International Financial Markets: Exchange Rates and Inflation

You graduated with your Master’s three years ago and are now employed as a manager at a well-known UK company. The main Board of the company is considering setting up a subsidiary company in continental Europe. The exact location has not yet been decided, but the overwhelming likelihood is that it will be within an EU country. The Board propose to operate a pilot project, as follows: The project would require an initial investment of €10m (in year 0). The expected revenues are €3m at the end of year 1, €5m at the end of year 2, and €10m at the end of both years 3 and 4. Take the sterling/euro direct exchange rate as 1.05. The company’s money cost of capital is estimated as 8% p.a. For the foreseeable future, the rate of inflation in the UK is estimated to be 3% p.a., and in the euro economies as 1% p.a.

In addition to the provision of goods and services by the subsidiary to the UK and Eurocurrency markets, it is anticipated that the subsidiary will trade with companies in the Far East. Arising from these proposals and intentions, the Board seek information on international financial markets to help with their decision-making; consequently, they have instructed you to write a paper, containing illustrative examples where appropriate, addressing this need. The Chief Executive Officer has said that she wishes to read an academically sound paper entitled ‘International Financial Markets: Exchange Rates and Inflation’, presented in accordance with the Submission Notes given below. The matters that should be covered by your paper include, but are by no means to be restricted to, the following:

1 Foreign currency translation using direct and indirect rates of exchange and the calculation of cross rates between pairs of currencies;
2 The feasibility of estimating spot and forward rates of exchange;
3 Internal and external hedging techniques;
4 As an illustrative Appendix, an estimate of the net present value of the proposed pilot project. The Board require NPV (expressed in pounds sterling) to be calculated using four methods: firstly, using real Euro denominated cash flows discounted at the Euro base real rate; secondly, real Sterling denominated cash flows discounted at the domestic real rate; thirdly, using Euro denominated money cash flows discounted at the Euro base money rate; and, fourthly, using Sterling money cash flows discounted at the Sterling money rate.

You graduated with your Master’s three years ago and are now employed as a manager at a well-known UK company.  The main Board of the company is considering setting up a subsidiary company in continental Europe.  The exact location has not yet been decided, but the overwhelming likelihood is that it will be within an EU country.  The Board propose to operate a pilot project, as follows:  The project would require an initial investment of €10m (in year 0).  The expected revenues are €3m at the end of year 1, €5m at the end of year 2, and €10m at the end of both years 3 and 4.  Take the sterling/euro direct exchange rate as 1.05.  The company’s money cost of capital is estimated as 8% p.a.  For the foreseeable future,the rate of inflation in the UK is estimated to be 3% p.a., and in the euro economies as 1% p.a.

In addition to the provision of goods and services by the subsidiary to the UK and Eurocurrency markets, it is anticipated that the subsidiary will trade with companies in the Far East.  Arising from these proposals and intentions, the Board seek information on international financial markets to help with their decision-making; consequently, they have instructed you to write a paper, containing illustrative examples where appropriate, addressing this need.  The Chief Executive Officer has said that she wishes to read an academically sound paper entitled ‘International Financial Markets: Exchange Rates and Inflation’, presented in accordance with the Submission Notes given below.  The matters that should be covered by your paper include, but are by no means to be restricted to, the following:

1    Foreign currency translation using direct and indirect rates of exchange and the calculation of cross rates between pairs of currencies;
2    The feasibility of estimating spot and forward rates of exchange;
3    Internal and external hedging techniques;
4    As an illustrative Appendix, an estimate of the net present value of the proposed pilot project.  The Board require NPV (expressed in pounds sterling) to be calculated using four methods: firstly, using real Euro denominated cash flows discounted at the Euro base real rate; secondly, real Sterling denominated cash flows discounted at the domestic real rate; thirdly, using Euro denominated money cash flows discounted at the Euro base money rate; and, fourthly, using Sterling money cash flows discounted at the Sterling money rate.

