Question 1.
An ANZ Bank currency trader working out of Wellington New Zealand wonders if she can make an intermarket arbitrage profit using Solomon Islands dollars (SBD) and Singapore dollars (SGD). If she has 10 million New Zealand dollars to work with and gathers the following quotes, calculate if she can make a profit (show your workings):
National Australia Bank quotes NZD/SBD 5.7796 – 5.8241
Citibank quotes NZD/SGD 1.0148 – 1.0156
Commonwealth Bank quotes SGD/SBD 5.6928 – 5.7371
S(NZD/SBD) 5.8241
S(NZD/SGD) 1.0156
S(SGD/SBD) 5.7371
#1: Start with NZD to SGD
Step 1: NZD/SGD = 9,846,396
Step 2: SGD/SBD = 56,489,759
Step 3: SBD/NZD = 9,699,311
In this scenario there is no arbitrage profit made as there is a loss.
#2: Start with NZD to SBD
Step 1: NZD/SBD = 58,241,000
Step 2: SBD/SGD = 10,151,644
Step 3: SGD/NZD = 10,310,000
In scenario 2 a profit was made.
Question 2.
Assume your firm is based in the US and has a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent $100,000 in interest each month. Australia has just raised its interest rate in order to boost the value of its currency (A$). The Australian dollar appreciates against the US dollar as a result. Briefly explain whether these actions would increase, reduce, or have no effect on: a) The volume of your subsidiary’s sales in Australia (measured in A$) b) The cost to your subsidiary of purchasing materials (measured in A$) c) The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$).
Briefly explain each answer.
a) The volume is not going to change directly as we are dealing in Australian Dollars to Australian clients. Fluctuations of the dollar don’t result in terms of purchases. However, indirectly the cost of goods will drop and a consequence the cost of production will drop, then there is a possibility of increased volume of sales due to a drop in price. b) The cost of goods will drop will drop, the cost of HKD/USD will not change, but due to a change in stronger Australian dollar, then the cost of raw goods in Australian dollars will fall. c) The subsidiary in Australia is conducting business in Australian dollars, therefore due to a stronger Australian dollar the number of Australian dollars to make the interest payments will decrease. This will have a direct impact of the profitability to the subsidiary. As will the lower cost of goods, assuming that the consumers sell price remains the same.
Question 3. If the government of Mexico officially changed the value of the Mexican peso from 3.2 pesos per US dollar to 5.5 pesos per US dollar. What was the percentage change in its value? Was this a depreciation, devaluation, appreciation, or revaluation? Briefly explain. The Percentage change = S1-S2/S2 x100 = 3.2-5.5/5.5 x100 = -41.81% devaluation in the Mexican Peso Generally depreciation applies to currencies that are from floating, market sensitive conditions that have little to no government intervention. As the government changed the rate from 3.2 to 5.5 Pesos to USD then this change is considered a devaluation of currency. Also as that you can now get 5.5 pesos to the USD from the previous rate at 3.2 it can be said that the currency has become weaker, therefore it is a devaluation rather than a revaluation.
You May Also Find These Documents Helpful
-
The economic system of capitalism involves the production and consumption of goods and services. Making a profit is the ultimate incentive (or reason)…
- 1459 Words
- 6 Pages
Good Essays -
See how economics can be understood as a game with rules that is played by people with different roles.…
- 5343 Words
- 23 Pages
Satisfactory Essays -
4. In Post’s 2014 consolidated income statement, how much should it report as a foreign exchange loss?…
- 290 Words
- 2 Pages
Satisfactory Essays -
Suppose you take a mortgage for $72,764 for 16 years with annual payments. If the annual interest rate is 3.4%, calculate the total interest amount paid over the life of the loan. That is, calculate the total interest paid in 16 years.…
- 2075 Words
- 16 Pages
Satisfactory Essays -
B. Suppose an American exporter has just received a payment of € 100,000, how many dollars will result upon conversion?…
- 912 Words
- 4 Pages
Good Essays -
3. A marine biologist is planning to move from Sydney, Australia, to San Francisco. She has $5,000 Australian dollars (AUD) to make the move. In the summer of 2006, the exchange rate of USD/AUD (U.S. dollars to Australian dollars) is 0.765, and the USD is rising against the AUD. If the rising dollar trend continues, and all other economic elements remain equal, will her AUD be worth more USD now or later? Explain.…
- 641 Words
- 3 Pages
Satisfactory Essays -
A method used to separate mixed costs into fixed and variable components is called the high-low method.…
- 4307 Words
- 18 Pages
Good Essays -
1. Do all international financial transactions necessarily involve exchanging one nation’s distinct currency for another? Explain. Could a nation that neither imports goods and services nor exports goods and services still engage in international financial transactions?…
- 5587 Words
- 23 Pages
Good Essays -
The Size of financial flows into Australia The size of financial flows into Australia from investors who wish to invest in Australia and need to convert their currency into AUD will affect demand for the dollar. The level of capital inflow will be affected by the level of Australian interest rates relative to overseas interest rates as well as the level of confidence in the Australian economy. If Australia has relatively higher interest rates and stronger confidence, then this will encourage capital inflow and increase demand for the AUD. Using this theory, the Australian dollar at the present looks to be in a relatively strong position. Interest rates are beginning to rise (official interest rate has recently been risen 0.25 points to 4.5% and is expected to raise to 5.25% by September this year, with economic growth expected to be around 3.75% in 2002/03.)…
- 1054 Words
- 4 Pages
Better Essays -
Introduction: What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past four months that have affected the value of the Australian dollar?…
- 3236 Words
- 13 Pages
Powerful Essays -
2) It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.…
- 3515 Words
- 18 Pages
Satisfactory Essays -
3. What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today?…
- 845 Words
- 4 Pages
Satisfactory Essays -
Automobiles are durable goods. In the short-run consumers are more responsive to price change. Consumers are less likely to buy another car if theirs is still working correctly. Buying a new car would become a necessity in the long term.…
- 352 Words
- 2 Pages
Satisfactory Essays -
For sure, consumer-driven health plans (CDHP) have been around since the 1990s, since its inception by health e-commerce ventures. CDHP is a saving account that is pre-taxed, and is to be used for medical expenses. In-network providers’ discount may are sometimes offered, however, it is not offered to enrollees who are restricted to choose their own treatment centers or health care providers. In this assignment, I will show the history of CDHP and how, why and when it was introduced. Some advantages and disadvantages will also be discussed. Details of the different kinds of health plans will be highlighted. Above all, I will give reason why I would not recommend this type of health care plan and its affects on society.…
- 2513 Words
- 11 Pages
Better Essays -
When a firm operates only in the domestic market, both for procuring inputs as well as selling its output, it needs to deal only in the domestic currency. As companies try to increase their international presence, either by undertaking international trade or by establishing operations in foreign countries, they start dealing with people and firms in various nations. Since different countries have different domestic currencies, the question arises as to which currency should the trade be settled in. The settlement currency may either be the domestic currency of one of the parties to the trade, or may be an internationally accepted currency. This gives rise to the problem of dealing with a number of currencies. The mechanism by which the exchange rate between these currencies (i.e., the value of one currency in terms of another) is determined, along with the level and the variability of the exchange rates can have a profound effect on the sales, costs and profits of a firm. Globalization of the financial markets also results in increased opportunities and risks on account of the possibility of overseas borrowing and investments by the firm. Again, the exchange rates have a great impact on the various financial decisions and their movements can alter the profitability of these decisions.…
- 718 Words
- 3 Pages
Good Essays