QUESTION 1

Comparison of prices or costs across different country and currency environments requires

translation of the local currency into a single common currency. This is most meaningful when the

comparison is for the identical product or services across countries.

Country City Cheap Date I

local currency

Exchange rate

Quote

Exchange

rate

7 Dec 2019

USD Price

Australia Sydney AUD 111.96 USD= 1 AUD 0.9290 114.01

Malaysia Kuala Lumpur MYR 117.85 USD= 1 MYR 0.3048 (A)

Japan Tokyo JPY 10,269.07 USD =1 JPY 0.0097 99.61

China Shanghai CNY 373. 87 USD = 1 CNY 0.1619 (B)

a) Fill up (A), and (B)

[2 marks ]

b) Assume a simple world in which the Malaysia exports beef burger to Australia. If the

Malaysia imposes large tariffs on the beef burger to Australian importers, explain the likely

impact on price of imported Malaysias beef burger and Australias demand of Malaysias

beef burger [ 2 marks]

c) What is the value of Australia dollar in Chinese yuan ?

[2 marks]

d) Why do firms become multinational?

[2 marks]

e) Deutsche Bank expects that Malaysian ringgit will appreciate against that the dollar from

its spot rate of $ 0.1619 to $ 0.1800 in a year. The following interbank lending and

borrowing rates exist

Currency Lending rate Borrowing rate

Dollar 6.0 % 6.7%

Malaysian ringgit 7.0 % 7.3%

Assume that Deutsche Bank has borrowing capacity of either $ 100,000 or MYR 500,000

in the interbank market depending on which currency it wants to borrow. How could

Deutsche Bank attempt to capitalize on its expectations without using deposited funds?

Describe strategy Deutsche Bank can speculate make profit from the expectation

appreciation Malaysian ringgit and estimate the profits in dollar that could be generated

from this strategy

[4 marks]

f) Andrew expects that Australian AUD will be appreciate in one year from $0.9290 to

$1.2100 and if a bank allows him to borrow $ 10,000 at 6% interest rate for one year. How

can Andrew speculate of this appreciation and what are the amount of profits (if any) from

this speculation?