International Financial Management Harvard Case Solution & Analysis

Question No.1 (a)

The interest rate of Argentine is high as compared to the interest rate (risk-free rate) of the United Kingdom. Interest rate is set by the Federal government in order to control inflation. If one country has a higher interest rate, which means there is high inflation in the country due to over-supply of money in the market. Similarly, the country which has lower interest so it can also be pointed out that the country would not have higher inflation.

It can be determined that a higher interest rate means no opportunities, and no commercial growth or expansion. Since, no company would like to pay higher interest rate, so opportunities into the market would not be availed, and consequently it would affect the money supply, and enforce the market to reduce inflation. The major concern in this situation is that many opportunities are left, and investment tends to provide lower return yields.
International Financial Management Harvard Case Solution & Analysis

Argentina has higher interest rate, and UK has lower interest rate or risk-free rate that means Argentina has lower opportunities for the business, and there is no growth. Similarly, UK has lower interest rate,and there are greater growth opportunities for companies. Because, the companies could avail loans on lower interest rates, and that investment in the country would increase which would provide higher yield as compared to Argentina.

It can be seen that the interest rate in Argentina is consistent relatively at a higher side which shows that the economy is having high inflation and it will lead to the high money supply as people will not be borrowing money because they will have to pay higher financial costs and the government will have to keep their monetary policy tighter for restricting the over flowing money supply and reverse the interest rate to keep the money supply up to the mark and vice versa. Whereas, People of UK will borrow money and invest in those securities which have higher growth opportunities so that they may maximize their wealth and pay finance cost easily and earn enough money to run their business operations and meet day to day personal expenses.

Question No. 1 (b)

Trade between two or more countries leads to some risks and benefits, and it is necessary to look at the transaction from both sides so that it provides a clear picture of the perceived value of the transaction of imports and exports. It also leads towards good relationship between countries and removing their trade barriers to make the trade easier and convenient for both the countries.

Risks

The major risk of trade is Low economic growth between these two countries as interest rate of Argentina is relatively high as compared to UK interest rate which leads to another risk of higher Inflation. It also creates risk for the monetary policy of both the countries and risk of variation in exchange rates......................

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