Case studies of international finance

Résumé du document

This document presents practical cases about international finance (exchange rates and international trade, profits and arbitrage etc.). Extract: "The Purchasing Power Parity is an economic technique that we can use when we want to determine the relative values of two currencies. It is useful because generally the amount of goods that can be bought with a currency varies drastically between different nations, based on availability of goods, demand for the goods, and a number of other, difficult to determine factors. Purchasing Power Parity solves this problem by taking some international measure and determining the cost for that measure in each of the two currencies, then comparing that amount. Perhaps the most famous example of Purchasing Power Parity was given by the Economist Magazine as the Big Mac index. The Big Mac is in fact the most similar product across different countries. That is why this measure became important according to analysts. It is also that Mc Donald's pricing strategy is very well established. Using the Big Mac index, we determine the cost of a Big Mac in a number of countries and can then conclude an exchange rate based on this index."

Extraits

[...] It is really not the preferred method to transfer profits back to the parent company because this money is taxed and it represents a loss for the company. The transfer pricing is indeed the best method to bring back profit from foreign subsidiaries. [...]

[...] The pricing affects the earnings of each part of the company. It however allows certain flexibility and the power to maintain a financial balance in every part of the organization. “This is a major concern for fiscal authorities who worry that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction”. Let's now describe the different methods that multinational firms use to bring back their profits from foreign countries. First they can simply change the profits made in a country in the currency of the parent company. [...]

[...] The price after one year rises to $120/share. No dividends are paid. The spot rate at the beginning of the year is $ 1.30 The spot rate at the end of the year is $ 1.20 Calculate the return to an American investor. (He invests dollars and receives dollars). With the information in above, calculate the return to a French investor who invests €15,000. (He must convert his euro to dollars to buy the shares, and then convert his dollars back into euro at the end of the year.) If the French investor originally invested but he had a one year forward contract to sell $10,000 for $ 1.25 calculate his return after converting all his money back into euro. [...]

[...] Amount to convert = Amount to pay / 04/2) Amount to convert = 1,000,000 / = 980,392€ 980,392€ x 1.10 891,265 If a 6 month put option on the is available with a strike price of 1.05 and a premium of £10,000, calculate the minimum you would receive in if you bought this option. €1,000,000 x 1.05 = If we apply the 6 month put option and exercise it, we will obtain £10,000 x + = £10,100 The minimum we would receive in if we buy this option is Questions and concern Transaction Exposure. Explain the difference between Transaction Exposure and Operating Exposure. Describe the four techniques discussed in class to reduce Operating Exposure. [...]

[...] interest rate: p.a. Calculate the forward premium or discount on the We have 1.10 = 0.90 and 1.05 = 0.95 So Spot rate = 0.90 6 month forward rate = 0.95 The forward premium on the = (forward rate spot rate) / spot rate Forward premium on the = ( 0.95 0.90 ) / 0.90 Forward premium on the = Using the information from above, calculate how much profit you could make from Covered Interest Arbitrage if you begin by borrowing £1,000,000 and investing in the If we borrow £1,000,000 and invest in the we will obtain x 1 million. [...]