This document provides sample answers and solutions to end-of-chapter questions and problems about balance of payments. It discusses key concepts like defining the balance of payments, reasons for examining BOP data, causes of US and Japan's current account balances, how countries can have overall BOP surpluses or deficits, components of official reserve assets, and how various transactions are classified in a country's BOP. It also provides an example of constructing a BOP table for Japan in 2006 and interpreting the data.
Chapter12 International Finance ManagementPiyush Gaur
Sara Lee Corporation issued its first Eurobonds, selling $100 million of three-year bonds with a 6% coupon rate. The bonds were fairly priced and offered a higher yield than US Treasuries. Sara Lee has an excellent credit rating and plans to use the bond proceeds for general corporate purposes. By issuing Eurobonds, Sara Lee can more quickly bring new debt issues to market than through domestic bonds and likely receives a lower borrowing rate. Sara Lee also raises funds in various currencies, matching its international cash flows and reducing exchange rate risk.
Chapter15 International Finance ManagementPiyush Gaur
This document provides suggested answers and solutions to end-of-chapter questions from a textbook on international portfolio investment. It includes:
1) Answers to 12 multiple choice or short answer questions on topics like factors driving international investment, security return correlations across countries, world beta, and the impact of exchange rate fluctuations.
2) Solutions to 7 quantitative problems calculating returns, risks, and optimal portfolio weights for international investments considering exchange rate movements and correlations between different markets.
3) A description of input received from three consultants for a pension fund regarding the risks and rewards of international equity allocation, with two favoring it and one questioning the ability of international investing to reduce risk.
Chapter14 International Finance ManagementPiyush Gaur
An interest rate and currency swap dealer faces several types of risk:
1) Interest rate risk from interest rates changing before unplaced swap positions can be laid off.
2) Basis risk when two counterparties reference different floating rate indices.
3) Exchange rate risk from fluctuating currency rates before unplaced positions are laid off.
4) Credit risk from counterparty default.
5) Mismatch risk from finding an exact offsetting position.
6) Sovereign risk if a country restricts a currency, preventing obligations from being honored.
Chapter16 International Finance ManagementPiyush Gaur
This document provides sample answers to questions about foreign direct investment and cross-border acquisitions. It addresses topics such as motivations for foreign acquisitions of US firms, factors driving Japanese investment in Southeast Asia, reasons for Asian investment in Mexico after NAFTA, and explanations for China becoming a top destination for foreign investment. The document also summarizes several theories of foreign direct investment and discusses political and country risks related to international business.
Chapter20 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems about international trade finance. It discusses key concepts like letters of credit, time drafts, bills of lading, banker's acceptances, and different types of countertrade transactions. The document aims to help students understand the basic documents and processes involved in conducting international trade and different payment options for exporters.
Chapter10 International Finance ManagementPiyush Gaur
This document contains questions and solutions related to accounting for foreign currency translation.
1) It explains the difference between the monetary/nonmonetary method and temporal method of foreign currency translation, which treat monetary and nonmonetary accounts differently.
2) It describes how translation gains and losses are handled differently under the current rate method compared to the other three methods.
3) It provides examples of when a foreign entity's functional currency would be the same as the parent company's currency according to FASB 52.
Chapter6 International Finance ManagementPiyush Gaur
The document contains sample questions and solutions related to international parity relationships and foreign exchange rates. It includes definitions of concepts like arbitrage and purchasing power parity. It also derives relationships such as interest rate parity, purchasing power parity, and the international Fisher effect. Sample problems are provided and solved related to covered interest arbitrage opportunities between currencies.
Chapter21 International Finance ManagementPiyush Gaur
This document contains questions and answers about international taxation and transfer pricing. It discusses key concepts like tax neutrality, different types of taxes like income tax and VAT, how double taxation can occur if all countries tax worldwide income, and methods used to mitigate double taxation like foreign tax credits. It also covers how the organizational structure of a foreign affiliate as a branch or subsidiary can impact tax liability. Finally, it summarizes how multinational companies may use transfer pricing strategies and ways to potentially repatriate blocked funds from a host country.
Chapter12 International Finance ManagementPiyush Gaur
Sara Lee Corporation issued its first Eurobonds, selling $100 million of three-year bonds with a 6% coupon rate. The bonds were fairly priced and offered a higher yield than US Treasuries. Sara Lee has an excellent credit rating and plans to use the bond proceeds for general corporate purposes. By issuing Eurobonds, Sara Lee can more quickly bring new debt issues to market than through domestic bonds and likely receives a lower borrowing rate. Sara Lee also raises funds in various currencies, matching its international cash flows and reducing exchange rate risk.
Chapter15 International Finance ManagementPiyush Gaur
This document provides suggested answers and solutions to end-of-chapter questions from a textbook on international portfolio investment. It includes:
1) Answers to 12 multiple choice or short answer questions on topics like factors driving international investment, security return correlations across countries, world beta, and the impact of exchange rate fluctuations.