Required:

Prepare the paper that the Board wish to consider.
[Total 100%]

One of the common characteristics of those EM4001Continuous Assessment submissions that received unsatisfactory grades in previous years was a failure to comply with the submission requirements.  Many failing candidates seemed to think that it didn’t matter if they ignored these detailed requirements: consequently, many candidates who had worked diligently (and whose submissions contained good work) nevertheless scored poorly, simply because of non-compliance with the Submission Notes or other requirements.  If you are unsure of the appropriate format to use for your submission, part of your task is to find out, because significant marks will be deducted if an inappropriate format is used.  As part of ensuring that your submission is in the correct style, you need to take the Submission Notes below seriously: they are not optional, and marks will be specifically allocated for compliance with them.  To reiterate, compliance, in every particular, with the GeneralSubmission Notesbelow and the Continuous Assessment Requirements is mandatory.

In addition, you are warned that citation from the Wikipedia website will result in a mark of zero.

General Submission Notes

Submissions must be bound by a staple in the top left-hand corner of the manuscriptonly.  Your submission must not be contained within a folder, plastic wallet, plastic envelope, or any other cover whatsoever: failure to comply with this requirement will automatically lead to the award of a zero mark — don’t fail on a technicality.

Submissions must be made in English and typed or word-processed in double-spacing on one side only of A4 size white paper with 3.5cm wide margins on both the left-hand and right-hand sides of the paper.

The requirements regarding font styles are as follows:

Font: Black Times New Roman throughout
Heading 1 (sections): 12pt; bold; all capitals
Heading 2 (subsection): 12pt; bold; capitals and lower case
Heading 3 (item): 12pt; italic; capitals and lower case
Body text: 12pt; justified; 2.0 line spacing
Page numbers: 12pt; bottom of page; centred

In addition to the multi-part submission sheets, the manuscript should have a separate initial cover page.  This cover page should give the title of the manuscript, the author’s name, SUN number, and degree course.

The cover page should be followed by the first page of the text, comprising the title of the paper (but not the author’s name) and an abstract of no more than 200 words.  A ‘Contents’ listing must not be included.  ‘Body text’ as a heading is unacceptably uninformative.

Submissions should be as concise as is consistent with clarity.  Tables and figures should be numbered consecutively in Arabic numerals with a descriptive caption.  Notes should be used only where necessary to avoid interrupting the continuity of the text, should be numbered consecutively, and should be placed at the end of the paper before References.

Acknowledgement of the work of other people must be made unambiguously to identify both author and their work with precision.  It is not acceptable to put an author’s name and a date at the end of a sentence or paragraph.  This applies whether the paragraph istaken from someone else’s work verbatim or contains a mixture of original (your) and derivative (someone else’s) work.  This is because all derivative material must be identified precisely.  Further, if you include other people’s words in your submission, then, to avoid plagiarising, you must properly attribute the words to their author not only by unambiguously providing a citation, but also by putting the words quoted in inverted commas.  It is not acceptable to omit the inverted commas and merely include the source in References — that is plagiarism and it has been, andwillcontinue to be, treated as cheating.  Since this Module was introduced in 2004, I have reported at least one student for plagiarism each year and every accusation that I have made has been found proven: if you plagiarise or are reckless in your citation, I shall detect it, charge you with the offence, and have you found guilty.

References should follow the Harvard system that uses the surname (only) of the author and date of publication as a key to the full bibliographical details, which are to be set out in References.  When an author’s name is mentioned in the text, the date is inserted in parentheses immediately after the name, as in ‘Edwards (1992)’: for example:

That mainstream commentators operate within a framework of ontological realism has been asserted by Chua (1986), Morgan (1988), Hines (1988), and Gaffikin (1988).

When a less direct reference is made to one or more authors, both name and date are bracketed, with the references separated by a semi-colon, for example:

Furthermore, some distinguished commentators have made similar remarks (e.g. Clooney, 1993; Stringfield, 1994; Wyle, 1985).

When the reference is to a work of dual or multiple authorship, the abbreviated form may be used, for example:

Margulies et al. (1996) assert that the efficacy of Lazorol is yet to be demonstrated by a conclusive clinical trial.

