Finance And Economics

Twin Agency Problem

The twin agency problem mainly depicts that two groups act for its own self-interest, and discards any interest of the firm. The main hurdles for the financial globalisation are twin agency problem, where investments in foreign companies are not safe. The twin agency problems are interrelated, where one is directly linked with other. The first agency problem is related to the exploitation, which is conducted by governments that provide essential resources to companies (Chen, Li, Xiao & Zou, 2014). The second problem mainly arises from company’s management itself, as they might use the additional funds for their personal benefit. The constant risk from weak management and exploiting government mainly increase the twin agency problems and hinders international investments (Peseta, 2014).

According to the shareholders wealth maximization model, companies are mainly concerned for increasing their wealth, which increases its share value. In addition, the stakeholder capitalism model mainly forces the company to address anxiety of management, creditors, employees, society, and shareholders. Furthermore, companies by using both the models are mainly able to determine the overall unsystematic and systematic risks associated with their operations. Denis (2016) stated that companies with the use of different models are mainly able to take relevant steps, which could be help in betterment of the company.

• Credit to the Chinese firm current account part and debit to Australian company part of the current account.
• Credit to Singapore in the current account, while debit to Australian resident current account.
• Credit to US in the financial account, while debit to German investor financial account.
• Credit to Australia in the current account, while debit to Indian firm current account.
• Credit to Japanese in the capital account, while debit to Australian firm capital account.

 Free capital flow, sovereign monetary policy, and fixed exchange rate are mainly considered to be the impossible trinity, whose violation could result in financial crisis. The violation of impossible trinity was mainly witnessed in 1997-1998 within the Asian market (Vines, 2015). The countries mainly violated the impossible trinity, which resulted in serious cash crunch and halted the overall operation so the economy. Currently it is stated that there are no models or theories, which could help countries and governments to violate the impossible trinity, as it is one of the significant aspect of the financial world and must be followed by all the governments (Bielecki & Rutkowski, 2013).

i) Stating the Australian dollar cash outlay for ABM ltd:

USD Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	JAP	Amount
1	0.0089	50000
		445
		585.53
AUD	USD	Amount
1	0.76	400
		526.32

a) For US manufacturing facility, ABM will be spending 526.32

b) For Japanese manufacturing facility, ABM will be spending 585.53

ii) Stating the choice of adequate manufacturer if choice is based on Australian dollar cash outlay:

Seeing the overall manufacturing costs overall US manufacturing facility will mainly be chosen, as it depicts a lower cost of production.

USD	JAP	Amount
1	0.0077	50000
		385
		481.25
AUD	USD	Amount
1	0.8	400
		500.00

The change in spot rate mainly depicts the profitable offer, which is portrayed by the Japanese manufacturer, as it will cost less than the USA manufacturing.

Germany inflation rate	2.0%
Spot exchange rate is A$/€	1.40
Australian inflation rate	1.6%
Difference in inflation rate	1.6% – 2.0% = -0.40%
Spot exchange rate is A$/€	1.40 * (1-0.40%)
Spot exchange rate is A$/€ at 1 yr	1.3944

Particulars	Amount
Strike price	S$ 1.3600/$
Less Spot rate	S$ 1.3400/$
Less Premium	$ 0.003/S$ or S$0.00408/$
Net profit	S $0.01592/$

After evaluating the above table t is derived that John intents that Singaporean dollar is going to decline against US dollar after 180 days. John could use put option at the strike price of S$1.3600 with a premium of $ 0.003/S$, where it is expected to reach S$1.3400. The above table mainly state the net profit of John after initiating the trade (Chaboud, Chiquoine, Hjalmarsson & Vega, 2014).

There are two different types of currency market strategies, which could be used by the government to intervene in their currency value. There is relatively two-intervention method direct and indirect method, where government mainly uses relevant intervention to control its currency (Bingham & Kiesel, 2013). The indirect method is mainly used by the central bank, where it increases or decreases the real rates to manage the capital outflow. In addition, the direct method used by central banks is when it buys or sells its currency to reduce or increase its supply. Both the methods are an effective measure, which governments are able to control value of their currency and effectively intervene in their currency exchange (Basher & Sadorsky, 2016).

 After the announcement of UK referendum on the EU membership relative change in GBP against the Australian Dollar could be witnessed. The percentage change of GBP against Australian dollar is witnessed at 11.95%, where relative increment in Australian currency could be witnessed. Carfi & Musolino (2014) mentioned that use of adequate hedging policy companies is able to reduce the risk from volatile currency market and maintain the level of their profits.

Amount Yen	40,000,000
Particulars	Amount	Rate	Present value
Spot	457,928	87.35
Forward	446,927	89.5	436,404
Unhedged position	437,397	91.45	427,099

Particulars	Australian	Japan
Borrowing	1.00%	2.00%
Lending	1.50%	1.00%
Borrowed		40,000,000
Amount received		39,215,686
Converted to A$ in spot rate	448,949
Interest amount received in three months	6,734
Amount received at the end of 3 months	455,683
PV of the amount received	444,954

The above table mainly depicts the relevant income, which could be generated from money market system. In addition, the non-hedge scenario will only provide an exchange value of A$427,099, whereas forward rate hedge ratio will mainly provide A$436,404. However, if adequate money market hedge is used then the income will be A$444,954, which relatively higher than other hedging method (White et al., 2013).

References:

Aizenman, J., Chinn, M. D., & Ito, H. (2013). The “impossible trinity” hypothesis in an era of global imbalances: Measurement and testing. Review of International Economics, 21(3), 447-458.

Basher, S. A., & Sadorsky, P. (2016). Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH. Energy Economics, 54, 235-247.

Bielecki, T. R., & Rutkowski, M. (2013). Credit risk: modeling, valuation and hedging. Springer Science & Business Media.

Bingham, N. H., & Kiesel, R. (2013). Risk-neutral valuation: Pricing and hedging of financial derivatives. Springer Science & Business Media.

Carfi, D., & Musolino, F. (2014). Dynamical Stabilization of Currency Market with Fractal-like Trajectories. Scientific Bulletin of the Politehnica University of Bucharest, Series A-Applied Mathematics and Physics, 76(4), 115-126.

Chaboud, A. P., Chiquoine, B., Hjalmarsson, E., & Vega, C. (2014). Rise of the machines: Algorithmic trading in the foreign exchange market. The Journal of Finance, 69(5), 2045-2084.

Chen, D., Li, S., Xiao, J. Z., & Zou, H. (2014). The effect of government quality on corporate cash holdings. Journal of Corporate Finance, 27, 384-400.

Denis, D. (2016). Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization. Financial Review, 51(4), 467-480.

Lustig, H., Roussanov, N., & Verdelhan, A. (2014). Countercyclical currency risk premia. Journal of Financial Economics, 111(3), 527-553.

Peseta, T. L. (2014). Agency and stewardship in academic development: The problem of speaking truth to power. International Journal for Academic Development, 19(1), 65-69.

Vines, D. (2015). Impossible Macroeconomic Trinity: The Challenge to Economic Governance in the Eurozone. Journal of European Integration, 37(7), 861-874.

White, A. E., Li, Y. J., Griskevicius, V., Neuberg, S. L., & Kenrick, D. T. (2013). Putting All Your Eggs in One Basket Life-History Strategies, Bet Hedging, and Diversification. Psychological Science, 24(5), 715-722.