INTERNATIONAL FINANCE
Q&A
QUESTION 1: Explain why a public forecast by a respected economist about future interest
rates could affect the value of the dollar today. Why do some forecasts by well-respected
economists have no impact on today’s value of the dollar?
QUESTION 2: In the 1990s, Russia was attempting to import more goods but had little to offer
other countries in terms of potential exports. In addition, Russia’s inflation rate was high.
Explain the type of pressure that these factors placed on the Russian currency
QUESTION 3: Infrastructure weakness was one of the causes of the emerging market crisis in
Thailand in 1997. Define infrastructure weakness, and explain how it could affect a country’s
exchange rate
QUESTION 4: Assume that there are substantial capital flows among Canada, the U.S., and
Japan. If interest rates in Canada decline to a level below the U.S. interest rate, and inflationary
expectations remain unchanged, how could this affect the value of the Canadian dollar against
the U.S. dollar? How might this decline in Canada’s interest rates possibly affect the value of the
Canadian dollar against the Japanese yen?
QUESTION 5: Duve, Inc. desires to penetrate a foreign market with either a licensing agreement
with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and
return between a licensing agreement with a foreign firm, and the acquisition of a foreign firm.
QUESTION 6: Explain how the theory of comparative advantage relates to the need for
international business
QUESTION 7: Offer your opinion on why the Internet may result in more international business.
QUESTION 8: Define (without graphics) how the optimal domestic portfolio is constructed.
QUESTION 9: The benefits of portfolio construction, domestically or internationally, arise from
the lack of correlation among assets and markets. The increasing globalization of business is
expected to change these correlations over time. How do you believe they will change, and
why?
QUESTION 10: Briefly discuss how did the global financial crisis in 2007-2010 happened and
three of its consequences
QUESTION 11: What were the main causes of Thailand’s crisis of 1997? What lessons were
learned and what steps were eventually taken to normalize Thailand’s economy? (
QUESTION 12: Based on the two situations below, explain the impact towards its exchange rate
for the currency. A) Suppose the government releases information that causes people to expect
that the purchasing power of money in the future will be less than then previously had
expected. What will happen to the exchange rate today? Why?
B) If the actual exchange rate of the euro value of the British pound is less than the exchange
rate that would satisfy absolute PPP. Which of the currencies is overvalued and which is
undervalued? Why?
, INTERNATIONAL FINANCE Q&A
INDIVIDUAL ASSIGNMENT – SEPTEMBER 2020
QUESTION 1: Explain why a public forecast by a respected economist about future interest
rates could affect the value of the dollar today. Why do some forecasts by well-respected
economists have no impact on today’s value of the dollar? (6 marks)
ANSWER: Interest rate rates are a variable in supply and demand. An increase in
demand for money will raise interest rates while a decline in demand for them will decrease.
Alternatively, an increase in supply will decrease interest rates while a decline in supply would
increase them (Heakal, 2019). Furthermore, lot investors tend to invest in an investment with a
higher interest rate because it is believed to be more profitable. For instance, in the future if
the interest rate in Malaysia increase against the interest rate of Brunei, this would make the
investment in Malaysia looks more attractive and therefore increases the demand for
Malaysian currency while at the same time making the demand for Brunei dollars decreases.
Therefore, movement of interest rates has an effect on exchange rates. To forecast the
movement of the exchange rate economists could make use of the movement of interest rate
and because of their assumptions regarding currency movements, they can decide in particular
countries to buy securities because the currency value changes would affect their yield. Such
acquisitions of securities include exchanges of currencies, which may affect the exchange rate
price equilibrium immediately.
Thus, when market participants have already expected a projection of interest rates by a
respected economist or are no different from original shareholders ' predictions, no additional
information is provided in an announced forecast. Therefore, traders would not respond to
such announcement and exchange rates would not be impacted.
Q&A
QUESTION 1: Explain why a public forecast by a respected economist about future interest
rates could affect the value of the dollar today. Why do some forecasts by well-respected
economists have no impact on today’s value of the dollar?
QUESTION 2: In the 1990s, Russia was attempting to import more goods but had little to offer
other countries in terms of potential exports. In addition, Russia’s inflation rate was high.
Explain the type of pressure that these factors placed on the Russian currency
QUESTION 3: Infrastructure weakness was one of the causes of the emerging market crisis in
Thailand in 1997. Define infrastructure weakness, and explain how it could affect a country’s
exchange rate
QUESTION 4: Assume that there are substantial capital flows among Canada, the U.S., and
Japan. If interest rates in Canada decline to a level below the U.S. interest rate, and inflationary
expectations remain unchanged, how could this affect the value of the Canadian dollar against
the U.S. dollar? How might this decline in Canada’s interest rates possibly affect the value of the
Canadian dollar against the Japanese yen?
QUESTION 5: Duve, Inc. desires to penetrate a foreign market with either a licensing agreement
with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and
return between a licensing agreement with a foreign firm, and the acquisition of a foreign firm.
QUESTION 6: Explain how the theory of comparative advantage relates to the need for
international business
QUESTION 7: Offer your opinion on why the Internet may result in more international business.
QUESTION 8: Define (without graphics) how the optimal domestic portfolio is constructed.
QUESTION 9: The benefits of portfolio construction, domestically or internationally, arise from
the lack of correlation among assets and markets. The increasing globalization of business is
expected to change these correlations over time. How do you believe they will change, and
why?
QUESTION 10: Briefly discuss how did the global financial crisis in 2007-2010 happened and
three of its consequences
QUESTION 11: What were the main causes of Thailand’s crisis of 1997? What lessons were
learned and what steps were eventually taken to normalize Thailand’s economy? (
QUESTION 12: Based on the two situations below, explain the impact towards its exchange rate
for the currency. A) Suppose the government releases information that causes people to expect
that the purchasing power of money in the future will be less than then previously had
expected. What will happen to the exchange rate today? Why?
B) If the actual exchange rate of the euro value of the British pound is less than the exchange
rate that would satisfy absolute PPP. Which of the currencies is overvalued and which is
undervalued? Why?
, INTERNATIONAL FINANCE Q&A
INDIVIDUAL ASSIGNMENT – SEPTEMBER 2020
QUESTION 1: Explain why a public forecast by a respected economist about future interest
rates could affect the value of the dollar today. Why do some forecasts by well-respected
economists have no impact on today’s value of the dollar? (6 marks)
ANSWER: Interest rate rates are a variable in supply and demand. An increase in
demand for money will raise interest rates while a decline in demand for them will decrease.
Alternatively, an increase in supply will decrease interest rates while a decline in supply would
increase them (Heakal, 2019). Furthermore, lot investors tend to invest in an investment with a
higher interest rate because it is believed to be more profitable. For instance, in the future if
the interest rate in Malaysia increase against the interest rate of Brunei, this would make the
investment in Malaysia looks more attractive and therefore increases the demand for
Malaysian currency while at the same time making the demand for Brunei dollars decreases.
Therefore, movement of interest rates has an effect on exchange rates. To forecast the
movement of the exchange rate economists could make use of the movement of interest rate
and because of their assumptions regarding currency movements, they can decide in particular
countries to buy securities because the currency value changes would affect their yield. Such
acquisitions of securities include exchanges of currencies, which may affect the exchange rate
price equilibrium immediately.
Thus, when market participants have already expected a projection of interest rates by a
respected economist or are no different from original shareholders ' predictions, no additional
information is provided in an announced forecast. Therefore, traders would not respond to
such announcement and exchange rates would not be impacted.
