international finance assignment spring 2023

Country Big Mac Actual Big Mac Implied Under/Over and Price in dollar Price in PPP of the Valuation currency local exchange Dollars Dollars against currency rate 3 =: @ 4 Dollar VND Fi

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISM

INTERNATIONAL FINANCE ASSIGNMENT

Đỗ Thị Ngọc Ánh

Nguyễn Linh Chi

Phạm Thị Thu Hà

Nguyễn Trang Nhung Group 4 - Tut 3 -

IFI May 3” 2023

20040400 09 20040400 18 20040400 23 20040100 29 20040400 86

Ha Noi, May 3rd 2023

1 Use the Economist’s Website to find the latest edition of the Big Mac Index of currency overvaluation and undervaluation (You will need to do a search for “Big Mac Currencies.”) Create a worksheet and diagrams to compare how the values of the British pound, the euro, the Japanese Yen, the Chinese Yuan and the Vietnam Dong have changed over time against USD in the past 3 years What are their implications? Evaluate the ability of Big Mac Index in predicting exchange rate movement

According to Investopedia, The Big Mac Index is a tool created by The Economist magazine to compare the purchasing power parity (PPP) between different currencies The index is based on the cost of a Big Mac burger in different countries and is used to evaluate whether a currency is overvalued or undervalued relative to the US dollar To use the Big Mac Index, the cost of a Big Mac burger is converted into US dollars and compared across different countries If the cost of a Big Mac is higher in one country than in the US, then that country's currency is considered overvalued against the US dollar Conversely, if the cost of a Big Mac is lower in one country than in the US, then that country's currency is considered undervalued The Big Mac Index is not intended to be a precise measure of currency valuation, but rather a simple and accessible tool for comparing currency values across different countries

Country Big Mac Actual Big Mac Implied Under/Over and Price in dollar Price in PPP of the Valuation currency local exchange Dollars Dollars against

currency rate (3) =(): @) (4) Dollar

(VND)

Figure 1: The Big Mac Index January 2020

Figure 2: The Big Mac Index July 2020

Figure 3: The Big Mac Index January 2021

Figure 6: The Big Mac Index July 2022

Figure 7: Valuation against USD changed in the past 3 years

-20

-50

—e (5) —e (£) (© =@— (¥) —=@—= Yuan —@— VND

Figure 8: Valuation against USD changed in the past 3 years The average price of a Big Mac has varied greatly over the years and across different countries In America, the average price of a Big Mac rose more than 6.85% from $4.82 to an average of $5.15 through 2020 and 2022 In 2023, Switzerland had the most expensive Big Macs in the world at $7.26, while just a year earlier, Switzerland's Big Macs were priced at $6.95 When a country's prices rise, all other things being equal, the value of its currency should decline, according to the purchasing power parity theory (PPP) theory, preventing the country's prices from diverging too far from those found in other countries However, over the past three years, the US dollar has appreciated in value relative to the currencies of most major countries in the world

* British Pound:

The British pound has lost value against the US dollar falling from 8.5% undervalued in Jan 2020 to 13.8% in July 2022 for three consecutive years This currency's devaluation comes after Britain proposed its biggest tax cuts in 50 years, including abolishing the 45% tax rate on incomes over £150,000 ($162,000) According to the principle of supply and demand, when the demand for a particular currency is high, the price will increase and vice versa The sharp drop in the value of the pound has investors concerned about the government's ability to manage debt, especially as rising interest rates make it much more expensive to borrow The tax plan may have been the initial cause of the pound's free fall, but investor confidence in the UK economy has been waning for some time due to issues such as Brexit Furthermore, this currency was also under pressure because the US Federal Reserve raised interest rates, causing the US dollar to appreciate

* Euro:

The devaluation trend of the Euro (EUR) in the recent three-year span has brought the Euro to par with the US Dollar (USD) In July 2022, the US Dollar is less than 1 cent away from parity with the common European currency High inflation and the energy crisis in the context of the war between Russia and Ukraine are considered important reasons for the euro's depreciation First, the rate of price escalation in Europe is becoming more and more intense, especially when the war in Ukraine causes scarcity of many basic goods (crude oil, gas) because most of Europe's growth model relies on the flow of cheap energy from Russia This further aggravates the supply chain congestion that emerged from the Covid-19 pandemic Additionally, the fact that the Fed continuously raised interest rates strongly has an

indirect effect on the value of the Euro, and at the same time promotes investors to look to the

USD as a "shelter" * Japanese Yen: The exchange rate between the USD and the Japanese yen has had a big difference during the last three years The exchange rate remained at around 110.04 yen per dollar over the years until July 2022, the rate exceeded 137.87 yen/USD The main reason for the yen's devaluation was the contrast between the Fed's tightening policy and the continued easing of monetary policy in Japan While developed economies operate monetary policy in a tight direction to control high inflation and return monetary policy to the trajectory it was before the Covid-19 pandemic, Japan still maintained ultra-loose monetary policy to support the recovery of the economy

* Chinese Yuan

Through the Big Mac Index, the value of Chinese Yuan was undervalued when compared to

the US dollar in the past triennium The lowest time is July 2020, 7 Yuan to 1 USD This rate

fell to 6.37 Yuan to 1 USD in January 2022 but showed signs of increasing in July 2022 The decline in the value of the Yuan is due to pressure from the uptrend, the strong appreciation of the USD along with the economic decline due to the Zero COVID policy China's economic slowdown forces this country's government to implement an easy monetary policy to support the economy A weak and rapidly depreciating domestic currency can help Chinese goods increase their price competitiveness in the international market, but it can also cause investor panic and capital flows may flee from China, to prevent money loss

