Twin Agency Problem
As per Scultz, twin agency problem is responsible for the existence of barriers with regards to capital flow even though the external barriers have been made extinct. He refers to two agency issues which through inter-related are actually separate. The first issue deals with corporate insider discretion which refers to the manner in which the corporate insiders exercise their control over the firm. They use their owner only for enhancing their own interest and not the firm which woos away the external investors.
This is because of the underlying costs of the given process which tends to hurt the interest of the minority shareholders especially. Besides, the rulers of the state may acting in a discretionary manner may try to further their own gains at the expense of the company which puts off the external investors who desire that state power should be constrained and investor interest needs to be protected.
Shareholder Wealth Maximization (SWM) – It refers to a theory which propagates the idea that the objective of the firms should be to maximize the wealth of the shareholders which are typically reflected from the capital gains and dividend income that the shareholders are able to derive. Further, this model assumes the efficiency nature of the stock markets i.e. the market prices are representative of the actual stock performance.
Stakeholder Capitalism Model (SCM) – This refers to an alternative theory where it is believed that objective of the firm should be the maximization of the overall stakeholder capital rather than just limiting to the interest of the shareholders.
Comparison
- SWM focuses on shareholders while SCM focuses on stakeholders.
- SWM focuses on gains in terms of stock price and dividends which are essentially short term while SCM focuses on long term value creation.
- SWM believes in efficiency of stock markets while SCM do not believe that markets are efficient andhence ignore share returns.
- Current Account
- Current Account
- Capital Account
- Current Account
- Capital Account
In accordance with the impossible trinity concept, the following three cannot be achieved by any economy simultaneously and at best two of the below mentioned objectives can be fulfilled simultaneously.
As a result, the central banks have the choice to choose the most relevant two objectives which they consider critical for the economy. For instance, if there is a free capital flow along with sovereign monetary policy, then the exchange rate cannot be fixed as in accordance with the direction of flow, it is essential the exchange rate would change. Further, if there is a sovereign monetary policy along with fixed exchange rate, there would be restrictions and regulations of capital flow as free capital flow would lead to the movement in exchange rate if monetary policy sovereignty is maintained.
- The cash outlay needs to be determined given the following information.
1 AUD = 0.76 USD
I Japanese Yen = 0.0089 USD = (0.0089*0.76 = 0.006764 AUD
- Japanese Manufacturer
Price of laptop in Japanese Yen = ¥50,000
Price of laptop in AUD = 50,000 * 0.006764 = AUD 338.2
- US Manufacturer
Price of laptop in USD = USD 400
Price of laptop in AUD = 400/0.76 = AUD 526.32
- Based on the outlay in AUD, it is evident that purchase should be made from the Japanese manufacturer and not the US manufacturer as the former is cheaper.
- The new exchange rates are given below.
1 AUD = 0.80 USD
I Japanese Yen = 0.0077 USD = (0.0077*0.80 = 0.00616 AUD
Japanese Manufacturer
Price of laptop in Japanese Yen = ¥50,000
Price of laptop in AUD = 50,000 * 0.00616 = AUD 308
US Manufacturer
Price of laptop in USD = USD 400
Price of laptop in AUD = 400/0.8 = AUD 500
Now, also the purchase would be made from the Japanese manufacturer since it is offering a lower price in AUD terms and hence the decision would not change.
The existing exchange rate is A$1.40/€.
Expected inflation over next year in Australia = 1.6%
Expected inflation over next year in Germany = 2%
Hence, exchange rate after 1 year = A1.4*(1.016/1.02)/€ or A1.39451/€
Price of the German car currently = € 50,000
Price of German car next year = € 50,000*1.02 =€ 51,000
Price of the car next year in AUD = 51000*1.39451 = AUD 71,120
It is apparent that the trader expected Singapore Dollar to appreciate with regards to USD which is why a decrease in the exchange rate is expected as shown in the given values. The appropriate option that he should buy is a put available for Singapore dollar as it expected the price to fall.
Strike price of the put option = S$ 1.36/$
Closing price of the currency at the expiry of the option = S$ 1.34/$
Hence, profit = 1.36-1.34 = S$ 0.02
Cost of purchasing the option = $ 0.003/S$ pr S$ 0.003*1.34 = S$ 0.004
Thus, net profit = 0.02-0.004 = S$0.016
The various currency market intervention strategies are indicated below.
- Sterilised Intervention – In this strategy, there is no change in monetary base and currency exchange rate is influenced through the sale or buying of foreign currency based on the exact requirements of the situation. However, this amount is offset through domestic currency transactions.
- Managed exchange rate – The central bank tends to intervene in market and adds to the money supply by either supplying foreign currency or mopping up the same depending on the exact requirement so as to ensure that critical currency levels are not breached and currency remains in a broad range.
Comparison
- The sterilised intervention does not lead to increase in money base which is not the case in managed exchange rate.
- Sterilised intervention is mainly required on account of foreign capital inflows while managed exchange rate is for ensuring the exchange rate remains range bound so as to avoid adverse impact on economy.
- There is no net use of foreign exchange in sterilised while is not the case in managed exchange rate which tends to increase or decrease the applicable exchange rate.
Exchange rate before the referendum = £0.5114/A$
Exchange rate after the referendum = £0.5725/A$
Hence % change = (0.5725 – 0.5114)/ 0.5114 = 11.95%
Therefore, AUD has appreciated by 11.95% and GBP has depreciated by the same amount.
The GBP has depreciated since for getting AUD 1,more GBP would be required after the referendum thus indicating that the value of GBP has gone done. Devaluation and depreciation both produce the same result but their contributory reasons are different. Devaluation is caused due to government intervention while depreciation is caused due to market forces including speculation. Since the government had no direct role to play in declining value of currency, hence this would be termed as depreciation.
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