1) Australian MNCs commonly invest in foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of Australian investors to invest in foreign securities?  

b. Explain how low Australian interest rates can affect the tendency of Australia-based MNCs to invest abroad.  

c. In general terms, what is the attraction of foreign investments to Australian investors? 

2) Exchange rate effects on trade. a. Explain why a stronger dollar could enlarge the Australian balance of trade deficit. Explain why a weaker dollar could affect the Australian balance of trade deficit.  

b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur.  

c. Why does the exchange rate not always adjust to a current account deficit?  

3) Factors affecting exchange rates. India tends to have much higher inflation than Australia and also much higher interest rates than Australia. Inflation and interest rates are much more volatile in India than in industrialised countries. The value of the Indian rupee is typically more volatile than the currencies of industrialised countries from an Australian perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the rupee than for currencies of industrialised countries. 

a. Identify the most obvious economic reason for the persistent depreciation of the rupee. 

b. High interest rates are commonly expected to strengthen a country’s currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the rupee’s value has declined against the Australian dollar over most years even though Indian interest rates are typically much higher than Australian interest rates. Thus, it appears that the high Indian interest rates do not attract substantial Australian investment in Indian securities. Why do you think Australian investors do not try to capitalise on the high interest rates in India? 

c. Why do you think the bid/ask spread is higher for rupees than for currencies of industrialised countries? How does this affect an Australian company that does substantial business in India? 

4) Decision to expand internationally 

Aussie Blades, Pty Ltd is an Australia-based company that has been incorporated in Australia for three years. It is a relatively small company, with total assets of only A$200 million. The 

company produces a single type of product: rollerblades. Due to the booming rollerblade market in Australia at the time of the company’s establishment, Aussie Blades has been quite successful. For example, in its first year of operation, it reported a net income of A$3.5 million. Recently, however, the demand for Aussie Blades’ ‘Speedos’, the company’s primary product in Australia, has been slowly tapering off, and Aussie Blades has not been performing well. Last year, it reported a return on assets of only 7 per cent. In response to the company’s annual report for its most recent year of operations, Aussie Blades’ shareholders have been pressuring the company to improve its performance; its stock price has fallen from a high of A$20 per share three years ago to A$12 last year. Aussie Blades produces high-quality roller blades and employs a unique production process, but the prices it charges are among the top 5 per cent in the industry. 

In light of these circumstances, Ben Holt, the company’s chief financial officer (CFO), is contemplating his alternatives for Aussie Blades’ future. There are no other cost-cutting measures that Aussie Blades can implement in Australia without affecting the quality of its product. Also, production of alternative products would require major modifications to the existing plant set-up. Furthermore, and because of these limitations, expansion within Australia at this time seems pointless. 

Holt is considering the following: If Aussie Blades cannot penetrate the Australian market further or reduce costs here, why not import some parts from overseas and/ or expand the company’s sales to foreign countries? Similar strategies have proved successful for numerous companies that expanded into Asia in recent years to increase their profit margins. The CFO’s initial focus is on Thailand. Thailand has recently experienced weak economic conditions, and Aussie Blades could purchase components there at a low cost. Holt is aware that many of Aussie Blades’ competitors have begun importing production components from Thailand. 

Not only would Aussie Blades be able to reduce costs by importing rubber and/or plastic from Thailand due to the low costs of these inputs, it might also be able to augment weak Australian sales by exporting to Thailand, an economy still in its infancy and just beginning to appreciate leisure products such as roller blades. While several of Aussie Blades’ competitors import components from Thailand, few are exporting to the country. Long- term decisions would also eventually have to be made; maybe Aussie Blades, Pty Ltd could establish a subsidiary in Thailand and gradually shift its focus away from Australia if its Australian sales do not rebound. Establishing a subsidiary in Thailand would also make sense for Aussie Blades due to its superior production process. Holt is reasonably sure that Thai companies could not duplicate the high-quality production process employed by Aussie Blades. Furthermore, if the company’s initial approach of exporting works well, establishing a subsidiary in Thailand would preserve Aussie Blades’ sales before Thai competitors are able to penetrate the Thai market. 

