During a shopping spree in China , C. Dundee has bought a Sony CD boom box (with woofers and tweeters) for CY 2,000, jade jewelry for CY 4,000, and four custom-made suits for CY 25,000. The spot exchange rate is CY/AUD= 5.

(a) If PPP held, what should the same boom box, jewelry, and suits cost in Australia?

 (b) Suppose Mr Dundee is (unexpectedly) stopped at customs as he arrives in Melbourne, and must pay import duties of 20 percent. If the same boom box, jewelry, and suits cost AUD 450, AUD 1,500, and AUD 8,000 in Australia, respectively, was his shopping spree worth at least the HKD 10,000 paid for airfare and hotels during his trip?

Suppose you are working for an international investment firm, and you observe that the annualized return for 3-year Australian corporate bonds is 2.83% while and the annualized 3-year French corporate bonds is 3.58%.

1. You get the following quotes:

EA$/€ = 1.3653

3-year forward rate: FA$/€, 3-year = 1.3894

Is there any arbitrage opportunity?  If yes, what would you do?  If not, why?  Explain.  (8 points)

Note:  Assume your firm does not have any funds denominated in A$ and € and remember to do the interest rate conversion into appropriate time period (use the simple compounding method to covert annualized interest rate to the appropriate time period).

1. Suppose your firm can move the markets (i.e., change the spot exchange rate, the forward exchange rate, and the corporate bond yields in both countries), what happens to these four variables after the transactions you carried in part (a)? Explain in words.  (8 points)
2. Find the A$/€ spot rate such that your firm will be indifferent between holding the Australian corporate bonds and the French corporate bonds. (4 points)

Note:

• Keep your answers to 4 decimal points if needed.
• This question requires you to use the precise form of covered interest rate parity.
• Instead of the assumption made in class (individuals are small players and cannot affect the exchange rates and interest rates), the firm in this question is a LARGE player that has the ability to change the exchange rates and the corporate interest rates when it carries transactions in the spot exchange market, the forward exchange market, and corporate bonds markets in Australia and France.
• Use the subscripts “A” and “F” to represent all the variables and terms used for Australia and France respectively in your written explanation. You must use these notations; otherwise, you will receive a grade of ZERO for the whole question. 

Kyoto Midtown is a composite urban district of modern buildings surrounding a historic Japanese garden. It features sophisticated bars, restaurants, shops, art galleries, a hotel, and leafy public spaces. Kyoto Midtown aims to offer a unique shopping experience with a broad selection of outlets that include Japan's first flagship boutique and the world's first concept shops. From playful and trendsetting boutiques to prestigious brands valued the world over, it aspires to be a place for people who appreciate the finer things in life.

In the past few years, however, visitor numbers have declined. For this reason, the management of Kyoto Midtown shopping center feels that it is important to develop a better understanding of its shoppers in order to make the shopping experience to the next level. It wants to know what attracts customers to its stores, what customers need while shopping and how they go about shopping. Based on these insights, it wants to develop strategies that are closely aligned with its customers' shopping strategies, needs, and preferences.

The management of the shopping center has hired Hoshimi Kusunoki, an international full-time MBA student to produce a report complete with practical, hands-on recommendations ready for implementation. Born and raised in an upper-class family in Yamanote, Hoshimi is familiar with the lifestyle and attitudes of people visiting the Kyoto Midtown shopping center and the high expectations that they have.

A key aim of Hoshimi's research project is to find out what shoppers would need to increase the frequency of shopping at the center as well as to understand how it compares to other shopping centers in Kyoto competing for customers. Based on preliminary research, Hoshimi has been able to develop the following specific project objectives:

To establish the profile of shoppers.

To understand their awareness and usage of the Midtown shopping center.

To understand how shoppers travel to the shopping center, how far they have traveled, and how frequently they shop there.

To explore shopper behavior and understand what they have purchased or had expected to

To understand their expectations of the Midtown shopping center.

To understand their attitudes to the Midtown shopping center.

Hoshimi wants to conduct a structured face to face interview with 100 shoppers at the shopping center and a competing shopping center. The interviews will take place during the key shopping hours across every day of the week among a representative sample of participants.

Questions:

1. Hoshimi has planned to carry out structured interviews. How do structured interviews differ from unstructured interviews? Which would be more appropriate for this study and why?

2. What are the possible advantages and disadvantages of using face-to-face interviews in this situation?

3. The information obtained during interviews should be as free as possible from bias. How can Hoshimi minimize bias introduced by the interviewer, the interviewee, or the situation?

