The strategy to cope with the catastrophic loss for an insurance company involves various techniques. Here are some of the strategies: 1. Reinsurance. 2. Diversification. 3. Risk Management. 4. Capital Management. 5. Catastrophe Bonds.
The strategy to cope with the catastrophic loss for an insurance company involves various techniques. The aim of insurance companies is to protect against possible risks or catastrophes.
Hence, a catastrophic loss is the greatest nightmare of an insurance company. When it happens, it could destabilize the company's financial position. That's why insurance companies need to devise strategies to cope with catastrophic loss.
Here are some of the strategies to cope with the catastrophic loss for an insurance company:
1. Reinsurance: Reinsurance is one of the best methods to cope with catastrophic loss for an insurance company. It involves transferring some risk to a third party, typically a reinsurer. The reinsurer then assumes a portion of the original insurer's risk in exchange for a premium. By doing so, the insurance company limits its exposure to catastrophic loss.
2. Diversification: Diversification is another strategy to cope with catastrophic loss for an insurance company. It involves spreading the risk across different lines of insurance or different geographic regions. By doing so, an insurance company can reduce the risk of a catastrophic loss in a single line of business or location.
3. Risk Management: Risk management is an essential strategy to cope with catastrophic loss for an insurance company. It involves identifying, assessing, and managing risks. By doing so, the insurance company can take steps to reduce the likelihood of a catastrophic loss.
4. Capital Management: Capital management is another strategy to cope with catastrophic loss for an insurance company. It involves managing the company's capital base to ensure that it has sufficient funds to cover losses. By doing so, an insurance company can weather a catastrophic loss without suffering financial difficulties.
5. Catastrophe Bonds: Catastrophe bonds are another strategy to cope with catastrophic loss for an insurance company. They are a form of securitization that allows insurance companies to transfer risk to the capital markets.
Catastrophe bonds are typically used to cover losses from natural disasters such as hurricanes or earthquakes. By doing so, an insurance company can reduce its exposure to catastrophic loss. These are the strategies to cope with catastrophic loss for an insurance company.
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The graph on the right shows an IS-LM graph for an economy. Point A on the graph represents the economy at potential output. Yn, with the natural rate of Real interest rate, r interest, rn, and stable inflation. Assume the country is running a deficit at point A. If the government decides to raise taxes in order to reduce the deficit, what impact would this have in the short run? What action might the central bank take in the medium run? 1.) Using the 3-point curved line drawing tool, draw a new IS curve that reflects the government's efforts to reduce the deficit Label your curve LM 2) Using the point drawing tool, show the short-run equilibrium that results from having raised taxes. Label your point "A2 IS 3.) Using the line drawing tool, draw a new LM curve that reflects the central bank's reaction to adjust the economy back to a medium-run equilíibrium Label your curve LM2 4.) Using the point drawing tool, show the medium-run equilibrium that results from the efforts of the central bank Label your point Ag Output.Y Carefully follow the instructions above and only draw the required objects In this example, short-run fiscal consolidation leads to bank will react by equilibrium, the economy i The central the policy rate, and in the medium-run 0 A, a recession, lowering: back to potential output but the natural policy O B. a recession, lowering, back to potential output and back to the original o c. an expansion, raising, below potential output but the natural policy rate O D. an expansion, raising, back to potential outout but the natural policy rate is lower natural policy rate. is back to its original level rate is lower
In the short run, raising taxes to reduce the deficit will lead to a recessionary impact on the economy.
The new IS curve reflects this contractionary fiscal policy.
In the medium run, the central bank may react by lowering the policy rate to stimulate economic activity and bring the economy back to potential output.
The new LM curve represents the central bank's response, and the medium-run equilibrium occurs at a lower natural policy rate.
1. Using the 3-point curved line drawing tool, draw a new IS curve that reflects the government's efforts to reduce the deficit. Label your curve LM.
The new IS curve will shift to the left to represent the contractionary effect of raising taxes. This indicates a decrease in aggregate demand and a contraction in the economy.
2. Using the point drawing tool, show the short-run equilibrium that results from having raised taxes. Label your point "A2 IS."
The short-run equilibrium will occur at the intersection of the new IS curve and the LM curve. This point represents the temporary situation following the tax increase, where the economy experiences a recessionary output level.
