Question 2

a) After the collapse of the Bretton Woods Agreement, the Smithsonian Agreement was introduced as a revision to the Bretton Woods system. Discuss the changes under the Smithsonian Agreement that were aimed at restoring confidence in the Bretton Woods system.(8 marks)

b) Salaries paid to managers are not an agency cost. Do you agree with the statement above? Justify your answer.(6 marks)

c) Explain why the management structure, such as centralised control and decentralised control, can affect the magnitude of the agency cost.(6 marks)

d) In 2005, Malaysia scrapped the ringgit currencys seven-year-old peg to the dollar and switched to a managed float system. Explain why some analysts believe that the switch to the managed float system was a wise move. (6 marks)

e) Explain with an example why the current account and financial account balances must exactly offset each other. (8 marks)

f) Discuss how the collapse of communism and revolution in information technologies allow countries to integrate into the global economy. (6 marks)

g) The following quotations are provided by Mayri Bank:

Value of Malaysian ringgit in U.S. dollar (MYR/USD) : 0.2500/0.2620 Value of Canadian dollar in U.S. dollar (CAD/USD) : 0.7840/0.7900

Required:

1. Given the information above, calculate the bid and ask quotations for the value of the Canadian dollar in Malaysian ringgit (CAD/MYR). (8 marks)

2. If you would like to exchange Canadian dollars, how much would CAD5,000 cost in Malaysian ringgit? (3 marks)

h) Explain why according to the International Fisher Effect (IFE), a higher interest rate would lead to a currency depreciation.

i) Differentiate between in the money, out the money and at the money positions in a put option contract.