Management of risk arising from exchange rate movements is one of the most important tasks for multinationals managers. This task includes forecasting exchange rate movements, which is a challenging task. To coin this difficulty, Lawrence Summers who was former US Treasury and Professor at Harvard University cynically joked that forecasting exchange rate is a job for a (dead) man whose IQ is less than 80. Unfortunately, however, we are often forced to forecast it. The best model for the forecasting has yet to be found although many theories including the Dornbush’s overshooting model, other monetary approach models, the balance of payment theory, and the portfolio balance theory have been proposed.
As such, we have to rely on a couple of businessmen’s forecasting methods: (1) forecasting based on recent trend (technical method); (2) focus on economic growth, interests, inflations (fundamental method); and (3) rely on market spot and forward rate (market-based method).
Assume that you are CEO of the Yangkee Multinational Fund Management Company located in Washington, America and considering portfolio investment on shares listed on the Australian Stock Exchange for a year from 1 June 2014. You are planning to repatriate all the investments (e.g. principal+dividend payment) and expected capital gains to the U.S. at one-time in a year. Understanding your thoughts, board of directors of your company requested a formal report of the plan by on-line submission. Next board meeting will be on Friday, 3 October in 2014. Chair of the board, Clinton- Obama, is one of alumni from your University and advised you that many board members are not familiar with international financial management so that the report should include at least:
1. Predict what is expected (spot) exchange rate between US$ and A$ in 1 June 2015? Justify your answer.
2. What are the advantages and disadvantages of investing in Australia compared to investing in China?
3. What are the advantages and disadvantages of portfolio investment compared to purchasing an existing company (e.g. mergers and acquisition)?
Madura, Jeff (2012). International Financial Management (12th edition). Mason, USA: South-Western Cengage Learning.
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