2) Solutions to 7 quantitative problems calculating returns, risks, and optimal portfolio weights for international investments considering exchange rate movements and correlations between different markets.
3) A description of input received from three consultants for a pension fund regarding the risks and rewards of international equity allocation, with two favoring it and one questioning the ability of international investing to reduce risk.
Chapter14 International Finance ManagementPiyush Gaur
An interest rate and currency swap dealer faces several types of risk:
1) Interest rate risk from interest rates changing before unplaced swap positions can be laid off.
2) Basis risk when two counterparties reference different floating rate indices.
3) Exchange rate risk from fluctuating currency rates before unplaced positions are laid off.
4) Credit risk from counterparty default.
5) Mismatch risk from finding an exact offsetting position.
6) Sovereign risk if a country restricts a currency, preventing obligations from being honored.
Chapter16 International Finance ManagementPiyush Gaur
This document provides sample answers to questions about foreign direct investment and cross-border acquisitions. It addresses topics such as motivations for foreign acquisitions of US firms, factors driving Japanese investment in Southeast Asia, reasons for Asian investment in Mexico after NAFTA, and explanations for China becoming a top destination for foreign investment. The document also summarizes several theories of foreign direct investment and discusses political and country risks related to international business.
Chapter20 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems about international trade finance. It discusses key concepts like letters of credit, time drafts, bills of lading, banker's acceptances, and different types of countertrade transactions. The document aims to help students understand the basic documents and processes involved in conducting international trade and different payment options for exporters.
Chapter10 International Finance ManagementPiyush Gaur
This document contains questions and solutions related to accounting for foreign currency translation.
1) It explains the difference between the monetary/nonmonetary method and temporal method of foreign currency translation, which treat monetary and nonmonetary accounts differently.
2) It describes how translation gains and losses are handled differently under the current rate method compared to the other three methods.
3) It provides examples of when a foreign entity's functional currency would be the same as the parent company's currency according to FASB 52.
Chapter6 International Finance ManagementPiyush Gaur
The document contains sample questions and solutions related to international parity relationships and foreign exchange rates. It includes definitions of concepts like arbitrage and purchasing power parity. It also derives relationships such as interest rate parity, purchasing power parity, and the international Fisher effect. Sample problems are provided and solved related to covered interest arbitrage opportunities between currencies.
Chapter21 International Finance ManagementPiyush Gaur
This document contains questions and answers about international taxation and transfer pricing. It discusses key concepts like tax neutrality, different types of taxes like income tax and VAT, how double taxation can occur if all countries tax worldwide income, and methods used to mitigate double taxation like foreign tax credits. It also covers how the organizational structure of a foreign affiliate as a branch or subsidiary can impact tax liability. Finally, it summarizes how multinational companies may use transfer pricing strategies and ways to potentially repatriate blocked funds from a host country.
Chapter7 International Finance ManagementPiyush Gaur
George Johnson is considering a $100 million floating rate bank loan tied to LIBOR. He is concerned about LIBOR rising and wants to hedge this risk using December Eurodollar futures contracts. The contracts expire on December 20, 1999, have a $1 million contract size and 7.3% discount yield. Johnson will ignore cash flow implications of marking to market, initial margins, and timing differences between futures and interest payments.
Chapter8 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems from a chapter about managing transaction exposure. It defines transaction exposure and differentiates it from economic exposure. It discusses and compares hedging transaction exposure using forward contracts versus money market instruments. It also compares the costs of hedging with forward contracts versus options contracts. Additional questions and problems cover topics like currency options, cross-hedging, and the effects of hedging on tax obligations.
Chapter18 International Finance ManagementPiyush Gaur
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Chapter5 International Finance ManagementPiyush Gaur
The document provides answers and solutions to questions about the foreign exchange market. It defines the market as encompassing the conversion of currencies and trading of currency options and futures. It describes the retail and interbank markets, with retail transactions making up 14% of trades. Major participants are international banks, their customers, non-bank dealers, brokers, and central banks. Interbank trades are settled through correspondent bank accounts. A currency trading at a premium in the forward market has a higher forward price than spot price. Most trading involves the US dollar due to its international use. Banks can eliminate currency exposure from client forward trades through swap transactions. Triangular arbitrage exploits price differences between currency pairs.
Chapter9 International Finance ManagementPiyush Gaur
This document provides solutions to questions and problems related to managing economic exposure from a chapter on the topic. [1] It defines economic exposure as the possibility that a firm's cash flows and market value may be affected by unexpected exchange rate changes. [2] It explains different types of exposure a firm may face, ways to measure exposure, and strategies to mitigate exposure through hedging or operational changes. [3] The solutions analyze several examples of firms facing exchange rate risk and recommend approaches to reduce their exposure like hedging with forward contracts or diversifying markets.
Chapter19 International Finance ManagementPiyush Gaur
The document provides solutions to end-of-chapter questions and problems related to multinational cash management. It discusses key factors for effective cash management within firms and why it is more difficult for multinational corporations. It also examines the pros and cons of centralized versus decentralized cash management systems. Sample problems calculate standard deviations of cash portfolios and demonstrate how a multinational company can reduce foreign exchange transactions and costs through netting interaffiliate cash flows.
