global finance in Featured F

Richard Artschwager was looking forward to having fun in Finland in the
summer of 1990. In a few days he was due to fly to Vaasa,.on the Gulf of
Bothnia. August, he had heard, was wonderful: one could stay up all. night
with barely a few hours of darkness. All at the expense” of the London
branch of Westdeutsche ‘ Landesbank, which had “hired Artschwager
straight out of university, where he had majored in art and economics. The
bank was seeking to develop stronger relationships with companies in the
north“ I1 rim of Europe: IlaIIl€1Y Norway, Sweden and Finland, countries
that were making noises about Wanting to join the European community.
Before he and his senior colleague went over, however, they had to pre-
pare. Their department rnanager had given them some statistics on the
country’s international transactions, for the bank wanted to understand
conditions in a country before getting involved. In particular the bank was.
concerned about what might happen to capital flows and the currency, the
Finnish markka; as readied “itself for possible membership_in the
European Monetary System. The-tables, shown as Exhibit 1 and Exhibit 2, M
gave summary information about Finland’s balance of payments.
What is this, a .test already? Artschwager wondered. Nevertheless he
was determined to give a credible showing of his answers to the questions.
Richard and Hans, please_examin’e ‘the attached figures on Finland ’s bal-
ance of payments for 1989, and tell me the following:
I Z. Did Finland have a trade surplus or deficit? What is the trend?
2. Was Finland ’s current account inusurplus or dqicit?
3.” What is the implication of your answer to the previous question for
Finland’s capital account?
4. Did Finland have a capital account surplus or deficit?‘
5. Did Finland have an overall balance of payments surplus or deficit?
6. Compare the country ’s overall balance of payments surplus or dgicit
with its change in ofiicial reserves.
7. (Even thatFinland had a fixed exchange rate in 1989, what is the
I . implication of your answers to the last two questions for conditions in
the domestic money market? I I

Bookwells
F O O C
mancmg CholC€S t

It was 9:30 on a cold Wednesday morning, and John Ackton had a prob-
lem. At 10:30 A.M. the company’s financial staff had a meeting: and john
was expected to make recommendations on how to finance the firm’s ex-
panding working capital;

John Ackton was Assistant Treasurer of Bookwell’s Ltd., a newly ac-
quired British subsidiary of Bookrite, the New York publishing firm. Based
in Oxford, Bookwell’s was a publisher and distributor of academic books;
at the time, their market was primarily in the United Kingdom. In their
last budget, Ackton and his colleagues had estimated additional working
capital needs of £2 million for the next six months.

john Ackton’s inclination was to take out a £2 million, six-month ster-
ling loan from Barclay’s Bank in London, with whom the company had
done business for years. He was keen to make a good show, however, of
evaluating all possibilities, so he had posed himself three questions.

First, should Bookwell’s borrow in England, as in the past, or should it
borrow in the Euromarket? What was the risk of the latter?
is 5
S.T. Sheridan, Jr. had been a customer of the middle marl<et/ private bank-
ing unit of C-Bank in San Antonio, Texas, for some years.

Theson of a wealthy doctor, he had great difficulty in his younger
years focusing on a career. After flunking out of several colleges,‘ he
traveled widely in Europe and even worked for a while in Germany as an
orderly in a -U.S. Arrnylhospital. S.T. finally returned home to Dallas, made
peace -’- sort of – with his dad and finished college at South Texas State.
By then he was 26 and it was time to settle on a career. With his academic
record, no respectable U.S. medical school was going to admit him. S.T.- Sr.
revived his hopes of having his son follow him in the medical profession
and provided the wherewithal to get Jr. into a medical school somewhere
south of the border.” . 7 _ _ _ A
As Director of Planning for Scott Paper Company,’ Dick Thompson does
not” typically have to get into arguments with the firm’s accountants,
Recently, however, his efforts to give Scott’s manufacturing subsidiariesin
Europe and japan more financial independence had been fiustrated by
the VP Finance, Who pointed to the losses these subsidiaries hadsustained
during the past six months. The reason was not in dispute: because of the
U.S. dollar’s rise of almost 7 percent against most other currencies, the‘
translated Value of the foreign subsidiaries had fallen.

Dicl<’s argument was that the loss was fictional, _a “paper loss”_ resulting
fromthe firm’s’ accountants ignoring the value of the overseas operations’
fixed assets and future revenues. “Because of purchasing power parity,”-he

said, “foreign prices tend- to rise, relative to U.S. prices, by an amount sufifi-
7 cienttooffset the currency change. For example, you were to take a few
representative goods in the United States, and compare the prices of iden-
tical goods injapan and Europe, translated into US, dollars at the current
rate, you’d find they’re similar.” ‘ _ _ I
“Is that so? Prove it!” retorted the chief accountant ‘Td betthat if you
compared the price of a Big Mac, or a gallon of gasoline or any other com-
parable commodity in a couple of different countries, you’d find that
there’s no practical relationship between prices and exchange rates.”
b Who is right? Can you identify the prices of one or.more comparable con-
sumer goods at least three different countries? Are their prices the same
in U.S. dollars, and if not, What is the percentage deviation from the_“law of
one price?” 1_’lease identify your sources! _ ‘ H ‘ ’ M