4. What advice would you give Hoshimi regarding the selection of participants for her interviews?

In 2003, China became the world's largest importer of iron ore. Between 2004 and 2005, China's steel production increased from by 26% from 270 to 340 million metric tons, or about one-third of world production. Fueled by rapid economic growth, production was projected to increase by a further 9% to 370 million tons in 2006. Iron ore is graded as fine and lump according to whether the majority of individual's particles have diameter of less or more than 4.75 millimeters. A third grade-pellets- is fined grained concentrate rolled into balls with diameter of 9.55 to 16.0 millimeters. Lump ore and pellets can be charged directly to a blast furnace, hence are most costly to use. Three companies- Australia's BHP and Rio Tinto, and Brazil's Companhia Vale do Rio Doce (CVRD)- control over 70 percent of worldwide exports of iron ore. By 2005, China purchased over 40% of world iron ore imports. Europe and Japan bought less than 25% and 20% respectively, in 2004, the principal sources of China's iron ore imports were Australia (78 million tons), India (50 million tons), Brazil (46 million tons), and South Africa (11 million tons). China imports a total of 5.7 million from other sources including Canada, Russia, and the USA, in 2005, China's import comprised 71% fine ore, 19% pellets, and 10% lumps. China imports of iron ore from India have been so large that Indian steel manufacturers lobbied their government to limit exports to China. To meet the burgeoning demand from China, BHP Billiton increased production by 45% from 72 million tons to about 105 million tons in just three years, 2002-05. Smaller Australian mining companies have also increased production capacity. These include Atlas Iron Ore, Fortescue Metals Group, Gindalbie Metals, Midwest Iron and Steel, Resource Mining Corporation, Golden West Resource, and Polaris. The big three iron one producer has entered into long-term supply contracts with major steel manufacturers. These contracts might specify minimum quantities that the ore producer must sell and the manufacturer must purchase. Steel manufacturers buy on free-on-board (FOB) basis. FOB buyers pay for freight. These contracts further specify that prices must be negotiated on an annual basis. European steel manufacturers buy relatively more fine ore. Prices for fine ore set the benchmark for prices for lump ore and pellets. The China Iron and Steel Association represent sixteen of China's major steel manufacturers in negotiation with iron ore producers. The association includes Baoshan Iron and Steel, which imports all of its iron ore, Maanshan Iron and Steel, which imports 75% of its iron ore, Chongqing Iron and steel, which imports 60 % and Angang New Steel, which imports relatively little iron ore. In late 2004, Nippon Steel of Japan agreed a substantial price increase with CVRD. Subsequently, CVRD and Rio Tinto negotiated a sharp 71.5% price increase with the China Iron and Steel Association for shipments in 2005-06. BHP Billiton calculated that the freight cost of shipping iron ore from Australia to China was about US $20 per ton less than shipping from Brazil. Accordingly, BHP sought a US$7.50 to $10 per ton surcharge from the China Iron and Steel Association in addition to the 71.5% price increase. The association rejected the surcharge as unreasonable and against international practice. China's Ministry of Foreign Affairs declined to intervene, saying that negotiation between BHP and Chinese steel manufacturer were commercial issue. However, China's Deputy Commerce Minister Ma Xiuhong remarked that BHP's surcharge would damage long-term relations between China and Australia. Meeting with resistance from the China Iron and Steel Association, BHP dropped its demand for the surcharge. However, Mr. Graeme Hunt, President of BHP Billiton Iron Ore, said that would raise the issue in the following year. Subsequently, BHP Billiton announced an 89% jump in profit to $6.4 billion for the year to June 2005, which was a record for an Australian company. China sales accounted for 12.6% of total revenue. BHP agreed to co-sponsor the 2008 Beijing Olympic Games by contributing money as well as golf, silver, and bronze for medals. Mr. Clinton Dines, President of BHP in China, said that the co-sponsorship would not dissuade BHP from re-opening discussions of surcharge. Meanwhile, Rio Tinto's profit increased 58% from $3.3 billion in 2004 to a record $5.2 billion in 2005. China sales accounted for 15% of total revenue.

Discussion question:

1. Why would steel manufacturers and iron ore suppliers agree to minimum purchases/sales in long-term contracts?

2. What advantage(s) would BHP Billiton gain by pricing steel manufacturers on a CIF (cost insurance and freight) rather than FOB basis?

3. What advantage(s) do Chinese steel manufacturers gain by negotiating jointly with iron ore suppliers?

4. How can Chinese steel manufacturers improve their bargaining position relative to BHP Billiton?