* Vietnam Dong In general, for the whole year of 2020, the exchange rate movement is not the same as in previous years, because the VND has even appreciated slightly by about 0.33% against the USD The decline in the value of the Vietnamese Dong against the USD across the previous three years was the strongest in 2022 As of the end of July 2022, the VND continued to decrease by 0.38% against the USD In the first 7 months of the year, the VND decreased by 2.21% but was still recorded as the lowest decline among EMs countries The current devaluation pressure of the VND is mainly because the Fed continues to raise interest rates, causing the USD to appreciate strongly, however, Vietnam still maintains a stable

macroeconomics, low inflation, positive real interest rates, and a surplus trade surplus and foreign exchange reserves are high

The Big Mac Index is an interesting and easy-to-use tool for comparing currency values between countries However, it has limitations when it comes to predicting exchange rate movements The index only takes into account the price of a single product (a Big Mac burger) in a single company (McDonald's), which may not be representative of the broader economy or the prices of other goods and services Furthermore, the Big Mac Index only provides a snapshot of currency valuations at a specific point in time, without considering many variables that can affect exchange rates such as interest rates, inflation rates, political and economic stability and other market forces Therefore, although the Big Mac Index can provide some insights into currency valuation and potentially identify overvalued or undervalued currencies, it may not a reliable predictor of exchange rate movements Investors and analysts should use the Big Mac Index in conjunction with other economic indicators and analysis to evaluate exchange rate movements

Question 2 : All multinational companies (MNEs) will state the goals and objectives of their currency risk management activities in their annual reports Choose two (2) MNEs of your choice, collect their foreign exchange exposure hedging objectives and strategies in

the past 3 years, make contrast and comparison when applicable Currency markets have become more volatile in recent decades With increasing globalization, multinational companies today face greater currency risk than ever before According to Greuning (2020), Currency risk results from changes in exchange rates and originates in mismatches between the values of assets and liabilities denominated in different currencies Investors or companies whose assets or businesses cross national borders face currency risks that can generate unpredictable profits and losses Therefore, currency risk management is an extremely important issue for the development of multinational companies

as well as banks Many institutional investors, such as hedge funds and mutual funds, and multinational corporations use forex, futures, options contracts, or other derivatives to hedge

the risk To make it more comprehensive, a case of using foreign exchange exposure hedging to reduce the risk exposures in the past 3 years between two MNES: Microsoft and Unilever

Foreign exchange exposure hedging objectives and strategies in Microsoft According to Satya Nadella, (Microsoft CEO), We are living through a period of historic

economic, social, and qualitative change The world of 2022 is not like the world of 2019

Inflation is at a 40-year high, supply chains are stretched and the war in Ukraine is underway At the same time, we are entering the era of technology with the potential to make great progress in all areas of the economy and society, so risk management is a really important thing in the apparatus of all companies

According to the financial statements of the company Microsoft for 2022 Certain transactions, assets and liabilities are forecast to be exposed to foreign currency risk Therefore, They have been monitoring their foreign currency risk on a daily basis to maximize the economic efficiency of their foreign currency hedge positions

The foreign currency risk associated with certain non-U.S dollar investments is hedged using foreign exchange forward contracts designated as fair value hedging instruments The foreign currency risk associated with certain Euro-denominated liabilities is hedged using foreign exchange forward contracts as a cash flow hedge

Certain options and forward contracts that are not designated as hedging instruments are also used to manage changes in exchange rates for certain amounts on the balance sheet and to manage other foreign currency risks

Foreign exchange exposure hedging objectives and strategies in Unilever The Group manages currency exposures within prescribed limits, mainly through the use of forward foreign currency exchange contracts Operating companies manage foreign exchange exposures within prescribed limits The aim of the Group’s approach to management of currency risk is to leave the Group with no material residual risk

The Group is also subject to currency risk in relation to the translation of the net investments of its foreign operations into euros for inclusion in its consolidated financial statements According to Unilever Annual Report and Accounts 2022 , Unilever aims to minimize this currency risk on the Group’s net investment exposure by borrowing in local currency in the operating companies themselves In some locations, however, the Group’s ability to do this is inhibited by local regulations, lack of local liquidity or by local market conditions The Treasury may decide on a case-by-case basis to actively hedge the currency exposure from net investment in foreign operations This is done either through additional borrowings in the related currency, or through the use of forward foreign exchange contracts Local currency

borrowings, or forward contracts, are used to hedge the currency risk in relation to the

Group’s net investment in foreign subsidiaries, these relationships are designated as net investment hedges for accounting purposes Exchange risk related to the principal amount of the USD denominated debt either forms part of the hedging relationship itself, or is hedged through forward contracts

In general, both companies use the same forex hedging strategy of using foreign exchange forward contracts A Foreign exchange forward contract helps them hedge against currency fluctuations as changes in exchange rates can have huge effects on their budget Locking in a specific price for a specific period helps them to significantly minimize the risk of losing cash As 2 the MNES , we mentioned above , basically it can easily be seen that there are not many dissimilar uses of hedge instruments, there is only the difference in the value of Foreign exchange forward contract which is more suitable for the circumstance and appreciated by the MNES

3 Mini-case chapter 2: The internationalization (or not) of the Chinese Renminbi (P.69,

Eitemanet al., 2021) (15th global edition)

3.1 Why would the Chinese government wish the renminbi to become a global currency? What are the costs and benefits of that greater global role?