Alternatively:

Margulies, Ruben, and la Salle (1996) assert that the efficacy of Lazorol is yet to be demonstrated by a conclusive clinical trial.

If an author has two references published in the same year, add lower-case letters after the date to distinguish them, as in:

There have been numerous calls for further research to be conducted in this area, e.g. Innes (1998a, 1998b).

The date of publication used is the date of the source to which you have referred.  However, when using a republished book, a translation, or a modern edition of an older edition, you should also give the date of the original publication, as in: ‘McCrane (1994/1832)’, to place the work chronologically and locate it in the reference list.  When using a reprinted article, cite the date of original publication only.

Page numbers are indicated by inserting the relevant numbers after the date, as in ‘Kingston (1999, p. 81)’ or ‘Tierney and Chen (1985, pp. 745-9)’.  Use the minimum number of figures in page numbers, dates, and so on, e.g., 123-7, 1008-9, 1967-72, except where the penultimate digit is 1, e.g. 212-14, 1914-17, etc.

The References section must include all references cited in the text and no others.  References should be arranged in alphabetical order according to the surname of the first author.  Full bibliographical details are required for all references.  The following examples demonstrate required styles:

1. Journal articles should be referenced, thus:

Greene, M. & Ross, D., ‘Wittgenstein’s Circularity Conjecture: A Review’, Philosophy and Society, Vol. 102, No. 3, 1925, pp. 87-110.

2. Books should be referenced, thus:

Lewis, S., Some Problematic Aspects of Sororal Solidarity in the Face of Bipolarity (7e) (Chicago: Chloe Books, 1996).

3. Citations from edited books should be referenced, thus:

Benton, P., ‘Clamp and Run Techniques Revisited’, in W.H. Morgenstern and R. Romano (eds), The Politics of Surgery, pp. 289-441 (London: Lawrence &Wishart, 1993).

4. Translated books should be referenced, thus:

Kovac, L., Preljuba (Split: Objaviti‘Stampa, 2002).  Rosebud, G. Pratt (trans) (Berkeley, CA: The Owl & Runt Press, 2003).

5. References to a report should be referenced, thus:

IPO Committee on Globalisation.The Role of the Philosopher in Countering Health Fascism (Firenze: International Philosophical Organisation, 2004, Occasional Report Series 23).’

6. Newspaper articles should be referenced, thus:

The Chicago Times Literary Supplement, ‘The day that shook the world’, 23 August 2003, p.9.

Note also that ‘n.d.’ should be used where no date of publication is given.  If there is no author to cite, ‘Anon.’ should be used; however, it is quite legitimate to cite a corporate author such as a professional body or a government department.  Acronyms should be avoided: the name of the organisation should be given in full.  Where citation is of an edition of a book other than the first, specify the edition cited.

The data for references should be taken from the document used.  Any additional descriptive information supplied should be given in square brackets, as in:

‘Moncrieff, O., Aggression in Post-parturient Vixens [in English suburban gardens], (1994, private communication with the author).’

Where there are different journals with the same title, add the place of publication in parenthesis, as in Journal of Management Accounting Education (New York) or Journal of Management Accounting Education (London), as appropriate.

Untranslated books and articles should be cited in their original language (Romanised where necessary) with an English translation in parenthesis if this is considered helpful.  Any information not in the Roman alphabet should be transliterated or Romanised.

In the case of unpublished material, such as research reports, theses, and dissertations, details of the work, level, department, body, or University involved, replace the usual publication details, as in:

‘Carpenter, W. D. J., Principia Mathematica: TractatusLogico-philosophicus, (1979, D.Phil. thesis, Trinity College, Cambridge University).’

There is not yet a standard format for citing Internet material; however, the main components of any Internet citation are the document’s URL and the access date.  The rest of the citation should match the standard format for printed works as closely as possible.

This is an individual assignment…
…and the Specification set out above is complete in itself and no further information will be supplied.  If any aspect of the Specification is unclear to you, you should make such reasonable assumptions as enable you to comply with the requirements.  Any assumptions that you do make should be declared and justified within your submission.

