Q3. (a) A persistent deficit in the net balance of payment (BOP) of a country is significant because of its effect on exchange rate movements and its official reserves, depending on the countrys exchange rate regime.

1. To a country that adopts free floating exchange rate regime, market conditions will assist in correcting the deficit. What are the adjustments you may foresee in both the current account and financial account of the countrys BOP under such regime? (6 marks)

2. On contrary, to a country that adopts fixed exchange rate regime, trade controls are very common to help correcting the deficit. However, economists may oppose to the use of the trade control. Why? (6 marks)

2. One of the major risks that a MNE consistently faces when undertaking an investment abroad is political risk. Suggest FIVE (5) ways in which the MNE can lower the risk. (10 marks)

Q3. (Continued)

3. Maverik Avengers is an active currency trader based in Kuala Lumpur, Malaysia. He has been following the movements of closely since the official Brexit. He notices that the exchange rates between the and RM are quoted directly at 5.0500-80 and the available 90-day forward points for the currency pair are 180-200.

If Avengers speculates the spot rates between the and RM to be trading at 5.0600-50 at the end of 90 days, demonstrate how Avengers can make a

speculation profit with RM10 million. (8 marks)

[Total: 30 marks]