginning dip down below the initial value, and later returns show win above the initial level. The theory of the J-curve is an explanation for the J-like pattern of change in a countrys trade balance in response to a sudden or substantial depreciation (or devaluation) of the currency. Consider the adjoining diagram depicting two variables measured, hypothetically, over some period of time the dollar/foreign exchange rate, E$/*, and the US current account balance, CA = EX IM.The exchange rate is meant to represent the average value of the dollar against all other trading country currencies and would correspond to a dollar value index which is often constructed and reported. Since the units of these two data series would be in very differen t scales, we imagine the exchange rate is measured along the left axis, while the CA balance is measured in different units on the right-hand axis. With appropriately chosen scales we can line up the two series next to each other to see whether changes in the exchange rate seem to correlate with positive or negative changes in the CA balance.Source Investopedia Question 7 measure is to impose a financial charge or other levy upon a taskpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is guilty by law. Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labor equivalent (often but not always unpaid labour). A tax may be defined as a pecuniary burden laid upon individuals or property owners to support the government, a payment exacted y legislative authority. A tax is not a voluntary payment or donation, but an enforced contribution, exa cted pursuant to legislative authority and is any contribution imposed by government whether under the progress to of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. The legal definition and the economic definition of taxes differ in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices.Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by creating money (e. g. , printing bills and minting coins), through voluntary gifts (e. g. , contributions to public universities and museums), by imposing penalties (e. g. , traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received.In modern receipts systems, taxes are levied in money but, in-kind and corvee taxation is characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada gross Agency, the home(a) Revenue Service (IRS) in the United States, or Her Majestys Revenue and Customs (HMRC) in the UK.When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual. Taxes are sometimes referred to as direct taxes or indirect taxes. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. An economic definition, by Atkinson, states that direct taxes may be adjusted to the individual characteristics of the taxpayer, whe reas indirect taxes are levied on transactions irrespective of the circumstances of vendee or seller. According to this definition, for example, income tax is direct, and gross revenue tax is indirect. In law, the terms may have different meanings. In U. S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction between direct and indirect taxation can be subtle but can be important under the law.The Advantages of Direct and Indirect Taxes Governments collect taxes by direct and indirect means. An example of a direct tax is payroll tax, where tax is deducted by an employer from an employees income, and paid directly to a collection agency, such as the Internal Revenue Service in the United States. An indirect tax is a tax which is not paid directly to the collection agency by the person paying the tax, but goes an intermediary, who then passes the tax to the collection agency. Sales taxes are examples of indirect taxes. Progressive Advantage of Direct TaxesOne advantage of direct taxation is that it is easy to apply in a progressive manner. Progressive taxes are a fair way of generating revenue, because multiple rates of taxation can be applied, based on the ability of the tax payer to pay the tax, especially if tax rates increase marginally. For example, a government may apply income tax to earnings at a rate of 10 percent, for all income earned up to $20,000. Then it applies a rate of 15 percent to income over $20,000. A person earning more than $20,000 will pay tax at a rate of 10 percent on the first $20,000 earned, and only pays 15 percent on earnings over that amount.Progressive, marginal, direct taxation is therefore fair because higher e arners bear a greater part of the tax burden, based on their ability to pay higher rates of tax. Transparency of Direct Taxation Direct taxes, which go directly by the person bearing the burden of the tax, are transparent taxes. For example, when an employer deducts taxes from the wages of an employee, the employee can see the amount of tax deducted, as it is included on his or her wage statement, or pay-slip. Self-employed tax payers can also see the amount of tax they need to pay to the government, hen they complete their tax returns. In a democracy, tax transparency means that governments have to justify taxes they impose to their voters, and tax-paying voters always aware of the tax burdens imposed on them by politicians. Environmental Benefits of Indirect Taxation Governments use Indirect taxes, such as taxes added to the price of goods and services, to modify the behaviour of individuals in order to help achieve environmental goals. For example, the true price of gasoline, at point of delivery to the public is low.The price does not encourage people to reduce their use of gasoline by using public transport, or buying more fuel-efficient vehicles. If a government wishes to reduce the use of gasoline as part of an environmental protection goal, it can artificially inflate the price of gasoline to the consumer, by imposing a sales tax to increase the price. When a government imposes a high enough tax on gasoline, it results in a reduction of demand for gasoline, and thus support the government in implementing its environmental policy. Source Wikinvest Question 8The Bretton Woods system was established in 1944 as the major capitalist situations initiated a architectural plan of national regulation aimed at containing the contradictions of the world economy and preventing