The language used in this Part 9 section may be denser than that to which you are used: it is part of your task to ‘decode’ this dense language — please don’t embarrass yourself by asking your tutor to do it for you.

The Continuous Assessment Requirements that follow form an integral part of this Specification.

PART 11: Continuous Assessment Requirements

Introduction

The mark awarded for Continuous Assessment submissions will reflect achievement, not effort.  Every year, many candidates put in a great deal of effort, but penalise themselves through poor technique.  These notes are intended to facilitate the avoidance of technical errors and stylistic infelicities.

The following notes are divided into several short sections.  The first is concerned with plagiarism and its avoidance.  The second section gives advice on citation and referencing.  Section three is concerned with presentation of your work.  The next section deals with the type of language, or ‘register’, in which your submission should be written.  Section five deals with the general approach to Continuous Assessment, and section six is concerned with the timely submission of completed Continuous Assessment.  The final section comprises a summary of stylistic imperatives.

1    Plagiarism and its avoidance

The notes that follow are not a substitute for a careful reading of the University’s regulations relating to plagiarism, collusion, and other forms of cheating.

Your submission must be entirely your own work.  The University defines collusion as ‘where two or more people have worked together without permission to produce a piece of work which is then submitted for assessment as the work of only one person’.  Collusion is a form of cheating, and carries correspondingly severe penalties.  It follows that your submission must not be the result of unauthorised collaboration between you and any other person, including other students and members of staff.  Occasionally, students ask tutors to read draft submissions ‘to see if it’s on the right lines’.  Such requests are inappropriate (and therefore never met), not only because the exercise of your judgement as to the suitability of possible approaches is an integral and significant part of the task, but also because giving such feedback would make the submission a collaborative work between student and tutor.

For similar reasons, the Continuous Assessment requirement is complete in itself and no further information will be supplied.  If any aspect of the Continuous Assessment remains unclear to you, despite your best efforts to make sense of it, you should make such reasonable assumptions as enable you to comply with the requirements.  In addition, any such assumptions that you make should be declared and justified within your submission.

The University defines plagiarism as ‘a form of cheating in which a student uses, without acknowledgement, the intellectual work of other people and presents it as her or his own’.  Plagiarism is a deplorable offence for at least three reasons.  Firstly, failing to acknowledge the person who first used a particular form of words is unfair to that person.  Secondly, plagiarism is theft (of intellectual property).  Thirdly, plagiarism is deceitful — it is an attempt to deceive the reader into believing that the writer is capable of the power of expression that the words display.  For all these reasons, plagiarism is cheating and carries severe penalties.

Unlike plagiarism, attributed quotation from the works of other authors (published or otherwise) is encouraged — but it is emphasised that attribution of the source must be made.  If you include other people’s work in your submission, then to avoid plagiarising you must properly attribute the words to their author by providing a reference.

Proper attribution of other people’s words requires that the words quoted appear in inverted commas and that the passage concerned is unambiguously referenced:

it is not acceptable to omit the inverted commas and merely include the source in a list of references — that is plagiarism and it will be treated as cheating.

The reference must be sufficiently detailed to enable the reader to locate and read the original words for herself or himself.  It is essential that you provide such references whenever you use the work of other people, whether that work is from a published article or book, unpublished lecture notes or from any other source.  Failure to do so is plagiarism, which is cheating, and carries correspondingly severe penalties.  If you are unsure whether you have properly attributed the work of another person, do not hesitate to ask the tutor who will be assessing your submission for advice.

2    The citation and referencing of published and other material

Reference to the work of other people should be a significant feature of Continuous Assessment submissions.  A submission that consists entirely of your own thoughts on a subject and disregards the body of work that has been created by the academic community over many years is unlikely to cover the issues adequately.  You should see part of your task as being to provide a critical review of the work that has already been performed in the area concerned.  In appraising the arguments, references to the work of earlier researchers provide evidence to support your conclusions.  Articulation of a relevant point will gain you some credit, but articulation of that same point, supported by a reference to a journal article (or book), will gain even more credit.  For that reason alone, it is imperative to cite journal articles and books that you have used in the course of preparing your submission.