3. Using the line drawing tool, draw a new LM curve that reflects the central bank's reaction to adjust the economy back to a medium-run equilibrium. Label your curve LM2.
To address the recessionary impact, the central bank may respond by lowering the policy rate to stimulate investment and consumption. This will shift the LM curve downward.
4. Using the point drawing tool, show the medium-run equilibrium that results from the efforts of the central bank. Label your point "Ag Output.Y."
The medium-run equilibrium occurs at the intersection of the new LM2 curve and the original IS curve. This point represents the economy returning to its potential output level, although with a lower natural policy rate due to the central bank's intervention.
In summary, the short-run impact of raising taxes to reduce the deficit is a recessionary contraction in the economy. The central bank may respond by lowering the policy rate to stimulate economic activity and bring the economy back to its potential output level in the medium run. This is represented by the new LM2 curve and the medium-run equilibrium point labeled "Ag Output.Y." The lower natural policy rate reflects the adjustments made by the central bank to counteract the recessionary effects of the fiscal consolidation.
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Paying interest to lenders is classified as an operating activity on the statement of cash flows. True or False
The given statement "paying interest to lenders is classified as an operating activity on the statement of cash flows" is false.
The paying interest to lenders is not classified as an operating activity on the statement of cash flows. It is categorized as a financing activity. The statement of cash flows classifies cash flows into three main categories operating activities, investing activities and financing activities.
The operating activities involve cash flows directly related to the core operations of the business, such as revenue from sales, payments to suppliers and salaries paid to employees. These activities are essential for generating revenue and profits.
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32. Two coffeemakers are available for purchase. One costs more to buy but less to operate. Silvio thinks the coffeemakers will last forever, and he behaves as if is never going to die himself. He is indifferent between the brands. At what interest rate would you he be indifferent between the two machines? Show your work. (3)
The interest rate at which Silvio would be indifferent between the two coffeemakers is given by (C2 - C1) / (O1 - O2).
To determine the interest rate at which Silvio would be indifferent between the two coffeemakers, we need to compare the present value of their costs. Let's denote the cost of the more expensive coffeemaker as C1 and the cost of the cheaper coffeemaker as C2. Additionally, let O1 represent the operating cost per year for C1 and O2 represent the operating cost per year for C2. The present value of costs for each coffeemaker can be calculated using the formula: PV = C + (O / r)where PV is the present value, C is the initial cost, O is the annual operating cost, and r is the interest rate. Since Silvio believes the coffeemakers will last, we can assume an infinite time horizon. Therefore, the present value of costs simplifies to :PV = C + (O / r)Since Silvio is indifferent between the two coffeemakers, their present values of costs should be equal:C1 + (O1 / r) = C2 + (O2 / r)
To find the interest rate at which Silvio is indifferent, we can rearrange
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Break-even and margin of safety LO P2 Coors Company expects sales of $456,000 (5,700 units at $80 per unit). The company's total fixed costs are $210,000 and its variable costs are $30 per unit.
Compute
(a) break-even in units and
(b) the margin of safety in dollars.
The answer is, the margin of safety in dollars is $120,000.
What does it entail?Break-even
The break-even point (BEP) is the quantity of sales that the business must achieve to cover its costs. The BEP can be measured in units or dollars.
We'll first calculate the BEP in units, which is expressed as:
BEPU = FC / (SPU - VCU)
BEPU is the Break-Even Point in Units
FC is the Fixed Costs
SPU is the Sales Price per Unit.
VCU is the Variable Cost per Unit.
We can use the provided data to compute BEPU:
BEPU = $210,000 / ($80 - $30)
BEPU = 4,200 units.
Therefore, the company needs to sell 4,200 units to break even.
Margin of safety
The margin of safety (MOS) is the difference between the actual sales and the break-even sales.
MOS may be expressed in units or dollars. MOS can be measured as follows:
MOSU = Actual Units Sold - BEPU MOSU is the Margin of Safety in Units
MOS$ = Actual Sales - BEP$ MOS$ is the Margin of Safety in Dollars
We can calculate MOS$ using the provided data:
MOS$ = Actual Sales - BEP$MOS$
= $456,000 - ($80 * 4,200)
MOS$ = $120,000.
