Report IFI assignment

Compare how the values of 5 currencies changed over time against USD in the past 3 years ( 20192022), tài chính quốc tế, trả lời các câu hỏi case study, chi tiết, điểm cao. International finance, 1. Why would the Chinese government wish the renminbi to become a global currency? What are the costs and benefits of that greater global role?

I QUESTION 1 Compare how the values of currencies changed over time against USD in the past years ( 2019-2022) In table and diagram below, the US dollar is the base currency and the overvaluation and undervaluation of currencies (British pound, euro, Japanese Yen, Chinese Yuan and Vietnamese Dong) South) are all compared to the US Dollar Looking at the table calculated based on the Big Mac index, in general, in the recent years from 2019 to 2022, the value of the British pound, the euro, the Japanese yen, the Chinese yuan and The Vietnamese dong is all undervalued against the US dollar, except in July 2021, the euro's value is overvalued against the US dollar, at 2.36% Out of the five countries mentioned, in the last three years, Vietnam is the country with the highest undervaluation of its currency against the US dollar according to the Big Mac index Except for July 2022, the Japanese Yen is the most depreciated, with 45.07% based on the Big Mac Index On the contrary, from 2019 to 2022, the value of the Euro depreciated the lowest against the US Dollar with the undervalued figure over the years being below 10%, except in July 2021 the value of the Euro is appreciated against the US dollar After Vietnam Dong , there are Chinese Yuan and Japanese Yen with a relatively undervaluation against the US dollar And of the countries, Britain is the one where the value of its currency has depreciated on average against the US dollar Country Under/Over Valuation Against Dollar** Jul-19 Jul-20 Jul-21 Jul-22 United States 0% 0% 0% 0% Britain 12.92%* 11.26%* -3.64%* 13.79%* Euro area -2.92%* -0.70%* 2.36%* -7.47%* Japan -23.87% -24.57% -28.04% -45.07% China -35.24% -35.72% -29.88% -30.93% Vietnam -40.59% -40.93% -39.22% -42.78% Figure 1: The change in values of the currencies against US dollar over the last years Note: (*) Percentage under/over valuation against the dollar is calculated as (Implied − Actual)/(Actual), except for the Britain and Euro area calculations, which are (Actual-Implied)/(Implied) (**) See detailed calculation in the attached excel file in Appendix h o w th e v a lu es of cu r re n cies c h a n g e d ov er time a g a in st U S D in th e p a st y e a rs Euro a re a J apa n C hina Vietna m -40.59% -40.93% -39.22% -42.78% -35.24% -35.72% -29.88% -30.93% -45.07% -23.87% -24.57% -28.04% -7.47% -12.92% -11.26% -3.64% -13.79% Brit a in -2.92% -0.70% 0.00% 0.00% 0.00% 0.00% Unit ed St a te s Under/Over Valuation Against Dollar Jul-20 Under/Over Valuation Against Dollar Jul-22 2.36% Under/Over Valuation Against Dollar Jul-19 Under/Over Valuation Against Dollar Jul-21 Diagram 1: The change in values of the currencies against US dollar over the last years Looking at the diagram above, it can be seen that Japan is a country where the value of its currency depreciated against the US dollar, increasing sharply from 23.87% in July 2019 to 45.07% in July 2022 Besides, there is the slight increase of the undervaluation of Vietnam Dong versus US Dollar over the years Britain and the Euro area, in general, also have a rise in the deprivation of their currencies against the US dollar, except for July 2021 when there is a big difference Specifically, in July 2021, the British Pound was just undervalued by 3.64% versus the U.S dollar and the Euro was overvalued by 2.36% against the U.S dollar Only the undervaluation of the Chinese currency against the US dollar decreased over the years The implications According to calculated data taken from the Big Mac Index, during the years from 2019 to 2020, most of the value of countries, the UK, European region, Japan, China, and Vietnam are undervalued against the US dollar Subtract the value of the Euro in July 2021, which is an inversion The undervaluation has the following positive and negative effects Countries with undervalued currencies relative to the US will have an export advantage Goods in these countries become cheaper for the US market in particular and the international market in general For example, in the event that the Chinese Yuan is undervalued against the US currency, this is a good sign for Chinese exports Chinese goods will be cheaper than US ones This can create a competitive advantage for products in the international market, increase export sales and affect the Chinese economy as a whole However, countries whose currencies have depreciated against the US dollar will experience an impact on the prices of imported products in those countries For example, from 2019 to 2022, Vietnam Dong depreciated relatively large against the US dollar This means that the price of Vietnamese products imported from the US or countries using US dollars will become more expensive This will likely affect the purchasing power of consumers in Vietnam and may lead to an increase in the prices of domestic goods Evaluate the ability of Big Mac Index in predicting exchange rate movement The Big Mac Index is a way of measuring the value of a country's currency against the US currency by comparing the selling price of a McDonald's