Good practice

You are strongly advised to retain and safeguard all notes and other resources (including any computer files) used in drafting your submission until after your mark has been released: this is because if your work is copied, even without your knowledge, in the subsequent plagiarism case the question of collusion and your complicity will arise.  To be blunt, if your work is copied by someone else, the onus will be on you to prove that the work originated with you.  Of course, to prevent others from copying from you without your knowledge, you are strongly advised to make full use of all available computer security measures at all times.

In addition, you must ensure that you make back-up copies of your work and retain them until after your mark is released.  You must ensure that your back-up copies are held on the University’s servers.  In the unlikely event of your work being mislaid after submission, this will ensure that you are able to receive full credit for your work.  If your work is mislaid after you hand it in and you are unable to produce a back-up copy when requested, you will receive a zero mark.

It is good practice to record as soon as possible full details of the author, title, publisher, date, etc. of useful material to which you intend to refer, because trying to trace details later is often both difficult and time-consuming.  Use filing cards, or a manual or electronic notebook, to record your references.  Your notebook should be beside you as you read, ready for you to capture useful material.

You should be aiming to achieve the level of professionalism required of contributors by journal editors.  For example, the details in your reference list must be accurate, complete, and consistent with your chosen citation system — journal editors will reject an article if there is a single reference for which there is an incomplete, or missing, citation.

3    Presentation and Structure

There are two aspects to the way you present your work to the reader.  Firstly, as a matter of courtesy to the reader, you should make his or her task as easy and enjoyable as possible.  Secondly, self-interest requires that your work should be presented in the best possible light because, whether you like it or not, the way in which you present your submission will have an impact on the mark you are awarded.

You should carefully consider the ‘user-friendliness’ of the finished submission.  A tightly bound package, parts of which can only be read by dismantling a complicated binding, will not be assessed (in 2008/09 one submission was bound by a staple in the top left-hand corner and by another staple in the bottom right-hand corner: this Continuous Assessment was returned unopened and assessed at zero).  Obviously, tiny print and poorly reproduced material will also count against you.  It should go without saying that only one side of the paper should be used: if both sides of the paper are used, only the upper side of each sheet will be assessed.  It is sensible to place page breaks so that your tutor is given a reasonable amount of space in which to write summary comments.  You should make use of the facilities afforded by your word-processing package to check grammar and spelling.

If the requirement of the Continuous Assessment Specification is divided into separate parts, you should provide a separate, self-contained answer to each of those parts.  Where a submission is received that fails to conform to this requirement, policy is to assess the entire submission as if it were a response to the first part only (and to award zero for each of the remaining parts on the grounds of non-submission).  Clearly, in these circumstances, much of the submission deemed to be in response to the first part only will be irrelevant to that part and this fact will be reflected in the mark awarded.

Apart from the word limit for the Abstract, there is neither a maximum nor a minimum word limit: however, experience suggests that the average student will write between approximately 2,500 and 3,500 words.  If you find that you can cover the material comprehensively in less than 2,500 words, that is perfectly acceptable.  Similarly, if you find that you can produce unrepetitive, unpadded, and relevant work that exceeds 3,500 words that, too, is perfectly acceptable.

4    Style and register

Finding a way of conveying to undergraduates the nature of language appropriate to Continuous Assessment submissions is a matter that occupies tutors in many disciplines.  The basic problem is that many students are unaware of the need to adopt a different ‘register’ in Continuous Assessment submissions from their everyday spoken English.  Everyday spoken English is ungrammatical, imprecise, and informal.  Continuous Assessment submissions should be grammatical, precise, and formal: in a word, ‘scholarly’.  Continuous Assessment submissions that are ungrammatical, contain spelling errors, fail to achieve precision, or are informal are penalised .

A frequently heard complaint about submissions is that they are ‘journalistic’, rather than scholarly.  To gain an insight into the register or ‘tone’ required, you should be familiar with that of articles in academic journals, for example, Journal of Business Finance and Accounting, Journal of Finance, or the Journal of Financial Economics.