Therefore, the margin of safety in dollars is $120,000.
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At a North Carolina residential real estate closing, the seller is normally charged for preparation of which of the following?
A. warranty deed
B. property survey
C. termite inspection report
D. title insurance policy
A buyer agent has a client who is interested in a property listed by the licensee's real estate firm. Written consent for dual agency must be obtained from the buyer no later than the time the
A. licensee makes an appointment to show the buyer the seller's property.
B. licensee shows the buyer the seller's property.
C. buyer makes an offer to purchase the seller's property.
D. seller accepts an offer from the buyer.
Under what circumstances may a North Carolina broker draft lease provisions?
A. when the language drafted by the broker is specifically dictated by the tenant
B. when the language drafted by the broker for the tenant is similar to language previously drafted by a licensed attorney
C. when the broker is acting as a tenant's agent under a written agency agreement
D. when the broker is the prospective tenant in the transaction
(a) North Carolina residential real estate closings include a warranty deed paid by the seller. (b) Before showing a buyer the seller's property, a North Carolina real estate agent can represent both parties. (c) Under a written agency agreement, North Carolina brokers can change lease terms.
(a) At a North Carolina residential real estate closing, the seller is normally charged for preparing the warranty deed. A warranty deed is a legal document that establishes a property owner's legal right to sell their property. The deed is given to the buyer, and it guarantees that the seller has the legal right to sell the property to them. In a real estate transaction, the warranty deed is usually prepared by an attorney or a title company.
(b) A buyer agent has a client who is interested in a property listed by the licensee's real estate firm. Written consent for the dual agency must be obtained from the buyer no later than the time the licensee shows the buyer the seller's property. Dual agency is a type of relationship that occurs when a real estate agent represents both the buyer and the seller in the same transaction. It is illegal in some states, but in North Carolina, it is allowed as long as both parties give their written consent.
(c) Under the North Carolina Real Estate Commission's rules, a broker may draft lease provisions when the language drafted by the broker for the tenant is similar to language previously drafted by a licensed attorney. The broker must also be acting as a tenant's agent under a written agency agreement. This rule is designed to ensure that tenants are protected and that brokers do not overstep their bounds.
The other options, such as drafting lease provisions that are specifically dictated by the tenant or drafting provisions when the broker is the prospective tenant in the transaction, are not allowed under North Carolina law.
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David t.tef corrmences operations on 1 fuly 2018 On the sarne date, it purchases a machine at a cost of s100 000 Feesidual value s 10000 Useful of the machinery is 5 years. David t ted sold the Machiruery on 30 june 2020 at sale price of 540000 Required:
a) Prepare depreciation Schedule using double declining balance depreciation method.
b). Prepare journal entry on 30 june 2020 (calculate acc, depreciation using double declining balance depreciathin method)
c) Prepare depreclation Schedule using Sum of years digit method.
d). Prepare journal entry on 30 june 2020 (Calculate acc. depreciation using sum of years digit method)
The depreciation expense for 2020 is calculated based on the remaining book value and the remaining useful life of the machinery using the respective depreciation method.
a) Depreciation Schedule using Double Declining Balance Method:
Year Cost Depreciation Accumulated Depreciation Book Value
2018 $100,000 $40,000 $40,000 $60,000
2019 $60,000 $24,000 $64,000 $36,000
2020 $36,000 $14,400 $78,400 $21,600
b) Journal Entry on June 30, 2020:
Depreciation Expense $14,400
Accumulated Depreciation $14,400
c) Depreciation Schedule using Sum of Years Digit Method:
Year Cost Depreciation Accumulated Depreciation Book Value
2018 $100,000 $33,333 $33,333 $66,667
2019 $66,667 $26,667 $60,000 $40,000
2020 $40,000 $20,000 $80,000 $20,000
d) Journal Entry on June 30, 2020:
Depreciation Expense $20,000
Accumulated Depreciation $20,000
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Marinis Corporation is considering buying a brand new machine and has gathered the following data: Investment $104,700 Estimated life 5 years Estimated annual cash inflows $29,900 Estimated annual cash outflows $10,000 Salvage value for the machine is estimated to be zero. Click here to view PV table. Calculate the net present value of the machine assuming a 5% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. Round present value answer to 0 decimal places, e.g. 125.) Net Present Value $ Should the company buy the machine based on your results
The net present value (NPV) of the machine, considering a 5% discount rate, is $26,912.45. Therefore, based on the NPV analysis, the company should proceed with buying the machine.
