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Answer for International Finance Assignment 1

1. Blueridge Corp. is multinational enterprise that makes most decisions for its foreign subsidiaries, while Greenwood Corp. allow its foreign subsidiaries to make important decisions. Explain which company faces a higher agency problem?

An agency problem exist within a multinational corporation when the subsidiaries’ interests are not align with interest of their parent company. By allowing its subsidiaries to make important decisions Greenwood Corp faces a higher agency problem that Blueridge Corp., which makes decisions on behalf of their subsidiaries.

2. The U.S. economy currently has an interest rate that is higher than its trading partners. How would this affect the tendency of U.S.-based MNCs to invest abroad?

Since multinational corporations prefer to invest in countries that offers the higher interest rate, when the U.S. interest rate is higher than its trading partners, holding all else constant, U.S.-based MNC will have fewer interest to invest abroad.

3. An American tourist spends $3,500 on a round-trip tour to Paris, France. How would this transaction be recorded in the U.S. balance of payments?

This transaction will be recorded as a debit entry (-$3500) in the current account of the U.S. balance of payment. Travel represents an expenditure on a foreign country’s service, and an outflow of financial flows.

4. Explain how a weaker Australian dollar could affect Australia balance-of-trade surplus.

A weaker Australian dollar would encourage Australian exports and discourages Australians from importing goods and services from abroad. Therefore a weaker Australian dollar is expected to improve Australia’s balance of trade surplus.

5. Northwood Bank’s bid price for the Singapore dollar is $0.7455 and it’s ask price is $.7495. What is the bid/ask percentage spread?

The bid/ask percentage spread equals (0.7495 – 0.7455) / 0.7495 = 0.00534 or 0.534%

6. Assume the Danish’s currency (the krone) is worth $.15 and the Japanese yen is worth $.008. What is the cross rate of the krone with respect to yen? That is, how many yen equal a krone?

The cross rate of the krone with respect to yen equals 0.15/0.008 = 18.75

7. Returning from a trip in Thailand, you have 3000 baht from your trip. You could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $0.03 per baht. Next month, you will be going to Japan and will need yen. The airport foreign desk will sell you yen for $0.01 per yen. You meet a Japanese tourist and he is on his way to Thailand. He is willing to buy your 3000 baht for 10,000 yen. Should you accept his offer, or cash the Baht in at the airport? Explain.

If you exchange baht for yen at the airport, you will first sell 3000 baht for 3000(0.03) = 90 dollars, followed by an exchange of 90 dollars to 90/0.01= 9000 yen. This amount is less than the 10,000 yen offered by the Japanese tourist (10,000 yen). So you should accept his offer of exchanging 3000 baht for 10,000 yen.

8. Assume that the U.S. inflation rate becomes low relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?

When the US inflation rate becomes low relative to the Canadian dollar,

a) The demand for the Canadian dollar should decrease because U.S. customers are less interested in buying Canadian goods

b) The supply for the Canadian dollar should increase because Canadians are more willing to purchase U.S. exports, and offer more Canadian dollar in exchange for the U.S. dollars.

c) The equilibrium value of the Canadian dollar should fall in response to a decrease in demand and an increase in the supply of the Canadian dollar.