International_Finance

International Finance Assignment Name: Jin Ji Class: DipFIN15 Student Number: DipFin1501 Lecturer: Mr. Chong Chin Siong Question 1 The Growth Triangle, in part a marketing scheme, is based on the idea of comparative advantage. The region as an integrated unit is thought to be attractive to investors because Singapore can provide highly developed telecommunications links and management expertise. Batam and Johor can offer abundant land and cheap labour. Together, they can produce the kind of business environment no longer available in Asia's newly industrialized countries. (Far Eastern Economic Review, 3 June 1991:34). In my opinion, the factor of production which is not enjoyed by Singapore is Land. Since 1960, land available in Singapore for agricultural, commercial, industrial, and residential purposes has risen by some 5 percent, an amount that reflects both reclamation and release of state-owned land for development. The industrial land costs in Singapore have been kept increasing for the past twenty years, and these costs are unlikely to come down because Singapore has developed about as much land as is likely to be socially acceptable at present. But in Batam, only 30 minutes away from Singapore's CBD, land costs are about 30 per cent of those in Singapore's suburbs. As to Johor and Riau, I think both of them are lack of skilled labor or “semi-skilled” labor. Compare with Penang, the high-tech infrastructure in Penang is better than that in Johor. Technological capabilities developed in Penang's firms are significantly higher and more varied than in Johor. Penang also enjoyed a statistically significant and higher mean for the supply of skilled labor than Johor. There is a report indicated that the state furniture industry is losing RM65mil a month because there is not enough skilled-labors to meet international demand. Johor Furniture Association vice-president Lim Poh Teot said the industry could not meet increased international demand due to the current regulations pertaining to foreign workers. Question 2 a. Cost = IDR40000 = USD40000×0.000111 = USD4.44 Sale = EUR8 = USD8×0.7950 = USD6.36 Profit = Sale - Cost = USD6.36 – USD4.44 = USD1.92 Rietchland makes profit 1.92 U.S. dollars on each unit of mineral sold. b. Sale = EUR5000 Profit = EUR2000 Cost = Sale – Profit = EUR5000 – EUR2000 = EUR3000 EUR3000 = ZAR22800 EUR1 = ZAR 22800 / 3000 = ZAR7.60 The implied exchange rate is ZAR7.60 per EUR. Question 3 a. Because the UK firm expects to receive HKD in the future, so its fear is HKD weakens. A hedger is involved in two markets: 1. The underlying (cash) market: HKD 2. The derivatives market: Futures The UK firm should: Hedge by Selling HKD futures (short position). If HKD drops, gains in the futures contract offset losses in the HKD receipt. b. Spot rate in 6 months: GBP1 = HKD16.7000 Receipt: HKD20m = HKD20 / 16.7000 = GBP1.1976m Today HKD1 = GBP 0.0620 Future HKD1 = GBP 0.0600 Gain on 1 contract = (0.0620 – 0.0600) ×12.50 = 20 ticks×12.50 = GBP250 Futures gain = GBP250 × (20000000 / 125000) = GBP40000 Net inflow = GBP1.1976m + GBP40000 = GBP1237600 Using the futures hedge, the net GBP inflow in 6 months is GBP1237600. c. Futures gain = GBP40000 Spot loss = HKD20m / 16.000 – HKD20m / 16.7000 = GBP52395.21 Hedge Efficiency Ratio = Futures gain / Spot loss = 40000 / 52395.21 = 0.7634 The hedge efficiency ratio is less than 1 which is not good for the UK firm. The ratio indicates that this is an imperfect hedge, but which is better than no hedge. This may be owing to timing issues or to the use of hedging instruments that are not entirely correlated to the underlying position d. This hedger is involved in two markets: 1. The underlying (cash) market: GBP/HKD spot 2. The derivatives market: GBP/HKD Forward market The UK firm should: Hedge by Selling HKD (Buying GBP) forward. Whether GBP/HKD raise or falls, the GBP payment amount is fixed by the forward contract. Net inflow = HKD20m / 16.3000 = GBP1226993.87 Using the forward hedge, the net inflow in 6 months is GBP1226993.87. e. The UK firm should use the futures hedge. Besides the net inflow from using the futures hedge is more than from the forward hedge (GBP1237600﹥GBP1226994), there are some other reasons to use the futures hedge as below: 1. Futures contracts have low default risk. The futures exchange guarantees all trades. There is no such guarantee in forward contracts. 2. Active markets exist for futures contracts. Forward contracts are not traded. 3. Futures contracts have greater liquidity. Futures contract obligations can be offset by a reverse trade on the exchange. Forward contracts cannot be reversed. 4. Forward contract profits (or losses) are recognized only at maturity. Futures profits (or losses) are recognized daily. References 1. COMPARATIVE ADVANTAGE. (n.d). Retrieved September 5, 2010, from: http://www.unu.edu/unupress/unupbooks/uu11ee/uu11ee1b.htm 2. Accounting for Growth in Singapore: Kenneth, Bercuson., Robert G, Carling. 1995. Singapore: a case study in rapid development. Washington DC: International Monetary Fund. 3. Fu-chen, Lo., Yue-man, Yeung. Emerging world cities in Pacific Asia 4. Chong-Yah, Lim. Southeast Asia: the long road ahead 5. Lack of manpower costing Johor furniture makers RM65mil a month. (n.d). Retrieved September 5, 2010, from: http://thestar.com.my/news/story.asp'sec=nation&file=/2010/6/19/nation/6501960