The net present value (NPV) is a financial indicator used to assess the profitability of an investment by comparing the present value of cash inflows and outflows.
A positive NPV suggests that the investment is expected to generate more cash inflows than outflows, resulting in a net positive return. In this case, the estimated annual cash inflows of $29,900 exceed the estimated annual cash outflows of $10,000.
By the discount these cash flows at a 5% rate over the 5-year life of the machine, the NPV is calculated to be $26,912.45.
Since the NPV is positive, it implies that the investment is expected to create value for the company and generate a positive return, indicating that purchasing the machine is a financially favorable decision.
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Consider the following Stackelberg duopoly. Both firms produce a homogenous good Firm 1 chooses how much to supply first Firm 2 chooses how much to supply after observing the quantity supplied by firm 1 The market demand is Q=50-P For firm 1, the marginal cost of production is 6 For firm 2 the marginal cost of production is 10 What is the optimal quantity suppled by firm 12 0 24 O 40 O 8 16
The optimal quantity supplied by Firm 1 in the Stackelberg duopoly scenario is 24.
In a Stackelberg duopoly, Firm 1 acts as the leader and determines its quantity of supply first, while Firm 2, the follower, observes the quantity supplied by Firm 1 before making its decision.
To determine the optimal quantity supplied by Firm 1, we need to consider the reaction of Firm 2. Firm 2 will maximize its profits by taking into account the quantity supplied by Firm 1.
Given that the market demand is Q = 50 - P, and the marginal cost of production for Firm 1 is 6, Firm 1's optimal quantity supplied will be where its marginal cost equals the marginal revenue.
The marginal revenue for Firm 1 can be calculated by differentiating the market demand equation with respect to quantity (Q). This gives us: MR1 = 50 - 2Q.
Setting MR1 equal to the marginal cost (6), we have: 50 - 2Q = 6.
Solving this equation, we find Q = 24.
Therefore, the optimal quantity supplied by Firm 1 in this Stackelberg duopoly scenario is 24 units.
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Using the Gordon growth formula, if D0 has been $0.91, the required return ir is 10% or 0.10, and the expected growth rate g is 6% or 0.06, then the current stock price is
a.$19
b.$29
c.$14
d.$24
Using the Gordon growth formula, if D0 has been $0.91, the required return ir is 10% or 0.10, and the expected growth rate g is 5% or 0.05, then the current stock price is
a.$10
b.$29
c.$20
d.$19
The current stock price using the Gordon growth formula for the given parameters is $19.
The Gordon growth formula, also known as the dividend discount model (DDM), is used to estimate the intrinsic value of a stock based on its dividends and expected growth rate. The formula is as follows:
Stock Price = D0 * (1 + g) / (ir - g)
In the first scenario, D0 is given as $0.91, the required return (ir) is 10% or 0.10, and the expected growth rate (g) is 6% or 0.06. Plugging these values into the formula:
Stock Price = $0.91 * (1 + 0.06) / (0.10 - 0.06)
Stock Price ≈ $19
Therefore, the current stock price is $19 for the first scenario.
In the second scenario, the only difference is the expected growth rate (g), which is 5% or 0.05. Using the same formula:
Stock Price = $0.91 * (1 + 0.05) / (0.10 - 0.05)
Stock Price ≈ $20
Hence, the current stock price is $20 for the second scenario.
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Diana Mite is the owner of 80% of the only class of stock of Watch This, Inc. ("WTI"). WTI manufactures and sells fireworks. WTI also designs and manages fireworks events. Five of Diana's siblings own the other 20% of the WTI stock. All WTI stockholders are US citizens and a valid S election is in place. WTI’s combined annual revenue is above $100 million. Diana will not revoke the S election. She wants her four children to be owners of WTI to remove some of its value from her estate. With the help of her lawyers she has created a trust for the benefit of her four children (ages 19, 22, 25 and 27). None of the children will purchase a trust interest. Diana intends to transfer 10% of WTI stock to the trust along with some minor amounts of cash. Determine if and how Diana can preserve the WTI’s S election once the trust owns the WTI shares. Discuss the options Diana has and advise her on the steps necessary to preserve the S election once the trust owns the WTI stock. Give Diana specific instructions on how to qualify the trust (or any portions thereof, and what, if any, elections regarding the trust are necessary. Explain in detail.
