International Finance – 1. Effects of September 11. Within a few days after the September 11, 2001, terrorist attack on the United States, the Federal Reserve reduced short-term interest rates to stimulate the U.S. Economy. How might this action have affected the foreign flow of funds into the United States and affected the value of the dollar? How could such an effect on the dollar have increased the probability that the U.S. economy would strengthen. 2. Intervention Effects on Corporate Performance. Assume you have 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 $100,000 in interest each month. Australia has just raised its interest rate in order to boost the value of its currency (Australian dollar, A$). The Australian dollar appreciates against the U.S. dollar as a result. 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. 3. Impact of Devaluation. The inflation rate in Yinland was 14 percent last year. The government of Yinland just devaluated its currency (the yin) by 40 percent against the dollar. Even though it produces products similar to those of the United States, it has much trade with the United States and very little trade with other countries. It presently has trade restrictions imposed on all non-U.S. countries. Will the devaluation of the Yin increase or reduce inflation in Yinland? Briefly explain. 4. Economic Effects on the Forward Rate. Assume that Mexico’s economy has expanded significantly, causing a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican Peso? 5. Deriving the Forward Rate. Before the Asian crisis began, Asian central banks were maintaining a somewhat stable value for their respective currencies. Nevertheless, the forward rate of Southeast Asian currencies exhibited a discount. Explain. 6. Movement in Cross Exchange Rates Assume that cross exchange rates are always proper, such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S dollar can be exchange for 125 Japanese yen or 4 Argentine peso at the foreign exchange both. Last year, the Japanese yen was valued at $0.01, and the Argentine peso was valued at $.30.Based on this information, the Argentine peso has change by what percent against the Japanese yen over the last year? 7. IPR and Changes in the Forward Rate Assume that interest rate parity exist. As of this morning, the 1-1-month interest rate in Canada was lower than the 1-month interest rate in the United States. Assume that as a result of the Fed’s monetary policy this afternoon, the 1-month interest rate in the United States declined this afternoon, but was still higher than the Canadian 1-month interest rate. The 1-month interest in Canada remained unchanged. Based on the information, the forward rate of the Canadian dollar ex habited a …. [discount or premium] this morning …. [Increased or decreased] this afternoon. Explain.
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