Direct Foreign Investment and International Business Assignment

Assignment Task

Question 1

The methods by which firms can conduct international business, and the relationship of each method with direct foreign investment are clearly mentioned and described as follows:

Question 2

• The impact of each international trade factor on imports, exports and current account is discussed as follows:

Question 3

The following are the factors that affect Direct Foreign Investment (DFI). The effect of each factor on DFI is also clearly described below:

Question 4

The exchange rate systems that might be used by a country to determine the value of their currency in relation to the foreign currency are 1) Fixed Exchange Rate Systems, 2) Freely Floating Exchange rate Systems, 3) Managed Float Exchange rate Systems, 4) Pegged Exchange Rate Systems.

Question 5

We disagree with the idea that the strength of a country’s currency is a measure of the level of economic development of a country, because the strength of a country’s currency do not necessarily show the degree/level of economic development of a country. For instance, if Country X's currency is worth more than that of Country Y’s currency, it does not necessarily mean that Country X's economy is stronger than Country Y's economy.

Question 6

Firms are motivated to expand their business internationally due to several reasons. To explain why firms are motivated to expand internationally, it is better to understand the three most important theories. These are 1) theory of comparative advantage, 2) imperfect markets theory, 3) the product cycle theory.

Question 7

Mr. Jackson resides in the United States of America while Mr. Daniel resides in the Great Britain with $300,000 and £200,000, respectively. The current spot rate is as follows: £1=U.S.D 1.50. British banks pay 4% per annum and U.S. banks pay 2% per annum. Assume the one year forward rate is: £1=U.S.D 1.46. Assume further that there is no tax on interest for both countries.

Required:

1.  Is covered interest arbitrage possible in the above scenario? Calculate the gain from covered interest arbitrage, if any yes by using maturity value of the Investment. Therefore, during the one year investment horizon, how much U.S. dollar will Mr. Jackson obtain if he deposits in Great Britain? United States?

Question 8

Assume that the United States inflation rate is expected to be 2% over the next year, while Ethiopian inflation rate is expected to be 7% over the next year. Assume the spot rate is as follows: 1 USD= 21 Birr

Required:

1. Assuming PPP, determine the percentage change in the value of Birr?
2. What is the forecasted value of Birr at the end of one year?

Question 9

CFO of Trident (U.S. firm) has just concluded a sale to Regency, a British firm, for £1,000,000. The sale is made in March for settlement due in June (3 months).

Assumptions:

1. • Spot rate is $1.7640/£
   • 3-month forward rate is $1.7229/£
   • UK 3 month investing rate is 8.0% p.a.
   • US 3 month investing rate is 6.0% p.a.
   • June put option in OTC market for £1,000,000; strike price $1.75/£; priced at $0.0265/£
   • June call option in OTC market for £1,000,000; strike price $1.77/£; priced at $0.0265/£
   • Trident can invest at the rates given above or borrow at 2% p.a. above those rates. Trident’s cost of capital is 12%.
   • Assume any new proceeds are invested in T-bills (not used to replace borrowings nor invested in the firm’s tangible assets)
   • Any new funds can be raised at the borrowing rate. Option premium is also financed using borrowings.
   • Trident’s foreign exchange advisory service forecasts future spot rate in 3 months to be $1.7400/£

Required :

1. Calculate the amount of cash Trident will secure in each of the following hedging strategies:

Question 10

Assume that a bank has quoted the British pound (£) at $1.55, the Newzerland dollar (NZ$) at $ 0.55 and the cross-exchange rate at 1£=NZ$ 3.15.

Required:

1. Determine the correct cross exchange rate

Question11 :- Assume that the Mexican peso exhibits a six month interest rate of 6 percent, while the U.S. dollar exhibits a six month interest rate of 5 percent. Assume further that the peso’s spot rate is $0.10.

Question 12 :- XYZ Company plans to determine how changes in British and U.S. interest rates will affect the value of British pound. The control variables are relative inflation rates and relative income growth.

Required:

1. Describe a regression model that could be used to achieve the stated objective. Also explain the expected sign of the regression coefficient

Question 13

Blue Demon Bank expects that the Chinese currency (the Yuan) will depreciate against the dollar from its spot rate of $0.15 to $0.14 in 30 days. The following

Question 14

Mr. Daniel resides in the United States of America and currently he is contemplating in which country bank to deposit his wealth of $100,000. For this purpose, he is considering three alternative countries-Ethiopia, Great Britain, and U.S.A. The current spot rate is as follows: U.S.D. 1=Br.20 and £1=U.S.D.1.5. Banks in Ethiopia are expected to pay an interest rate of 5% per annum, British banks pay 3% per annum and U.S. banks pay 2% per annum. The inflation rate per annum for Ethiopia, Britain and United States is expected to be 10%, 7% and 6% respectively. Assume interest rates and inflation rates will be constant every year throughout the next five years. Use purchasing power parity (PPP) to forecast exchange rates five years from now. Assume further that there is no tax on interest for all the three countries. Mr. Daniel has a five year investment horizon.

Question 15

Assume the following information:

• Spot rate of Canadian dollar =$0.80
• 90-day forward rate of Canadian dollar =$0.79

Question 16

In forecasting foreign exchange rates, experts may use fundamental forecasting techniques. What is a fundamental forecasting technique? Discuss by using an illustration.

Question 17

Mr. Solomon resides in the United States of America and currently he is contemplating in which country bank to deposit his wealth of $200,000. For this purpose, he is considering two alternative countries-Great Britain and U.S.A. The current spot rate is as follows: £1=U.S.D 1.5. British banks pay 2% per annum and U.S. banks pay 1% per annum. Assume interest rates will be constant every year throughout the next five years. Assume the five year forward rate is: £1=U.S.D 1.45. Assume further that there is no tax on interest for both countries. Mr. Solomon has a five year investment horizon and engages forward contract if he has to invest in Britain.

Question 18

Assume that the United States inflation rate is expected to be 1% over the next year, while Ethiopian inflation rate is expected to be 6% over the next year. Assume the spot rate is as follows: 1 U.S.D= 20 Birr

Question 19

Assume that a bank has quoted the British pound (£) at $1.50, the Newzland dollar (NZ$) at $ 0.50 and the cross exchange rate at 1£=NZ$ 2.95.

Required:

1. Determine the correct cross exchange rate?

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