As a financial analyst for Aussie Blades, Pty Ltd, you are assigned to analyse international opportunities and risk resulting from international business. Your initial assessment should focus on the barriers and opportunities that international trade may offer. Holt has never been involved in international business in any form and is unfamiliar with any constraints that may inhibit his plan to export to and import from a foreign country. Holt has presented you with a list of initial questions you should answer.  

a. What are the advantages Aussie Blades could gain from importing from and/or exporting to a foreign country such as Thailand? b. What are some of the disadvantages Aussie Blades could face as a result of foreign trade in the short run? What about in the long run?  

 c. Which theories of international business described in this chapter apply to Aussie Blades, Pty Ltd in the short run? Which apply in the long run?  

d. What long-range plans other than the establishment of a subsidiary in Thailand are an option for Aussie Blades and may be more suitable for the company?  

e. If a subsidiary is established in Thailand and the Thai baht weakens over the next five years, will the value of Aussie Blades be favourably affected, unfavourably affected or not affected? Briefly explain. 

5) Blades follows a policy of invoicing in Thai baht (Thailand’s currency). Holt felt that this strategy would give Aussie Blades a competitive advantage since Thai importers can plan more easily when they do not have to worry about paying differing amounts due to currency fluctuations. Furthermore, Aussie Blades’ primary customer in Thailand (a retail store) has committed itself to purchasing a certain amount of Speedos annually if Aussie Blades will invoice in baht for a period of three years. Aussie Blades’ purchases of components from Thai exporters are currently invoiced in Thai baht. 

Holt is rather content with current arrangements and believes the lack of competitors in Thailand, the quality of Aussie Blades’ products, and its approach to pricing will ensure Aussie Blades’ position in the Thai rollerblade market in the future. Holt also feels that Thai importers will prefer Aussie Blades over its competitors because Aussie Blades invoices in Thai baht. 

You, as Aussie Blades’ financial analyst, have doubts as to Aussie Blades’ ‘guaranteed’ future success. Although you believe Aussie Blades’ strategy for its Thai sales and imports is sound, you are concerned about current expectations for the Thai economy. Current forecasts indicate a high level of anticipated inflation, a decreasing level of national income, and the continuing depreciation of the Thai baht. In your opinion, all of these future developments could affect Aussie Blades financially, given the company’s current arrangements with its suppliers and with the Thai importers. Both Thai consumers and companies might adjust their spending habits should certain developments occur. 

In the past, you have had difficulty convincing Holt that problems could arise in Thailand. Consequently, you have developed a list of questions for yourself, which you plan to present to the company’s CFO after you have answered them. Your questions are listed here:  

a. How could a higher level of inflation in Thailand affect Aussie Blades (assume Australian inflation remains constant)? 

b. How could a decreasing level of national income in Thailand affect Aussie Blades? 

c. How could the continuing depreciation of the Thai baht affect Aussie Blades? How would it affect Aussie Blades relative to Australian exporters invoicing their rollerblades in Australian dollars? 

d. How could competition from cheaper imports of rollerblades into Thailand by Chinese companies affect Aussie Blades? 

e. How could the imposition of tariffs on luxury goods (rollerblades are considered a luxury in Thailand) affect Aussie Blades? 

6) Assessment of prevailing spot and forward rates by the Sports Exports Company.  

As the Sports Exports Company exports Australian Rules footballs to the United Kingdom, it receives British pounds. The cheque (denominated in pounds) for last month’s exports just arrived. Jim Logan (owner of the Sports Exports Company) normally deposits the cheque with his local bank and requests that the bank convert it to Australian dollars at the prevailing spot rate (assuming that he did not use a forward contract to hedge this payment). Logan’s local bank provides foreign exchange services for many of its business customers who need to buy or sell widely traded currencies. Today, however, Logan decided to check the quotations of the spot rate at other banks before converting the payment into Australian dollars. 

a. Do you think Logan will be able to find a bank that provides him with a more favourable spot rate than his local bank? Explain. 

b. Do you think that Logan’s bank is likely to provide more reasonable quotations for the spot rate of the British pound if it is the only bank in town that provides foreign exchange services? Explain. 

c. Logan is considering using a forward contract to hedge the anticipated receivables in pounds next month. His local bank quoted him a spot rate of A$1.65 and a one-month forward rate of A$1.6435. Before he decides to sell pounds one month forward, he wants to be sure that the forward rate is reasonable, given the prevailing spot rate. A one-month Treasury security in Australia currently offers a yield (not annualised) of 1 per cent, while a one-month Treasury security in the United Kingdom offers a yield of 1.4 per cent. Do you believe that the one-month forward rate is reasonable given the spot rate of A$1.65? 

d. The pound is being sold in question (3) at a discount in the forward market. If Logan anticipates that the value of the pound will continue to decrease against the Australian dollar (that is, the future spot rate will be lower than the forward rate) in the next few months, what strategy should Logan take to make a profit from the pound? Explain your answer