As the Chief Executive Officer (CEO) of a multinational firm in Australia, you are considering opening a new factory in Argentina, which uses the Peso as its currency. You estimate that the initial investment during the first year will be 10 million Pesos. The Chief Financial Officer (CFO) believes that the international capital markets are integrated (8 marks).

(a) Explain the underlying assumptions of the CFOs claim (2 marks).

(b) You find that the yield on short-term government bonds in Argentina is 8%, but the equivalent in Australia is only 0.8%. If the international capital markets are integrated, explain whether investing in short-term Argentina government bonds will generate a higher return in Australian dollars than investing in the Australian government bonds (3 marks).

(c) Before you make your investment decision, the Government of Argentina unexpectedly announces a new policy, that the Argentina government will decide the exchange rate between the Australian dollar and Peso. Explain whether you will be more or less confident about opening the new factory, given the new policy in place (3 marks).