When you read articles in academic journals, you will notice that they do not include the use of colour, or logos, or other unnecessary diagrams.  Where relevant, tables, graphs, and other diagrams can help immensely with explication: however, the inclusion of irrelevant pictures (whether ‘clipart’ or imported photographs) is deplored.  Cartoons of men with magnifying glasses, photographs of piles of money, and other incongruous pictures with no informational content are irrelevant, childish, and penalised .

It is emphasised that quality is more important than quantity.  It is also emphasised that a scholarly piece of work is required.  You should write in the third person, justify your assertions, defend your opinions, cite sources, and list them in a References section (not a Bibliography) at the end of your submission.

To summarise: in your submission, you should emulate the style and register of articles in academic journals.  Some further aspects of style and register are now examined.

English language

Experience has shown that poor use of English is by no means restricted to overseas students.  Since effective communication is an important part of this Module, assessment of Continuous Assessment and examinations involves consideration of use of English.  If your English is weak, you need to work at improving it.  Some books that may help you are as follows:

Mind the Gaffe by R. L. Trask (published by Penguin) has the twin advantages of being (largely) sound and easy to read ;
The original H. W. Fowler’s A Dictionary of Modern English Usage is sound, easy to read, relevant, great fun and republished by Oxford University Press at less than £10 ;
The King’s English by H. W. Fowler & F. G. Fowler is also recommended;
The Complete Plain Words by Sir Ernest Gowers is sound but somewhat recondite, covering a good deal of advanced material that is unlikely to be relevant to many.

You will need a good dictionary, and The Chambers Dictionary is considered by many to be the best single volume dictionary available .

On evidence

Generalisations are a feature of journalism and are often open to challenge.  Too often candidates make assertions based merely on personal experience (which is to say that they are based on personal prejudice), rather than on evidence.  If you think that you may usefully make a generalisation, or a more particular claim, you should cite evidence to support your assertion (such as a reference to a journal article), or, of course, supply your own deductive logic from other statements that are themselves supported by references, or else are of very wide acceptance.

Citing evidence is excellent insurance: if you make a claim that is true and you cite evidence to support your assertion you will get more credit (= marks) than if you simply make the assertion.  Better still, if you make a claim that is untrue but you cite evidence to support your assertion you will still get credit (= marks) — whereas if you write nonsense unsupported by any evidence it will count against you.  Citing evidence puts you in a win-win situation — get used to citing evidence for all your assertions, no matter how obvious they may seem to you.  Even postgraduates frequently underestimate the volume of evidence required: in over 25 years’ university lecturing, this author has never encountered a submission where the volume of cited evidence has been excessive.

5    General notes on completing Continuous Assessment

Candidates should have developed the ability to analyse and draw conclusions.  Questions that can be adequately answered by mere recitation of facts are never set.  Every effort has been made to avoid ambiguities, and no questions designed to trick candidates are ever set.  If a question appears capable of bearing more than one interpretation, take the one that appears most probable, but make sure that the interpretation you choose is probable, and not merely possible: your tutors do not expect you to conjure with words.

It is reiterated that the mark awarded to your submission will reflect achievement, not effort.  In the past, many candidates have put in a great deal of effort, but penalised themselves through faulty technique and poor presentation.  In Continuous Assessment submissions for this module, you should aspire to achieve the level of scholarly presentation met in articles published in journals such as Journal of Business Finance and Accounting, Journal of Finance, Accounting, Organizations and Society or the Journal of Financial Economics In this context, scholarly implies that you will:

•    Use evidence carefully
•    Review and refer to the existing literature on the subject
•    Cover the subject matter thoroughly
•    Address the question(s) set.

Continuous Assessment that requires discussion or comment will often include an introductory quotation or position statement (whether explicitly stated or implicitly implied).  An adequate submission will include some background ‘scene-setting’, of course: however, the crucial component of the submission should be analysis — so ensure that you address the Continuous Assessment set.  A common cause of failure is the submission of work that is all background and no analysis.  This is because comparatively few marks are ever available for purely de