the development of socialist revolution. Its demise in 1971 inaugurated a new stage, characterised by the development of globalised production and the command of an international financi al market. When the US pulled the rug from under the previous system it did so in order to maintain its position of global hegemony in the new economic order which was beginning to emerge. It managed to do so but at great cost.The free market program it has so strenuously promoted over the past 30 years has intensified all the contradictions of the capitalist mode of production. At the same time, starting with the unilateral decision of August 15, 1971, the basis for collaboration between the major capitalist powers has been narrowing. The combined impact of these two processes has created the conditions for major economic, social and political upheavals in the world capitalist economy in the period at a time ahead. Source Wordiq Question 9 There are many factors that influence the exchange rate of US dollar.Generally speaking, there are mainly four reasons first, the health condition and the rate of return for investment of the US economy, secondly, the balance of international p ayment in the US, thirdly, the level of wager rates in the US compared with those in other countries, and fourthly, the rate of inflation. The following might be the reason why its expected to continue tight throught to the basement floor colossal budget and trade deficits. Ultra-low enkindle rates. (Zero on the short end. ) $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid. Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U. S. economy. There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Heres why Two Reasons for a Dollar Rebound There are two main forces that could drive the dollar higher All the problems mentioned above are already well recognized and priced into the greenback. Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldnt imagine Internet stocks doing anythin g but soaring higher.Five years ago, they couldnt imagine real estate doing anything but barrelling down the same one-way street. study lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down. When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point and an opportunity. This is no exception. Commentators seem to forget that all currency values are contingent. You cant just look at fundamentals in the United States. You have to look at them abroad, too. And there isnt uch out there right now thats terribly positive Americas Fellow Heavyweights Have Problems, Too Take Europe, for example Eurozone In the third quarter, the 16-nation Eurozone grew at a 1. 5% annual rate. The U. S economy, by comparison, grew at 3. 5%. European consumers and most business sectors are still feeling the pain from the deepest recession since the 1930s. The continent is likely to be the weake st region for global expansion next year, according to Julian Callow, Chief European Economist at Barclays Capital in London. United Kingdom This is no bastion of strength, either.Europes biggest economy outside the Eurozone is still in recession, due to overly indebted British households and tight credit. British GDP contracted at an annualized 1. 6% in the third quarter. Japan The worlds second-largest economy has its own problems, too. At 172% of GDP, Japans government debt is by far the largest among rich nations. Whats more, its expected to reach 200% next year and hit 300% within a decade. emerging social security costs and the weak economy are the primary culprits. The new government there is trying to prevent a double-dip recession by spending even more.But with government debt soaring to records, talk of new stimulus measures is already pushing up long-term rates and threatening to break short the impact of fresh spending. Source Economics help Question 10 regulation deviation is a widely used measurement of variability or diversity used in statistics and probability theory. It shows how much variation or dispersion there is from the average (mean, or expected/budgeted value). A low received deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data are spread out over a large range of values.Technically, the standard deviation of a statistical population, data set, or probability distribution is the square root of its variance. It is algebraically simpler though practically less robust than the average absolute deviation. A useful property of standard deviation is that, unlike variance, it is expressed in the same units as the data. Note, however, that for measurements with percentage as unit, the standard deviation will have percentage points as unit. In addition to expressing the variability of a population, standard deviation is commonly used to measure confidence in s tatistical conclusions.For example, the margin of error in polling data is determined by scheming the expected standard deviation in the results if the same poll were to be conducted multiple times. The reported margin of error is typically about twice the standard deviation the radius of a 95 percent confidence interval. In science, researchers commonly report the standard deviation of experimental data, and only effects that fall far outside the range of standard deviation are considered statistically significant normal random error or variation in the measurements is in this way distinguished from causal variation.Standard deviation is also important in finance, where the standard deviation on the rate of return on an investment is a measure of the volatility of the investment. When only a consume of data from a population is available, the population standard deviation can be estimated by a modified quantity called the sample standard deviation pic Risks can be reduced in fo ur main ways Avoidance, Diversification, Hedging and Insurance by transferring risk. Systemic risk, also called market risk or un-diversifiable risk, is a risk of security that cannot be reduced through diversification.Participants in the market, like hedge funds, can be the source of an increase in systemic risk and transfer of risk to them may, paradoxically, increase the exposure to systemic risk. Unsystematic risk also called the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification. A ratio developed by Nobel laureateWilliam F. Sharpe to measure risk-adjusted performance. TheSharpe ratiois calculated by subtracting the risk-free rate such asthat of the10-year U.S. Treasury stick by from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is pic Th e Sharpe ratio tells us whether a portfolios returnsare due to sassy investment decisions or a result of excess risk. This measurement is very useful becausealthough one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolios Sharpe ratio, the better its risk-adjusted performance has been.A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being dissectd. