Presentation Assignment

1. Given the factors that affect the value of a foreign currency, describe the type of economic or other conditions in China that could cause the Chinese yuan to weaken, and therefore to adversely affect your business.

2. Explain how currency futures could be used to hedge your business in China. Explain how currency options could be used to hedge your business in China.

As your business grows in China, one of your business associates that you regularly consulted with on business matters reminded you of the potential pitfall of investing in emerging Asia markets. Specifically he referred to the Asian financial crisis to remind you of the potential risk factors that can affect your business. In view of that, you have decided to study further into the Asian Financial Crisis that happened in the late 1990s. Below are some of the issues you would like to address to be better prepared for similar incidents.

3. Was the depreciation of the Asian currencies during the Asian crisis due to trade flows or capital flows? Why do you think the degree of movement over a short period may depend on whether the reason is trade flows or capital flows? Is China susceptible to a similar situation?

4. Why do you think the Indonesian Rupiah was more exposed to an abrupt decline in value than the Japanese yen during the Asian crisis (even if their economies experienced the same degree of weakness)? How is China position today in comparison to Indonesia back then?

5. During the Asian crisis, direct intervention did not prevent depreciation of currencies. Offer an explanation for why the interventions did not work. Given today's China current economic and financial status, do you think the People's Bank of China will be able intervene successfully to support the yuan if it is under selling pressure from the market?

6. During the Asia crisis, some local companies in Asia borrowed US$ rather than local currency to support local operations. Why would they borrow US$ rather than local currency to support their operation? Why did this strategy backfire? Would you borrow US$ or AUD to finance your China business expansion? (give actual comparison of interest rates / exchange rate differential to support your answer)

7. During the Asian crisis, Hong Kong and China successfully intervened (by raising their interest rate) to protect their local currency from depreciating. Nevertheless, these countries were also adversely affected by the Asian crisis. Why do you think the actions to protect the values of their currencies affected these countries' economies? Why do you think the weakness of other Asian currencies against the dollar and the stability of the Chinese and Hong Kong currencies against the dollar adversely affected their economies?

8. During the Asian crisis, the currencies of many Asian countries declined even though their governments attempted to intervene with direct intervention or by raising interest rates. Given that the abrupt depreciation of the currencies was attributed to an abrupt outflow of funds in the financial markets, what alternative Asian government action might have been more successful in preventing a substantial decline in the currencies' values? Are there any possible adverse effects of your proposed solution?

9. Why do you think the depreciation of the Asian currencies adversely affected Australian companies? (There are at least three reasons, each related to a different type of exposure of some Australian companies to exchange rate risk.)