Big Mac hamburger However, the Big Mac Index is not an accurate predictor of exchange rate movements, but rather a relative measure of the value of a country's currency relative to the US currency Although there may be some correlation between the Big Mac price and the exchange rate, there are many other factors that can affect the value of money, such as interest rates, inflation, taxes, economic growth, political events and investor sentiment Therefore, the ability of Big Mac Index in predicting exchange rate movement is not strong II QUESTION Introduction Two global corporations, PepsiCo, Inc (PepsiCo) and 3M conglomerate business (3M), are the foundation of our analysis Particularly, PepsiCo is a significant US food and beverage company whose goods are consumed by consumers more than a billion times every day in more than 200 nations and territories In which, from 2020 to 2022, their operations outside of the United States produced about 45% of the net income for the corporation In terms of 3M, this is also a large US corporation with over 100 years of development history, and operates in many fields such as consumer goods, stationery, electricity, telecommunications, industrial products, products for the transportation industry, health care and labor protection including more than 55,000 products With businesses operating in over 70 different countries, 3M today sells its goods in approximately 200 nations, with sales outside the US accounting for about 60% of total revenue As a result, exposure to exchange rate risks is totally inescapable for multinational corporations, particularly those with substantial scale like PepsiCo and 3M In other words, even a slight change in the value of the US dollar could endanger both companies' sales and financial success Therefore, currency risk management is extremely important and necessary In the next section, we will carefully analyze the tactics that Pepsico and 3M used to combat exchange rate risk over the 3-year period, from 2020 to 2022 Comparison 2020 2021 2022 Matching Cash Flow Matching Cash Flow Matching Cash Flow 3.Cross-currency interest rate swaps Forward contract Forward contract Cross-currency interest rate swaps Cross-currency interest rate swaps Hedging Hedging Hedging Short, medium, long Short, medium, long Short, medium, long MXN, RUB, CAD, CNY, GBP, ZAR MXN, RUB, CAD, CNY, GBP, ZAR MXN, RUB, CAD, CNY, GBP, ZAR Breakeven Loss Loss Forward contract Hedging instruments Purpose Maturity Main foreign currency hedged Effectiveness Figure 2: Hedging instruments following four aspects of Pepsico Hedging instruments 2020 2021 2022 1.Forward contract 1.Forward contract 1.Forward contract 2.Option contract 2.Option contract 2.Option contract 3.Matching CF 3.Matching CF 3.Matching CF 4.Cross-currency swap 4.Cross-currency swap 4.Cross-currency swap Purpose Maturity Main foreign currency hedged Hedging, Speculation Hedging, Speculation Hedging, Speculation Short, medium Short, medium Short, medium Liquid currencies Liquid currencies Liquid currencies Loss Gain Gain Effectiveness Figure 3: Hedging instruments following four aspects of 3M 2.1 Hedging instruments It is evident from the two summary tables above that forward contracts and matching cash flow are the top priority tools used by Pepsico and 3M The two techniques are used not only to hedge against the risk that changes in foreign currency values impact these group's sales, purchases and borrowings; but also, to manage the risk from net investments (the currency risk in relation to the translation of the net investments of its foreign operations into functional currency) in foreign subsidiaries through sourcing purchases from local suppliers, negotiating contracts in local currencies with foreign suppliers In addition to these two instruments, both businesses utilize a few more derivatives to control their exposure to foreign exchange risk, including Pepsico's cross-currency interest rate swaps and Option contracts, cross-currency swap used by 3M 2.2 Purpose In fact, companies can use financial instruments for a variety of purposes For instance, 3M, this company, besides the purpose of hedging, also uses derivatives to speculate and make a profit Pepsico, on the other hand, uses these tools for the sole purpose of hedging against the effect of exchange rate fluctuations 2.3 Maturity We learned from reading the two companies' annual reports that both give priority to short- and medium-term financial instruments, and they both regulate maturity limits in particular For instance, depending on the currency, 3M uses a 12-, 24-, or 36-month horizon (maximum is 36 months) to hedge a percentage of their overall exposure For Pepsico, forward contracts cannot be longer than years, and cross-currency interest rate swaps cannot be longer than 12 years 2.4 Currency Because Mexico, Russia, Canada, China, the United Kingdom, and South Africa collectively generated the largest part of Pepsico's total net revenue with 21% in 2020 and 23% for 2021 and 2022; the currencies of the aforementioned nations have been chosen by Pepsico as the primary currencies for hedging 3M uses financial hedges to mitigate currency risk only for more liquid currencies like EUR, JPY, GBP Because, for less liquid currencies, financial hedging is frequently more expensive and subject to more restrictions Thus, the company managed via local