Summarize the movements in the exchange rate of the Australian dollar against the US dollar over the last 36 months. Using appropriate models, explain the various factors which have caused these movements. Considering current national and international economic conditions, critically discuss the impacts of the overall exchange rate outcome on the Australian economy and its implications for monetary and fiscal policies.
A useful source of information is the Australian Financial Review. This newspaper publishes articles on the fluctuations in the exchange rate almost daily. A prime source of information is, of course, the Reserve Bank of Australia. In analyzing the impacts of the rising dollar on the Australian economy, you should be familiar with the challenges it is currently facing. As a starting point, read the article: "Cuts won't stave off a recession" (The Australian July 2, 2013). Although this article (attached) discusses mainly the recent RBA's interest rate decision, it provides a good snapshot of our current economic issues.
Show evidence (by quotations and/or references/in-text referencing) of wide reading. While the work is to be presented as an essay it is expected that appropriate use will be made of chosen diagrams and tables which enable you to concisely demonstrate your line of reasoning.
Title of Essay should indicate what you are trying to argue.
Word Limit: 1200
Please include references.
In compliance with BrainMass rules this is not a completion of assignment but only background help.
On November 07, 2010 for the first time the Australian Dollar breached the $1.00 mark. This was a strong recovery from the $0.83 in June 2010. There are several factors that accounted for this increase in the value of Australian Dollar. The economic recovery had gained momentum. This was supported by significant increases in commodity prices, stronger corporate profitability, higher wage growth and strong corporate profitability. Private domestic demand fuelled economic recovery. Also at that time the US was still affected by the recession. Its GDP growth rate was weak (1). Under these circumstances the value of the Australian Dollar increased vis-à-vis the US dollar.
In 2011, the Australian Dollar reached $1.09 on July 31st, 2011. However, on October 9th, 2011, the Australian Dollar dropped to $0.965. The increase in the value of the Australian Dollar up to July 31st, 2011 is attributable to global economic recovery. The strong economic growth in Asia had increased the demand for Australian resources exports, and improved the Australian terms of trade of record highs. The boom was restricted to be concentrated in sectors related to the resource boom and in sectors of the service sector. The strong Australian dollar was expected to hurt manufacturing and trade exposed sectors. The drop in the Australian Dollar is attributable to high uncertainty and volatile economic environment. Even though the terms of trade remained favorable, the Australian Dollar declined because of increased uncertainty in the global economic outlook, weak consumer, and business confidence (2). The high exchange rate of Australian Dollar inhibited exports and led to strong competition from cheap Asian produced substitutes. Even the overall employment in Australia began to decline in full time jobs.
In 2012 February, the foreign exchange rate was $1.076 on February 27, and later the exchange rate dipped to $0.97 on June 3, 2012. The increase in the foreign exchange rate of ...
Exchange rate between Australian and US dollar is explained in a structured manner in this response. The answer includes references used.
Questions on international finance
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4. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
6. Which of the following is not true regarding options? Explain why answer is correct as opposed to other answers
Answer: Options are traded on exchanges, never over-the-counter.
Wrong Answers: Similar to futures contracts, margin requirements are normally imposed on option traders.
Although commissions for options are fixed per transaction, multple contracts may be involved in a transaction, thus lowering the commission per contract.
Currency options can be classified as either put or call options.
10. If a country's government imposes a tariff on imported goods, that country's current account balance will likely __________ (assuming no retaliation by other governments).
Answer: increase (but why?)
Answer: are usually issued in bearer form.
wrong answers: typically carry several protective covenants
cannot contain all provisions
17. The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry.
The answer is false but why?
18. The Eurocredit market primarily concentrates on:
Answer: medium-term lending.
wrong answers: short term lending (less than one year), long term lending, providing an exchange of foreign currencies for firms who need them, placing newly issued stock in foreign markets.
20. A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
True - but why?
21. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:
Answer: obtain a 90-day forward purchase contract on Canadian dollars.
explain why this answer.
22. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ______ in Mexican demand for U.S. goods, and the Mexican peso should _______.
Answer: increase; depreciate
24. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.
Answer: False (but why?)
31. Product cycle theory suggests that firms seek to penetrate new markets over time. Explain why.
35. The Single European Act of 1987:
Answer: increased competition in most industries.
Describe how and why?
37. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
PCFt = a0 + a1et + mt
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:
Currency Regression Coefficient (a 1)
Earlier Subperiod Regression Coefficient (a 1)
Australian dollar (A$) -.80 .10
Sudanese dinar (SDD. .20 .25
Based on these results, which of the following statements is probably not true?
The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
All of the above are true.