Explain what the Balance of Payments is and provide some details and examples of the components of the Current Account and the Capital/Financial Account. (10 marks)
Establish clearly how two of the parities (i.e., Purchasing Power Parity (PPP) and Interest Rate Parity (IRP)) relate specific accounts of the Balance of Payments to the movements of exchange rates. Provide examples that illustrate the use of these parities to financial managers. (10 marks)
(Total 20 marks)
Question 2
Required:
Justify why information about the Balance of Payments of countries and the exchange rates between currencies are relevant to a financial manager when making a company’s investment decisions. Provide some risks and examples that may support your statements. (10 marks)
Critically explain the Central Bank’s and government’s intervention measures applied to the economy during the 2020 crisis, and how specifically these interventions have helped the business sector. Please, contrast the financial needs and financial impact affecting small firms and Multinational Enterprises (MNEs). (10 marks)
(Total 20 marks)
Question 3
“In recent years, as younger investors, in particular, have shown an interest in putting their money where their values are, brokerage firms and mutual fund companies have begun to offer exchange-traded funds (ETFs) and other financial products that follow ESG criteria. Robo-advisors such as Betterment and Wealthfront have also used them to appeal to these investors. According to the most recent report from US SIF Foundation, investors held $11.6 trillion in assets chosen according to ESG criteria at the beginning of 2018, up from $8.1 trillion just two years earlier.” Source: Investopedia (03/11/20). ESG. By James Chen. Reviewed by Gordon Scott. Online at:
Required:
The Environmental, Social and Governance criteria (ESG) is actively encouraging companies to act more responsible in relation to stakeholders and the world in general. After briefly explaining what the criteria involves, critically consider what decisions must be made by any company to minimize the damages that the company causes in these areas around the world (i.e., Environmental considerations, Social Sustainability, and the manner how companies apply diligent Governance principles).
(10 marks)
Make a summary of possible financial consequences that these ethical decisions may bring to financial results/performance of the company the short-term. Provide some examples of specific financial accounts in the Financial Reports of the company which will be affected. Conclude your answer with some ideas about potential benefits which the financial manager should emphasize in order to persuade shareholders that being socially responsible (i.e., genuinely applying the ESG criteria) will reduce specific risks and enhance the performance of the company in the longer term. (10 marks)
(Total 20 marks)
Section 2: Answer ALL questions
Question 1
Goyankee Plc are proposing to expand their operations to the USA and you as corporate treasurer have been asked to recommend to the board of directors how you might manage the translation risk in the balance sheet and also how Goyankee Plc can utilise currency swaps as a mean of long-term hedging.
In your report to the board you must cover the following aspects: –
Advise the board on the operation and mechanics of a sterling/US dollar swap and
Advise the board of any potential problems or drawbacks in utilising currency swaps.
(Total 20 marks)
Question 2
Financial models are widely blamed for underestimating and thus mispricing risk prior to the financial crisis. Explain how financial models like VaR underestimated the risks and led to losses being greater than predicted.
(Total 20 marks)
Question 3
Purchasing Power Parity (PPP) Theory states, that price differences between countries should narrow over time by the exchange rate movements or by different rates of inflation (which also has some implications on exchange rate movements).
Discuss the merits and drawbacks to hedging currency transactions even though PPP states that supply and demand for currencies will come into equilibrium in the long run. (12 marks)
Explain why corporate treasurers in a non -financial corporate do not as a rule use financial futures and how they differ from forward contracts. (8 marks)
(Total 20 marks)