This document discusses how multinational corporations can manage economic and translation exposure through hedging strategies. It explains that economic exposure refers to how exchange rate fluctuations can impact future cash flows. MNCs can assess economic exposure and reduce it by restructuring operations to balance exchange rate sensitive cash flows. Translation exposure results from translating foreign subsidiary financials to the home currency, but does not directly impact cash flows. MNCs can hedge translation exposure using forward contracts to offset gains or losses from currency fluctuations. However, hedging translation exposure has limitations from inaccurate forecasts and accounting distortions.
Country X has a comparative advantage in food production while Country Y has a comparative advantage in textile production. If Country X shifts resources to focus on food and Country Y shifts to focus on textiles, total production will increase for both goods. Through free trade where Country X exports food for Country Y's textiles, both countries can increase their consumption beyond what is possible through domestic production alone.
Chapter17 International Finance ManagementPiyush Gaur
The document provides solutions to end-of-chapter questions and problems related to international capital structure and the cost of capital. It discusses how cross-listing a firm's stock on foreign exchanges can decrease its cost of capital by pricing the stock based on international risk rather than local risk. It also describes how pricing of local stocks can be affected through a "pricing spill-over effect" and how firms benefit from lower costs even if their securities remain untradable. Sample problems demonstrate calculating domestic and world betas and how a firm's cost of capital decreases when its shares become internationally tradable.
- Globalization has led to increased international trade and investment as well as the rise of multi-national corporations operating facilities in multiple countries.
- When transacting internationally, currencies must be exchanged and exchange rates fluctuate daily based on supply and demand in global currency markets. Exchange rate movements can impact the profitability of international businesses.
- Governments sometimes intervene in currency markets to influence exchange rates but ability to influence rates is limited by foreign exchange reserves. The international monetary system has evolved from fixed to floating exchange rates.
Chapter4 International Finance ManagementPiyush Gaur
This document contains a chapter on corporate governance around the world with suggested answers to end-of-chapter questions. It discusses key topics like the strengths and weaknesses of public corporations, conditions that give rise to agency problems, objectives of corporate governance reform, and differences in legal protections between common and civil law traditions. The questions address issues such as stock options, foreign listings in the US, free cash flows, and the Parmalat corporate scandal in Italy.
Chapter2 International Finance ManagementPiyush Gaur
1. The document provides answers and explanations to questions about international monetary systems, including Gresham's Law, the gold standard, the Bretton Woods system, and exchange rate regimes.
2. It also answers questions about the European Monetary System, special drawing rights, criteria for a good international monetary system, and the prospects of the euro becoming a global reserve currency.
3. The final part presents a mini case about the potential for the United Kingdom to adopt the euro.
The money multiplier is 1/required reserve ratio = 1/0.25 = 4
A $1,000 decrease in excess reserves by the Fed would cause a $4,000 decrease in the money supply based on the money multiplier formula. The answer is c.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
The document discusses key components of the balance of payments including the current account, capital account, and financial account. It explains factors that influence international flows of funds such as economic conditions, government restrictions, exchange rates, and inflation rates in countries. It also summarizes several international organizations that facilitate global trade and financial flows, such as the IMF, World Bank, WTO, and regional development agencies.
Locational, triangular, and covered interest arbitrage help ensure efficiency in foreign exchange markets. Locational arbitrage exploits price differences between banks. Triangular arbitrage exploits deviations from cross rates. Covered interest arbitrage exploits interest rate differences between countries and hedges against exchange rate risk. These forms of arbitrage eliminate pricing inefficiencies and bring markets to equilibrium.
IMPORTANCE OF HEDGING IN PROJECT FINANCE TRANSACTIONSStrachanPartners
Hedging is a risk management strategy used to alleviate losses from fluctuations in commodity prices, currencies, or securities. It transfers risk to a hedge counterparty similar to an insurance policy. Hedging is relevant for project finance transactions because of the large investments needed for infrastructure projects in developing countries, which face risks from exchange rate fluctuations, limited government control, and political risks like expropriation. Common hedging methods for project finance include natural hedges, currency swaps, futures contracts, and non-renewal insurance. While hedging provides benefits, it can also be very expensive and difficult to obtain, especially for political risks.
The document discusses factors that influence currency exchange rates, including inflation rates, interest rates, balance of trade, government debt, economic conditions, and demand. A country's currency will appreciate if it has lower inflation or raises interest rates. Higher government debt or a recession can lead to currency depreciation. Exchange rates also depend on demand from foreign investors and international economic and political uncertainties. Models for predicting exchange rates incorporate factors like spot rates, forward rates, and demand and supply trends.
