Disruption of Us-China Trade Wars on China.

4.1 Disruption of US-China Trade Wars on China

Zhongxing Telecommunications Equipment Corporation or ZTE is one of China’s leading technology exporters with 80% of its technology and components rely on U.S. suppliers. Therefore, its exclusion from the U.S. market has brought it close to bankruptcy since it can not operate without American components and operating system (Babones, 2018).Since 2012, Huawei Technologies and ZTE Corporation have been suspected by the U.S. government of enabling the Chinese government to conduct cyber espionage. In August 2018, the two companies were banned from use by the U.S. government and government contractors. Huawei is dependent on chip technology from Qualcomm (QCOM) and the Android operating system from Google parent Alphabet (GOOGL). China also depends on chip-equipment technology dominated by Applied Materials (AMAT), Lam Research (LCRX) and KLA-Tencor (KLAC) (Investors, 2018).

Vision Inc. is a large U.S-based multinational corporation with subsidiaries in eight different countries. The company provided initial cash infusion to establish each subsidiary. However, each subsidiary has had to finance its own growth since then. The parent and subsidiaries of Vision Inc. typically use HSBC (with branches in numerous countries) when possible to facilitate any flow of funds necessary.

Required

a. Explain the various ways in which HSBC could facilitate Vision Inc. flow of funds, and identify the type of financial market where that flow of funds occurs. For each type of financing transaction, specify whether HSBC would serve as a creditor or would simply be facilitating the flow of funds to Vision Inc.

b. Recently, the British subsidiary of Vision Inc. called on HSBC for a medium–term loan and was offered the following alternatives.

Loan Denomination in Annualized Rate

British Ponds 13%

U.S dollars 11%

Canadian Dollars 10%

Japanese Yen 8%

Evaluate the important characteristics that should help the British subsidiary in choosing a particular currency to borrow money.

Case-2

Fine Goods Inc. is a U.S based MNC that has been aggressively pursuing business in Eastern Europe since the Iron curtain was lifted in 1989. Poland has allowed its currency’s value to be market determined. The spot rate of Polish Zloty is $.40. Poland also has begun to allow investments by foreign investors as methods of attracting funds to help build its economy. Its interest rate on 1-year securities issued by the federal government is 8%, which is substantially higher than the 3% rate currently offered on 1-year U.S treasury securities.

A local bank has begun to create a forward market for Zloty. This bank was recently privatized and has been trying to make a name for itself in international business. The bank has quoted a 1-year forward rate of $.39 for the zloty. As an employee in the MNC’s International money market division, you have been asked to assess the possibility of investing short-term funds in Poland. You are in charge of investing $50 million over the next year. Your objective is to earn the highest return possible while maintaining safety (since the firm will need the funds next year).

Since the exchange rate is has just become market determined, there is a high possibility that the Zloty’s value will be very volatile for several years as it seeks its true equilibrium value. The expected value of the Zloty in year 1 is $.40 but there is a high degree of uncertainty about this. The actual value in 1 year may be as much as 40% above or below this expected value.

Required

a. Would you be willing to invest the funds in Poland without covering your position? Assess.

b. Suggest how you could attempt covered interest arbitrage. Also calculate the expected return from using covered interest arbitrage.

c. Evaluate the risks involved in using covered interest arbitrage here.

d. If you had to choose between investing your funds in U.S Treasury bills at 3% or using covered interest arbitrage, what would