Suppose you are the Chief Financial Officer (CFO) of a multinational company in the UK, which uses the pound as its currency. The Chief Executive Officer (CEO) is planning to open a new subsidiary in New Zealand, which uses the New Zealand dollar as its currency. The initial investment in the first year is to purchase a large forest. You believe that the international capital markets are integrated.

(a) If the CEO thinks that the pound but not the New Zealand dollar must be used to evaluate this project, explain whether you agree with the CEOs opinion.

(b) The CEO plans to invest in New Zealand government bonds because the yield on short-term government bonds in New Zealand is much higher than the equivalent in the UK. Explain whether you agree with the CEOs plan.

(c) Assume that the New Zealand government just passed a new regulation. Under the new regulation, foreign investments related to sensitive New Zealand assets (e.g., forests and residential land) are subject to government screening. Explain whether you will be more or less confident about opening the new subsidiary, given the new regulation in place.