A currency swap involves the exchange of principal and interest payments in one currency for the same in another currency at fixed intervals over the contract period. In a currency swap, counterparties can choose to exchange principal at the start and end of the swap or just exchange interest payments. An interest rate swap is an agreement where one party pays a fixed interest rate on a loan while receiving a floating rate, or vice versa, from the other party in order to reduce exposure to interest rate fluctuations. Common types of interest rate swaps include fixed to floating, floating to fixed, and float to float (basis) swaps. Swaps allow parties to achieve their desired interest rate exposure and are customized over-the-counter agreements.
The document discusses India's balance of payments position in 2013. It provides definitions and explanations of key terms like balance of payments, current account, and capital account.
India had a current account deficit of $88.16 billion in 2013, which was 4.2% of GDP. The trade deficit was $195.66 billion due to higher imports, especially of oil. Software exports and private transfers helped offset this deficit. Foreign direct investment and portfolio investment contributed to the capital account surplus of $88.16 billion, balancing out the current account deficit. However, more policy measures were needed to attract long term funds and improve the external accounts position.
The document summarizes the key aspects of a country's balance of payments (BOP), including:
1) The BOP records all economic transactions between a country's residents and the rest of the world in a given period, usually one year. It has both a current account and a capital/financial account.
2) A BOP deficit can put pressure on a country's exchange rate and signals the need for corrective measures.
3) Measures to correct a deficit include reducing imports through monetary steps like devaluation or non-monetary steps like tariffs and quotas.
Chapter7 International Finance ManagementPiyush Gaur
George Johnson is considering a $100 million floating rate bank loan tied to LIBOR. He is concerned about LIBOR rising and wants to hedge this risk using December Eurodollar futures contracts. The contracts expire on December 20, 1999, have a $1 million contract size and 7.3% discount yield. Johnson will ignore cash flow implications of marking to market, initial margins, and timing differences between futures and interest payments.
Chapter8 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems from a chapter about managing transaction exposure. It defines transaction exposure and differentiates it from economic exposure. It discusses and compares hedging transaction exposure using forward contracts versus money market instruments. It also compares the costs of hedging with forward contracts versus options contracts. Additional questions and problems cover topics like currency options, cross-hedging, and the effects of hedging on tax obligations.
Chapter18 International Finance ManagementPiyush Gaur
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Chapter5 International Finance ManagementPiyush Gaur
The document provides answers and solutions to questions about the foreign exchange market. It defines the market as encompassing the conversion of currencies and trading of currency options and futures. It describes the retail and interbank markets, with retail transactions making up 14% of trades. Major participants are international banks, their customers, non-bank dealers, brokers, and central banks. Interbank trades are settled through correspondent bank accounts. A currency trading at a premium in the forward market has a higher forward price than spot price. Most trading involves the US dollar due to its international use. Banks can eliminate currency exposure from client forward trades through swap transactions. Triangular arbitrage exploits price differences between currency pairs.
Chapter9 International Finance ManagementPiyush Gaur
This document provides solutions to questions and problems related to managing economic exposure from a chapter on the topic. [1] It defines economic exposure as the possibility that a firm's cash flows and market value may be affected by unexpected exchange rate changes. [2] It explains different types of exposure a firm may face, ways to measure exposure, and strategies to mitigate exposure through hedging or operational changes. [3] The solutions analyze several examples of firms facing exchange rate risk and recommend approaches to reduce their exposure like hedging with forward contracts or diversifying markets.
Chapter19 International Finance ManagementPiyush Gaur
The document provides solutions to end-of-chapter questions and problems related to multinational cash management. It discusses key factors for effective cash management within firms and why it is more difficult for multinational corporations. It also examines the pros and cons of centralized versus decentralized cash management systems. Sample problems calculate standard deviations of cash portfolios and demonstrate how a multinational company can reduce foreign exchange transactions and costs through netting interaffiliate cash flows.
This document discusses how multinational corporations can manage economic and translation exposure through hedging strategies. It explains that economic exposure refers to how exchange rate fluctuations can impact future cash flows. MNCs can assess economic exposure and reduce it by restructuring operations to balance exchange rate sensitive cash flows. Translation exposure results from translating foreign subsidiary financials to the home currency, but does not directly impact cash flows. MNCs can hedge translation exposure using forward contracts to offset gains or losses from currency fluctuations. However, hedging translation exposure has limitations from inaccurate forecasts and accounting distortions.
Country X has a comparative advantage in food production while Country Y has a comparative advantage in textile production. If Country X shifts resources to focus on food and Country Y shifts to focus on textiles, total production will increase for both goods. Through free trade where Country X exports food for Country Y's textiles, both countries can increase their consumption beyond what is possible through domestic production alone.
Chapter17 International Finance ManagementPiyush Gaur
The document provides solutions to end-of-chapter questions and problems related to international capital structure and the cost of capital. It discusses how cross-listing a firm's stock on foreign exchanges can decrease its cost of capital by pricing the stock based on international risk rather than local risk. It also describes how pricing of local stocks can be affected through a "pricing spill-over effect" and how firms benefit from lower costs even if their securities remain untradable. Sample problems demonstrate calculating domestic and world betas and how a firm's cost of capital decreases when its shares become internationally tradable.