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility. The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e. g. Treasury Bills or a comple tely diversified portfolio), per each unit of market risk assumed. The Treynor measure is similar to the Sharpe measure, but the Treynor measure uses the portfolios beta instead of the portfolios standard deviation. The Treynor measure is calculated as follows (rp rf) / ? p In this equation, rp = the average return on the portfolio, rf = the average risk-free rate, and ? p = the weighted average beta of the portfolio. The Treynor measure is found by dividing the portfolio risk premium by the portfolio risk as measured by the beta. An assets Treynor measure in isolation also means little.It also must be measured against the markets Treynor measure, which is calculated by dividing the market risk premium, or the return on the market minus the risk-free rate by the beta of the market, which is 1. 0. If the assets Treynor measure is greater than the markets Treynor measure, the asset has outperformed on a risk-adjusted basis. Source Investopedia SECTION B strain QUESTIONS Question 1 O ne of the primary uses of PPP is in lessening the misleading effects of shifts in a national currency. This is particularly an issue when calculating a nations Gross Domestic Product (GDP).For example, if the riel falls in value to 80% of its value on the dollar, the GDP as expressed in US dollars will also drop to 80%. This does not accurately reflect the standard of living in that country (a common use of GDP), however, because the devaluation of the riel is most likely due to international trade issues that will not yet have had any effect on the average Cambodian. By using purchasing power parity, however, one is not misled by the temporary devaluation of the riel in relation to the dollar a Big Mac still costs 9,000 riel in Cambodia and $3 USD in the US, and so the Big Mac index exchange rate system the same.Purchasing power parity is, of course, an imperfect device for determining things such as GDP, as the exchange rate will vary based on the basket item used for the index. This effect is lessened by looking at a large sample of commodities, rather than one or two, but this simply minimizes the problem rather than eliminating it entirely. It is also worth noting that PPP lumps items together into broad classes, not taking into account things such as quality a hat is a hat is a hat, and its value in the index remains static, even though a shoddy hats value on the international market would be much lower than a well-made hats value.According to reside rate parity the difference between the (risk free) interest rates paid on two currencies should be equal to the differences between the spot and forward rates. If interest rate parity is violated, then an arbitrage opportunity exists. The simplest example of this is what would happen if the forward rate was the same as the spot rate but the interest rates were different, then investors would 1. borrow in the currency with the lower rate 2. convert the cash at spot rates 3. enter into a forward contract t o convert the cash plus the expected interest at the same rate 4. nvest the money at the higher rate 5. convert back through the forward contract 6. repay the principal and the interest, knowing the latter will be less than the interest received. therefore, we can expect interest rate parity to apply. However, there is evidence of forward rate bias. Covered interest rate parity Assuming the arbitrage opportunity described above does not exist, then the relationship for US dollars and pounds sterling is (1 + r? )/(1+r$) = (? /$f)/(? /$s) where r? is the sterling interest rate (till the date of the forward), r$ is the dollar interest rate, /$f is the forward sterling to dollar rate, ?/$s is the spot sterling to dollar rate Unless interest rates are very high or the period considered is long, this is a very good approximation r? = r$ + f where f is the forward premium (? /$f)/(? /$s) -1 The above relationship is derived from assuming that covered interest arbitrage opportunities shoul d not last, and is therefore called covered interest rate parity. Uncovered interest rate parity Assuming uncovered interest arbitrage leads us to a slightly different relationship r = r2 + E? S where E? S is the expected change is exchange rates.This is called uncovered interest rate parity. As the forward rate will be the market expectation of the change in rates, this is equivalent to covered interest rate parity unless one is speculating on market expectations being wrong. The evidence on uncovered interest rate parity is mixed. The effect proposes that if the real interest rate is equal to the nominal interest rate minus the expected inflation rate, and if the rea interest rate were to be held constant, that the nominal rate and the inflation rate have to be adjusted on a one-for-one basis. Real interest rate = nominal interest rate inflation rate.In simple terms an increase in inflation will result in an increase in the nominal interest rate. For example, if the real interes t rate is held at a constant 5. 5% and inflation increased from 2% to 3%, the black cat Effect indicates that the nominal interest rate would have to increase from 7. 5% (5. 5% real rate + 2% inflation rate) to 8. 5% (5. 