operational actions using natural hedging tools instead, such as pricing, productivity, hard currency, … 2.5 Result The use of financial instruments in 2020 did not work out in 3M because 3M had a loss while Pepsico had no loss, which met their hedging purpose Regarding the upcoming two years, the two companies have demonstrated completely different outcomes While 3M made money in 2021 and 2022, Pepsico's use of financial instruments resulted in losses in both of those years III QUESTION 3: Mini-case chapter Why would the Chinese government wish the renminbi to become a global currency? What are the costs and benefits of that greater global role? 1 Why would the Chinese government wish the renminbi to become a global currency? Because China is currently the world's largest commercial trader and has the world's second-biggest economy after the United States, the Chinese government requires more easily accessible currency China believes that if many of its commercial transactions are paid in RMB, then China's trade will be less affected by the lack of dollars or any other foreign currency The renminbi would make cross-border financial transactions safer for China since it would lower the country's exposure to currency rate risk and allow it to become less dependent on foreign institutions and international payment systems Furthermore, the use of RMB for international payments will facilitate them to be processed by a payment system under China's authority 1.2 What are the costs and benefits of that greater global role? China may incur some drawbacks as a result of its greater global role First, if they are given unrestricted access to China's market and currency, the renminbi's value might increase, which could reduce China's export competitiveness and negatively affect China’s exports Additionally, there is worry that significant sums of Chinese savings may leave the country in search of higher returns as interest rates in important capital markets, like the dollar and euro, have started to rise Also, if China's currency is the international currency, the renminbi can become the reserve currency However, when the renminbi becomes the reserve currency, China will have a Triffin Dilemma problem This means that, when China's renminbi is used as an international currency, China has to print more money to meet global as well as domestic demand This could lead to inflation and the depreciation of the renminbi, harming China's interests At the same time, other countries may not want to use the Chinese currency anymore due to its decline in value In short, the renminbi becoming an international currency will adversely affect China's monetary policy However, besides the above disadvantages, RMB becoming a global currency also brings about some benefits for China It can minimize exchange risk, as Chinese investors would be independent from other countries’ currency while making an international transaction Globalization of RMB can promote the development of China's financial market, since the government and investors are able to borrow capital in RMB with low interest rates In general, countries will have higher demand for the renminbi if the currency is used for invoicing and commercial payments What are the theoretical requirements in order for a currency to be considered internationalized or global? The following are the theoretical prerequisites for a currency to be termed internationalized or global First of all,an international currency needs to be readily accessible for trade or it means that the international currency is highly liquid It must be accepted and easily used around the world, including in international commercial transactions and in other financial activities Secondly, the international currency is used for international investment (capital account/market activity) Finally, the international currency takes the function of a reserve currency if there are enough foreign central banks to own it At what stage is the Chinese renminbi in its globalization process? What is keeping it from becoming fully globalized? 3.1 At what stage is the Chinese renminbi in its globalization process? The Chinese renminbi globalization process is restricted in the second stage Because, while the renminbi is ready for trading, the Chinese authority is not prepared for such a great number of foreign investments China is an appealing market for investors globally with the highest population of 1.4 billion people Still, since the demand for the renminbi is in such high demand, its value will definitely soar if it becomes an international currency Therefore, Chinese investors will seek to use the renminbi to invest in foreign countries, where they may earn a higher return than previously As a result, Chinese savings would flow out of their country 3.2 What is keeping it from becoming fully globalized? It can be said that China's fiscal and monetary policies keep the renminbi from becoming fully globalized The fiscal and monetary policy still faces many risks and challenges, including issues of controlling capital outflows, dependence on state-owned companies and government intervention in the financial market Moreover, due to a number of variables, including government interference and the lack of transparency in monetary and fiscal policy, the present renminbi has not yet attained this degree of reliability and stability