- Globalization has led to increased international trade and investment as well as the rise of multi-national corporations operating facilities in multiple countries.
- When transacting internationally, currencies must be exchanged and exchange rates fluctuate daily based on supply and demand in global currency markets. Exchange rate movements can impact the profitability of international businesses.
- Governments sometimes intervene in currency markets to influence exchange rates but ability to influence rates is limited by foreign exchange reserves. The international monetary system has evolved from fixed to floating exchange rates.
Chapter4 International Finance ManagementPiyush Gaur
This document contains a chapter on corporate governance around the world with suggested answers to end-of-chapter questions. It discusses key topics like the strengths and weaknesses of public corporations, conditions that give rise to agency problems, objectives of corporate governance reform, and differences in legal protections between common and civil law traditions. The questions address issues such as stock options, foreign listings in the US, free cash flows, and the Parmalat corporate scandal in Italy.
Chapter2 International Finance ManagementPiyush Gaur
1. The document provides answers and explanations to questions about international monetary systems, including Gresham's Law, the gold standard, the Bretton Woods system, and exchange rate regimes.
2. It also answers questions about the European Monetary System, special drawing rights, criteria for a good international monetary system, and the prospects of the euro becoming a global reserve currency.
3. The final part presents a mini case about the potential for the United Kingdom to adopt the euro.
The money multiplier is 1/required reserve ratio = 1/0.25 = 4
A $1,000 decrease in excess reserves by the Fed would cause a $4,000 decrease in the money supply based on the money multiplier formula. The answer is c.
Factor Affecting exchange rate and Theories of exchange rate Jatin Goyal
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
The document discusses key components of the balance of payments including the current account, capital account, and financial account. It explains factors that influence international flows of funds such as economic conditions, government restrictions, exchange rates, and inflation rates in countries. It also summarizes several international organizations that facilitate global trade and financial flows, such as the IMF, World Bank, WTO, and regional development agencies.
Locational, triangular, and covered interest arbitrage help ensure efficiency in foreign exchange markets. Locational arbitrage exploits price differences between banks. Triangular arbitrage exploits deviations from cross rates. Covered interest arbitrage exploits interest rate differences between countries and hedges against exchange rate risk. These forms of arbitrage eliminate pricing inefficiencies and bring markets to equilibrium.
IMPORTANCE OF HEDGING IN PROJECT FINANCE TRANSACTIONSStrachanPartners
Hedging is a risk management strategy used to alleviate losses from fluctuations in commodity prices, currencies, or securities. It transfers risk to a hedge counterparty similar to an insurance policy. Hedging is relevant for project finance transactions because of the large investments needed for infrastructure projects in developing countries, which face risks from exchange rate fluctuations, limited government control, and political risks like expropriation. Common hedging methods for project finance include natural hedges, currency swaps, futures contracts, and non-renewal insurance. While hedging provides benefits, it can also be very expensive and difficult to obtain, especially for political risks.
The document discusses factors that influence currency exchange rates, including inflation rates, interest rates, balance of trade, government debt, economic conditions, and demand. A country's currency will appreciate if it has lower inflation or raises interest rates. Higher government debt or a recession can lead to currency depreciation. Exchange rates also depend on demand from foreign investors and international economic and political uncertainties. Models for predicting exchange rates incorporate factors like spot rates, forward rates, and demand and supply trends.
A currency swap involves the exchange of principal and interest payments in one currency for the same in another currency at fixed intervals over the contract period. In a currency swap, counterparties can choose to exchange principal at the start and end of the swap or just exchange interest payments. An interest rate swap is an agreement where one party pays a fixed interest rate on a loan while receiving a floating rate, or vice versa, from the other party in order to reduce exposure to interest rate fluctuations. Common types of interest rate swaps include fixed to floating, floating to fixed, and float to float (basis) swaps. Swaps allow parties to achieve their desired interest rate exposure and are customized over-the-counter agreements.
The document discusses India's balance of payments position in 2013. It provides definitions and explanations of key terms like balance of payments, current account, and capital account.
India had a current account deficit of $88.16 billion in 2013, which was 4.2% of GDP. The trade deficit was $195.66 billion due to higher imports, especially of oil. Software exports and private transfers helped offset this deficit. Foreign direct investment and portfolio investment contributed to the capital account surplus of $88.16 billion, balancing out the current account deficit. However, more policy measures were needed to attract long term funds and improve the external accounts position.
The document summarizes the key aspects of a country's balance of payments (BOP), including:
1) The BOP records all economic transactions between a country's residents and the rest of the world in a given period, usually one year. It has both a current account and a capital/financial account.
2) A BOP deficit can put pressure on a country's exchange rate and signals the need for corrective measures.
3) Measures to correct a deficit include reducing imports through monetary steps like devaluation or non-monetary steps like tariffs and quotas.