To preserve Watch This, Inc.'s (WTI) S election once the trust owns 10% of the WTI stock, Diana can establish the trust as a Qualified Subchapter S Trust (QSST).
A QSST is a specific type of trust that allows the income and tax benefits of an S corporation to flow through to the beneficiary. By qualifying the trust as a QSST, the S election can be maintained.
To qualify the trust as a QSST, Diana needs to ensure that certain requirements are met. First, the trust must be irrevocable and provide that all income must be distributed annually to the beneficiary. In this case, Diana's four children would be the beneficiaries of the trust. The trust agreement should clearly state that the income generated by the WTI stock must be distributed to the children on an annual basis.
Additionally, the trust must distribute the entire trust corpus to the beneficiary upon their reaching a specified age or a triggering event, such as the death of the current income beneficiary. Diana's specific instructions should outline the conditions under which the trust corpus will be distributed to her children, such as upon reaching a certain age or at her death.
It is important for Diana to work closely with her lawyers and tax advisors to ensure that the trust is structured correctly and that all necessary elections and documentation are completed to maintain the S election for WTI. They can guide her through the process, assist with drafting the trust agreement, and ensure that the trust meets the specific requirements for a QSST. This will help Diana achieve her goal of removing some of WTI's value from her estate while preserving the S election and its associated tax benefits.
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2. Suppose that labor supply was a function of the real interest rate. In particular, suppose that Nt=Ns(wt′θt′rt), where ∂r∂Ns>0 (a) Can you provide any intuition for why labor supply might positively depend on the real interest rate? (b) Suppose that labor supply is increasing in the real interest rate. Derive the Y scurve graphically.
(a) Real interest rates positively impact labor supply by increasing savings, reducing borrowing costs, and stimulating economic growth. (b) The Y curve shows output-real interest rate relationship, with positive slopes indicating upward labor supply shift.
(a) Labor supply may positively depend on the real interest rate due to several reasons.
First, a higher real interest rate increases the return on savings, encouraging individuals to save more and work harder to accumulate funds for future consumption.
Second, a higher real interest rate may reduce the cost of borrowing for businesses, leading to increased investment and economic growth. This, in turn, can create more job opportunities and incentivize individuals to supply more labor.
Lastly, a higher real interest rate can attract foreign investments, stimulating economic activity and potentially increasing the demand for labor.
(b) If labor supply is increasing in the real interest rate, the graphical representation of the Y (output) curve would exhibit a positive slope. On the graph, the Y curve represents the relationship between the level of output and the real interest rate.
As the real interest rate increases, labor supply rises, leading to higher productivity and output levels. This upward shift in labor supply is reflected in the Y curve sloping upwards.
A higher real interest rate stimulates economic activity, encourages investment, and attracts labor, resulting in an expansion of the output possibilities for the economy.
This positive relationship between labor supply and the real interest rate is captured by the upward-sloping Y curve.
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Do you think that the JobSeeker and JobKeeper programs were effective enough to stimulate consumption and aggregate output? Use the concept of multiplier for your answer. Time series data at quarterly frequency (from December 2013 to December 2021) for the share of (household) saving as a percentage of GDP is given in a spreadsheet in the same folder as this assessment (File Name: Household saving ratio). Using the data, plot the marginal propensity to consume (c) and the multiplier against time (two separate graphs). Does the information in the graphs support your answer?
Analyzing c and the multiplier using saving ratio data assesses JobSeeker and JobKeeper program effectiveness.
To assess the effectiveness of the JobSeeker and JobKeeper programs in stimulating consumption and aggregate output, we can analyze the marginal propensity to consume (c) and the multiplier using the provided time series data on the household saving ratio. The marginal propensity to consume represents the proportion of an additional income that is spent on consumption, while the multiplier indicates the impact of an initial change in spending on overall output.
