N1548
International Financial management
Seminar 2 questions
1. Identify the correct BOP account of the US for each of the following transactions.
a. A German-based pension fund buys U.S. government 30-year bonds for its investment portfolio.
b. Scandinavian Airlines System (SAS) buys jet fuel at Newark Airport for its flight to Copenhagen.
c. Hong Kong students pay tuition to the University of California, Berkeley.
d. The U.S. Air Force buys food in South Korea to supply is air crews.
e. A Japanese auto company pays the salaries of its executives working for its U.S. subsidiaries.
f. A U.S. tourist pays for a restaurant meal in Bangkok.
g. A Colombian citizen smuggles cocaine into the United States, receives cash, and smuggles the dollars back into Colombia.
h. A U.K. corporation purchases a euro-denominated bond from an Italian MNE.
2. Comment on the following statement: “Since the United States imports more than it exports, it is necessary for the United States to import capital from foreign countries to finance its current account deficits.”
3. In contrast to the United States, 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?
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4. Assume that the United Arab Emirates has the following import/export volumes and prices. It undertakes a major “devaluation” of the UAE Dirham (AED) by 6% on average against all major trading partner currencies.
a. Is the AED a free float or fixed currency?
b. Does the UAE has a monetary policy independence?
c. What is the pre-devaluation and post-devaluation trade balance?
d. How does the UAE central bank manage the currency overall?
e. What are the implications on the currency if there is a trade deficit or surplus?
f. Propose two economic policies that might help correct the potential deficit?
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Assumptions
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Values
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Initial cross exchange rate, EUR/AED
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4.20
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Price of exports, (AED)
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100.0000
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Price of imports, (EUR)
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112.0000
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Quantity of exports, units
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300
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Quantity of imports, units
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200
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Percentage devaluation of the AED
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6.00%
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5. Construct the balance of payment table for Germany for year 2010 which is comparable in format to Exhibit 3.1 below, and interpret the numerical data. You may consult International Financial Statistics published by IMF or the World Bank’s database (https://data.worldbank.org/indicator), or search for useful websites for the data yourself.
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. It is noted that Germany experienced ‘divestment’ by foreigners in equity security investment in 2010. It is also noted that the above numbers may be affected somewhat by the government updating of the economic data. One salient feature of the above table is that Germany realized a significant merchandise trade surplus but a deficit in service trade, suggesting that Germany’s comparative advantage may be in the manufacturing sector, not in service sector.