BALANCE OF PAYMENTInternational flow of goods & services & coping with curren...Hilal Ahmad
The document discusses balance of payments categories and the international flow of goods, services, and capital. It describes how the current account, capital account, and official reserves account relate through double-entry bookkeeping. It also explains the linkages between domestic savings and investment, and the current and capital accounts. The document considers possible solutions for coping with a current account deficit, finding that currency depreciation and protectionism are generally ineffective, while stimulating national saving may help address imbalances.
This document discusses key concepts related to a country's balance of payments (BoP). It defines the BoP and explains that it is a statistical record of a country's international transactions over a period of time. It outlines the main categories in the BoP - the current account, capital account, and official reserve account. It also summarizes common BoP problems countries may face, such as deficits, and the policy options available to address them, including adjusting spending levels versus switching spending between domestic and foreign goods.
India's balance of payments for the year ending March 2013 showed a current account deficit of $88.16 billion, or 4.2% of GDP. The trade deficit was $195.66 billion due to higher merchandise imports of $502.34 billion compared to exports of $306.58 billion. However, net invisibles earnings of $107.49 billion, including software exports of $64.92 billion and private transfers of $42.89 billion, partially offset the trade deficit. The average trade deficit was running at $16.31 billion per month. Exports of manufactured and engineering goods, which made up only 41% of total exports, need to increase by 15-20% annually to reduce the current
The document provides an overview of balance of payments accounts, including:
- The balance of payments records a country's international transactions and is presented as double-entry bookkeeping. It includes the current account, capital account, and official reserve account.
- The current account records trade in goods, services, investment income, and transfers. A deficit means imports exceed exports.
- The capital account records cross-border investment and flows of assets. It includes foreign direct investment, portfolio investment, and other investments.
- Together, the accounts must net to zero to balance according to the balance of payments identity. Surpluses and deficits impact currency valuation and the economy.
This document provides information about an online course and final exam for ACCT 504. It includes details on assignments and case studies for each week of the course, as well as three different practice final exams with multiple choice questions testing concepts related to financial accounting, reporting, analysis, and more. The document provides high-level overviews and essential details about the course content and structure as well as samples of the type of questions included on the final exam.
The document discusses balance of payments (BOP), which measures international economic transactions between residents of a country and foreign residents. It has three main parts: the current account, capital account, and reserves. BOP disequilibrium can occur for various reasons, and countries use methods like devaluation, tariffs, import quotas, and export duties to correct disequilibriums. Equilibrium is achieved when surpluses or deficits are eliminated from the BOP.
The document summarizes key concepts related to a country's balance of payments. It discusses the current account balance and capital/financial account. For the US in 2006, it showed a current account deficit of $811.5 billion due to a large trade deficit, though this was offset by a capital/financial account surplus of $811.5 billion from foreign investment in the US. Maintaining a current account deficit is not necessarily problematic if funds are used for investment rather than consumption. Global savings and interest rates also impact current account balances.
This document discusses India's balance of payments. It begins by defining the balance of payments as a systematic record of all economic transactions between residents of a country and the rest of the world. It then explains the importance of the balance of payments for understanding currency demand and supply, exchange rates, and monetary policy shifts. The document outlines the key components of a balance of payments statement, including the current account, capital account, and errors and omissions. It also discusses accounting treatments for balance of payments surpluses and deficits and the effects of disequilibriums on the economy. In less than 3 sentences.
This document provides an overview of balance of payments accounting. It discusses the key components of a country's balance of payments including the current account, capital account, financial account, and official reserves account. It also summarizes trends in the balance of payments of major countries like the US, Japan, UK, Germany, and China. The US generally runs a current account deficit while China typically has a current account surplus.
The document provides an overview of a country's balance of payments (BOP). It discusses the key components of the BOP including the current account, capital account, and reserve account. The current account records trade flows and investment income, while the capital account records flows of financial capital. Together these must net to zero according to the BOP identity. A country's BOP data can provide insights into competitiveness and capital flows over time. Monetary and fiscal policies can impact BOP components and exchange rates through their effects on growth, inflation, and interest rates.
The document discusses the balance of payments (BOP) of a country. It defines BOP as a systematic record of all economic transactions between residents of a country and the rest of the world over a given period of time. The BOP has two components - the current account, which records trade in goods and services as well as income and transfers, and the capital account, which covers financial transactions such as investments. A disequilibrium in the BOP can result in a surplus or deficit. The government can employ various monetary and non-monetary measures to correct a BOP disequilibrium, such as depreciating the currency, increasing exports, reducing imports, and implementing fiscal policies.
The document discusses the components of a country's balance of payments (BOP), which is a statistical record of its international transactions. It is presented as a double-entry bookkeeping statement with receipts and payments over a time period. The major components are the current account (exports, imports, services, income), capital account (investments, loans), and official reserve account (gold, foreign currency, SDRs). The current account balance is in surplus if receipts exceed payments and in deficit if payments exceed receipts. The capital account similarly shows a surplus if capital inflows exceed outflows. Overall BOP surplus or deficit depends on the combined balance of the current and capital accounts.
