This question have 4 part to deal with,this is the part 4.1

i wanna ask about question 4 (a and b)

Questions for Week 6 Presentation 1. Explain how your business would likely be affected (at least in the short run) if the central bank of China intervened in the foreign exchange market by exchanging Chinese yuan for dollars in the foreign exchange market. 2. Explain how your business would likely be affected if the central bank of China used indirect intervention by lowering Chinese interest rates (assume inflationary expectations have not changed). 3. Chinese interest rates are normally substantially higher than Australia interest rates. a) What does this imply about the forward premium or discount of the Chinese yuan? b) What does this imply about your business using the forward or futures contracts to hedge your periodic profits in yuan that must be converted into dollars? c) Do you think you would frequently hedge your exposure to Chinese yuan? Explain your answer. 4. Chinese interest rates are normally substantially higher than Australian interest rates. a) What does this imply about the inflation differential (Chinese inflation minus Australian inflation), assuming that the real interest rate is the same in both countries? Does this imply that the Chinese yuan will appreciate or depreciate? Explain. b) It may be argued that the high Chinese interest rate should entice Australian investors to invest in China money market securities, which could cause the yuan to appreciate. Reconcile this theory with your answer in part (a). If you believe that the high Chinese interest rate will not entice Australian investors, explain your reasoning. c) Assume that the difference between Chinese and Australian interest rates is typically attributed to a difference in expected inflation in the two countries. Also assume that purchasing power parity holds. Do you think that your business cash flows will be adversely affected? In reality, purchasing power parity does not always hold. Assume that the inflation differential (China inflation minus Australian inflation) is not fully offset by the exchange rate movement of the yuan. Will this benefit or hurt your business? Now assume that the inflation differential is more than offset by the yuan's exchange rate movement. Will this benefit or hurt your business? d) Assume that the nominal interest rate in China is currently much higher than the Australian interest rate. and that this difference is due to a high rate of expected inflation in China. You are considering hiring a local company to promote your business, but you would have to borrow funds to finance this campaign. A consultant advises you to delay the marketing campaign for a year so that you can capitalise on the high nominal interest rate in China. He suggests that you retain the profits that you would normally have remitted to Australia and deposit them in a Chinese bank. The Chinese yuan cash flows that your business deposits will grow at a high rate of interest over the year. Should you follow the advice of the consultant? BACKGROUND One of the best ways to learn the broad concepts presented in this course is to put yourself in the position of an MNC manager or board member and apply the concepts to financial decisions. Although board members normally do not make the decisions discussed here, they must have the conceptual skills to monitor the policies that are implemented by the MNC's managers. Thus, they must frequently consider what they would do if they were making the managerial decisions or setting corporate policies. This exercise is based on a business that you could easily create: a business that teaches individuals in a non-Australian country to speak English. Although this business is very basic, it still requires the same types of decisions faced by large MNCs. Assume that you live in Australia and invest A$60,000 to establish a language school called Bell Beijing in Beijing, China. You set up a small subsidiary in China with an office and an attached classroom that you lease. You hire local individuals who can speak English and teach it to others. Your school offers two types of courses: a one-month structured course in English and a one-week intensive course for individuals who already know English but want to improve their skills before visiting Australia. You advertise both types of teaching services in local newspapers. All revenue and expenses associated with your business are denominated in Chinese yuan. Your subsidiary sends most of the profits from the business in China to you at the end of each month. Although your expenses are fairly stable, your revenue varies with the number of clients who sign up for the courses in China