5% real rate + 3% inflation rate). International Fisher Effect theory that the currency of a nation with a comparatively higher interest rate will depreciate in value in comparison to the currency of a nation with a comparatively lower interest rate.It further implies that the conclusion of depreciation will be equal to the difference in interest rates in those two nations. It is based on the observation that the level of real interest rate in an economy is closely linked to the level of local inflation rate and is independent of a governments monetary policies. Thus, in general, the higher the inflation rate, the lower the value of currency. Source Investopedia Question 2 Firstly, Comparative advantage was first described by Robert Torrens in 1815 in an essay on the Corn Laws.He concluded it was to Englands advantage to trade with Portugal in return for grain, even though it might be possible to produce that grain more cheaply in England than Portugal. However, the concept is usually attributed to David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries.In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not c hanged but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.Example Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great in others it is small.Despite the fact that the younger man has absolute advantage in all activities, it is not in the interest of either of them to work in isolation since they both can benefit from specialization and exchange. If the two men divide the work according to comparative advantage then the young man will specialize in tasks at which he is most productive, while the older man will concentrate on tasks where his productivity is only a little less than that of the young man. Such an arrangement will increase total production for a given amount of labor supplied by both men and it will benefit both of them.Imperfect market refers to a type ofmarket that does not operate under the rigid rules of perfect competition. Perfect competition implies an industry or market in which no one supplier can influence prices, barriers to entry and exit are small, all suppliers offer the same goods, there are a large number of suppliers and buyers, and information on pricing and process is readily available. Forms of imperfect competition include monopoly, oligopoly, monopolistic competition, monopsony and oligopsony. Thirdly, a product life round refers to the time period between the launch of a product into the market till it is finally withdrawn.In a nut shell, product life cycle or PLC is an odyssey from new and innovative to old and overaged This cycle is split into four different stages which encompass the products journey from its entry to exit from the market. The product life cycle theory is used to comprehend and analyze various maturity stages of products and industries. Product innovation and diffusion influence long-term patterns of international trade. This term product life cycle was used for the first time in 1965, by Theodore Levitt in an Harvard Business Review article Exploit the Product Life Cycle. Anything that satisfies a consumers need is called a product.It may be a tangible product (clothes, crockery, cars, house, and gadgets) or an intangible service (banking, health care, hotel service, airline service). Irrespective of the kind of product, all products introduced into the market undergo a common life cycle. To understand what this product life cycle theory is all about, let us have a quick look at its definition. This cycle is based on the all familiar biological life cycle, wherein a seed is planted (introduction stage), germinates (growth stage), sends out roots in the ground and shoots with branches and leaves against gravity, thereby maturing into an mature (maturity stage).As the plant lives its life and nears old age, it shrivels up, shrinks and dies out ( surrender stage). Similarly, a product also has a life cycle of its own. A products entry or entryway phase into the market corresponds to the introduction stage. As the product gains popularity and wins the trust of consumers it begins to grow. Further, with increasing sales, the product captures enough market share and gets stable in the market. This is called the maturity stage. However, after some time, the product gets overpowered by latest technological developments and entry of superior competitors in the market.Soon the product becomes obsolete and needs to be withdrawn from the market. This is the decline phase. This was the crux of a product life cycle theory and the graph of a products life cycle looks like a bell-shaped curve. Let us delve more into this management theory. Source Buzzle Question 3 Belize Costa Rica Earnings before taxes 1,000,000. 00 1,500,000. 0 corporate income tax Rate 0. 4 0. 3 Tax 400,000. 00 450,000. 00 Earnings after taxes 600,000. 00 1,050,000. 00 300,000. 0 525,000. 00 Dividend wtax rate 0. 1 0 Dividend wtax amount 30,000. 00 0 Remitted amount after wtax 270,000. 00 525,000. 0 Current US collective income tax rate 5% Dividend received by US parent after US Corporate tax 26,2500. 00 Net Dividend Received 270,000. 0 498,750. 00 tally Earning before tax 250,000. 00 Total Dividend received by Gramboa 768,750. 0 Total Tax paid 906,250. 00 Overall effective taxrate 36. 35% Question 4 Option 1 No HedgingAssume that the expected spot rate in 90 Days is indeed $1. 7850/?. Now a) 90 days pu tX = 1. 75P = 0. 015 b) 90 daysX = 1. 71P = 0. 01 3 months laterExercise Option (a) Received = (1. 75 0. 015) * 3mil = $5,205,000. 00 Answer Do Not exercise Option 2 Forward Hedge profane a forward hedge at 90 Days forward rate at $1. 7550/? Now enter F 1,755 Money receivable in $ = 1. 755 x 3m = $5. 265m Option 3 Money Market Hedge 1) Day 1 Borrow ? , Amount borrowed = ? (3m / (1 + (14/4) /100)) = ? 2,898,550. 00 2) Day 1 Convert all ? to $ = $1. 762 x 2,898,550. 00 = $5,107,246. 00 Option 1 Put $5,107,246. 0 to US bank 6% Option 2 Use $5,107,246. 00 as capital investment 3 months laterOption 1 Received ? 3 mil to pay ? 3 mil to British Bank Dollars in pocket = $5,107,246. 00 * (1+6%* 3/12) = $5,183,854. 69 Option 2 Received ? 3 mil to pay ? 3 mil to bank $5,107,246. 00 (1+12%*3/12) = $5,260,463. 00 Conclusion Money market is the scoop option as the money received is more than Put option hedge. Forward hedge resulted in receiving more than money market hedge wheras no hedg ing is assuming that the expected spot rate is reached but that is leaving it to chance. END OF ASSIGNMENT