This document contains a 10 question multiple choice exam on accounting topics such as intangible assets, liabilities, stockholders' equity, and earnings per share. The exam includes questions that require calculations and journal entries. It provides an accounting assessment on various concepts tested in ACCT 551.
The document summarizes the significance of a country's balance of payments (BOP). It discusses how the BOP:
1) Provides detailed information about the supply and demand of a country's currency through trade statistics in the current account and capital flows.
2) Helps evaluate a country's economic performance in international trade.
3) Identifies appropriate trading partners and provides economic information about countries.
The BOP is recorded using double-entry bookkeeping and composed of current, capital, and official reserve accounts. It impacts currency values, with current account deficits putting downward pressure and capital account surpluses creating upward pressure, and can result in BOP crises. Examples are provided.
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Chapter3International Finance Management
1. CHAPTER 3 BALANCE OF PAYMENTS
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1. Define the balance of payments.
Answer: The balance of payments (BOP) can be defined as the statistical record of a country’s
international transactions over a certain period of time presented in the form of double-entry
bookkeeping.
2. Why would it be useful to examine a country’s balance of payments data?
Answer: It would be useful to examine a country’s BOP for at least two reasons. First, BOP provides
detailed information about the supply and demand of the country’s currency. Second, BOP data can be
used to evaluate the performance of the country in international economic competition. For example, if a
country is experiencing perennial BOP deficits, it may signal that the country’s industries lack
competitiveness.
3. The United States has experienced continuous current account deficits since the early 1980s. What do
you think are the main causes for the deficits? What would be the consequences of continuous U.S.
current account deficits?
Answer: The current account deficits of U.S. may have reflected a few reasons such as (I) a historically
high real interest rate in the U.S., which is due to ballooning federal budget deficits, that kept the dollar
strong, and (ii) weak competitiveness of the U.S. industries.
4. In contrast to the U.S., Japan has realized continuous current account surpluses. What could be the
main causes for these surpluses? Is it desirable to have continuous current account surpluses?
2. Answer: Japan’s continuous current account surpluses may have reflected a weak yen and high
competitiveness of Japanese industries. Massive capital exports by Japan prevented yen from appreciating
more than it did. At the same time, foreigners’ exports to Japan were hampered by closed nature of
Japanese markets. Continuous current account surpluses disrupt free trade by promoting protectionist
sentiment in the deficit country. It is not desirable especially when it is brought about by the mercantilist
policies.
5. Comment on the following statement: “Since the U.S. imports more than it exports, it is necessary for
the U.S. to import capital from foreign countries to finance its current account deficits.”
Answer: The statement presupposes that the U.S. current account deficit causes its capital account
surplus. In reality, the causality may be running in the opposite direction: U.S. capital account surplus
may cause the country’s current account deficit. Suppose foreigners find the U.S. a great place to invest
and send their capital to the U.S., resulting in U.S. capital account surplus. This capital inflow will
strengthen the dollar, hurting the U.S. export and encouraging imports from foreign countries, causing
current account deficits.
6. Explain how a country can run an overall balance of payments deficit or surplus.
Answer: A country can run an overall BOP deficit or surplus by engaging in the official reserve
transactions. For example, an overall BOP deficit can be supported by drawing down the central bank’s
reserve holdings. Likewise, an overall BOP surplus can be absorbed by adding to the central bank’s
reserve holdings.
7. Explain official reserve assets and its major components.
Answer: Official reserve assets are those financial assets that can be used as international means of
payments. Currently, official reserve assets comprise: (I) gold, (ii) foreign exchanges, (iii) special
drawing rights (SDRs), and (iv) reserve positions with the IMF. Foreign exchanges are by far the most
important official reserves.
3. 8. Explain how to compute the overall balance and discuss its significance.
Answer: The overall BOP is determined by computing the cumulative balance of payments including the
current account, capital account, and the statistical discrepancies. The overall BOP is significant because
it indicates a country’s international payment gap that must be financed by the government’s official
reserve transactions.
9. Since the early 1980s, foreign portfolio investors have purchased a significant portion of U.S. treasury
bond issues. Discuss the short-term and long-term effects of foreigners’ portfolio investment on the U.S.
balance of payments.
Answer: As foreigners purchase U.S. Treasury bonds, U.S. BOP will improve in the short run. But in the long
run, U.S. BOP may deteriorate because the U.S. should pay interests and principals to foreigners. If foreign funds
are used productively and contributes to the competitiveness of U.S. industries, however, U.S. BOP may improve
in the long run.
10. Describe the balance of payments identity and discuss its implications under the fixed and flexible
exchange rate regimes.
Answer: The balance of payments identity holds that the combined balance on the current and capital
accounts should be equal in size, but opposite in sign, to the change in the official reserves: BCA + BKA
= -BRA. Under the pure flexible exchange rate regime, central banks do not engage in official reserve
transactions. Thus, the overall balance must balance, i.e., BCA = -BKA. Under the fixed exchange rate
regime, however, a country can have an overall BOP surplus or deficit as the central bank will
accommodate it via official reserve transactions.
11. Exhibit 3.5 indicates that in 1999, Germany had a current account deficit and at the same time a
capital account deficit. Explain how this can happen?
Answer: In 1999, Germany experienced an overall BOP deficit, which must have been accommodated by
the central bank, e.g., drawing down its reserve holdings.
4. 12. Explain how each of the following transactions will be classified and recorded in the debit and credit
of the U.S. balance of payments:
(1) A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept
in New York City.
(2) A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card.
(3) A Indian immigrant living in Los Angeles sends a check drawn on his L.A. bank account as a gift to
his parents living in Bombay.
(4) A U.S. computer programmer is hired by a British company for consulting and gets paid from the U.S.
bank account maintained by the British company.
Answer:
_________________________________________________________________
Transactions Credit Debit
_________________________________________________________________
Japanese purchase of U.S. T bonds
Japanese payment using NYC account
U.S. citizen having a meal in Paris
Paying the meal with American Express
Gift to parents in Bombay
Receipts of the check by parents (goodwill)
Export of programming service
British payment out its account in U.S.
_________________________________________________________________
13. Construct the balance of payment table for Japan for the year of 2006 which is comparable in format
to Exhibit 3.1, and interpret the numerical data. You may consult International Financial Statistics
published by IMF or research for useful websites for the data yourself.
5. Answer:
A summary of the Japanese Balance of Payments for 2006 (in $ billion)
Credits Debits
Current Account
(1) Exports 898.91
(1.1) Merchandise 615.81
(1.2) Services 117.30
(1.3) Factor income 165.80
(2) Imports -717.72
(2.1) Merchandise -534.51
(2.2) Services -135.56
(3.3) Factor income -47.65
(3) Unilateral transfer 6.18 -16.87
Balance on current account 170.52
[(1) + (2) + (3)]
Capital Account
(4) Direct investment -6.78 -50.17
(5) Portfolio investment 198.56 -71.04
(5.1) Equity securities 71.44 -25.04
(5.2) Debt securities 127.12 -46.00
(6) Other investment -86.67 -91.00
Balance on financial account -107.10
[(4) + (5) + (6)]
(7) Statistical discrepancies -31.44
Overall balance 31.98
Official Reserve Account -31.98
Source: IMF, International Financial Statistics Yearbook, 2008.
6. Note: Capital account in the above table corresponds with the ‘Financial account’ in IMF’s balance of
payment statistics. IMF’s ‘Capital account’ balance is included in ‘Other investment’ in the above table.
Investments in financial derivative assets are also included in other investment. It is noted that Japan
experienced ‘divestment’ by foreigners in both direct investment and other investment categories in 2006.
PROBLEMS
1. 2000 U.S. Balance of Payments
Solution:
Merchandise -1224.43
Balance on current account -444.69
Balance on capital account 444.26
Statistical discrepancies .73
7. MINI CASE: MEXICO’S BALANCE OF PAYMENTS PROBLEM
Recently, Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings and a
major currency devaluation in December 1994, followed by the decision to freely float the peso. These
events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation,
however, the trade balance has improved.
Investigate the Mexican experiences in detail and write a report on the subject. In the report, you
may:
(a) document the trend in Mexico’s key economic indicators, such as the balance of payments, the
exchange rate, and foreign reserve holdings, during the period 1994.1 through 1995.12.;
(b) investigate the causes of Mexico’s balance of payments difficulties prior to the peso devaluation;
(c) discuss what policy actions might have prevented or mitigated the balance of payments problem and
the subsequent collapse of the peso; and
(d) derive lessons from the Mexican experience that may be useful for other developing countries.
In your report, you may identify and address any other relevant issues concerning Mexico’s balance of
payment problem. International Financial Statistics published by IMF provides basic macroeconomic
data on Mexico.
8. Suggested Solution to Mexico’s Balance-of-Payments Problem
To solve this case, it is useful to review Chapter 2, especially the section on the Mexican peso crisis.
Despite the fact that Mexico had experienced continuous trade deficits until December 1994, the
country’s currency was not allowed to depreciate for political reasons. The Mexican government did not
want the peso devaluation before the Presidential election held in 1994. If the Mexican peso had been
allowed to gradually depreciate against the major currencies, the peso crisis could have been prevented.
The key lessons that can be derived from the peso crisis are: First, Mexico depended too much on
short-term foreign portfolio capital (which is easily reversible) for its economic growth. The country
perhaps should have saved more domestically and depended more on long-term foreign capital. This can
be a valuable lesson for many developing countries. Second, the lack of reliable economic information
was another contributing factor to the peso crisis. The Salinas administration was reluctant to fully
disclose the true state of the Mexican economy. If investors had known that Mexico was experiencing
serious trade deficits and rapid depletion of foreign exchange reserves, the peso might have been
gradually depreciating, rather than suddenly collapsed as it did. The transparent disclosure of economic
data can help prevent the peso-type crisis. Third, it is important to safeguard the world financial system
from the peso-type crisis. To this end, a multinational safety net needs to be in place to contain the peso-
type crisis in the early stage.