By plotting these measures against time, we can observe any trends or patterns. If the marginal propensity to consume is high and the multiplier is greater than 1, it suggests that the programs were effective in stimulating consumption and aggregate output. Conversely, if these measures are low or declining, it may indicate limited effectiveness. Analyzing the graphs will provide insights into the relationship between the programs and their impact on consumption and aggregate output over time.
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the primary reason organizations train new employees is to:
The primary reason organizations train new employees is to provide them with the necessary knowledge, skills, and abilities to perform their job effectively.
Training programs bridge the gap between the employee's existing capabilities and the specific requirements of their role within the organization. By providing comprehensive training, organizations ensure that new employees understand their job responsibilities, learn about the organization's processes and procedures, and develop the necessary technical expertise. This enables them to contribute effectively to the organization and enhances their job competence. Additionally, training programs help employees adapt to the organizational culture, boost engagement and retention, ensure safety and compliance, promote skill development and career advancement, and foster teamwork and collaboration.
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On Thursday, August 4th, 2022, Tesla announced that it would give (3) three shares of its stock for every (1) one share that a stockholder has on record as of Wednesday, August 17th, 2022. Tesla will grant the shares to entitled stockholders at the end of the trading day on Wednesday, August 24th, 2022. This action of Tesla giving its eligible stockholders (3) three shares for every (1) one share that is owned represents a
a. Treasury Stock
b. Stock Split
c. Stock Spin-Off
d. Realized Gain
b.stock split is when a company divides its existing shares into multiple shares. In this case, Tesla is giving three shares for every one share held by stockholders. This increases the number of outstanding shares without changing the overall value or proportionate ownership of the company.
Stock splits are often done to make shares more affordable and increase liquidity, making them a popular choice for companies experiencing significant growth, like Tesla.
A stock split is a corporate action where a company divides its existing shares into multiple shares. In the case of Tesla's announcement, it stated that it would give three shares for every one share held by stockholders. This means that if an investor owned one share of Tesla, they would receive three additional shares as a result of the stock split. The purpose of a stock split is to increase the number of outstanding shares without changing the overall value or proportionate ownership of the company. It is often done to make shares more affordable for investors and increase the liquidity of the stock. In this scenario, Tesla's decision to grant additional shares to its eligible stockholders is a classic example of a stock split.
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Clouds Ltd. produces umbrellas. Clouds Ltd. expects to produce 400 umbrellas with fixed production overheads of £220,000. The actual production level equals 20 umbrellas more than expected with fixed production overheads of £140,000. Selling, general and administrative expenses equal £4,200. Clouds Ltd. sells 320 umbrellas for £25 per unit. The variable production cost per umbrella equals £12.
Required:
a) Generate the profit statement using the absorption costing technique. (6 marks)
b) Generate the profit statement using the marginal costing technique. (6 marks)
c) Considering your answers in a) and b):
- Which is your advice for Clouds Ltd.? Explain your answer in detail.
- How is it possible to reconcile the profit results under the two costing methods?
This causes a discrepancy in profit figures. Reconciliation is achieved by adjusting the treatment of fixed overheads, either by absorbing them into unit costs or treating them as period expenses.
a) Absorption costing profit statement:
Sales revenue: 320 umbrellas × £25 = £8,000
b) Marginal costing profit statement:
Sales revenue: 320 umbrellas × £25 = £8,000
c) Advice for Clouds Ltd.:
Based on the profit results, Clouds Ltd. is incurring losses in both absorption costing and marginal costing.
Reconciliation of profit results:
The difference in profit results under absorption costing and marginal costing arises from how fixed production overheads are treated. Absorption costing allocates fixed overheads to units produced, while marginal costing considers them as period expenses. This causes a discrepancy in profit figures. Reconciliation is achieved by adjusting the treatment of fixed overheads, either by absorbing them into unit costs or treating them as period expenses.
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Name three considerations an organization should make when deciding to incorporate 'big data' analytics into their strategic HR function.
Fully describe any legal concerns (including naming relevant laws and such) and how you might recommend mitigating such concerns for each consideration.
Three considerations for organizations incorporating 'big data' analytics into their strategic HR function are data privacy and security, legal compliance, and ethical use of data.
Data privacy and security are critical when utilizing 'big data' analytics in HR. Organizations must implement measures to safeguard employee data and comply with relevant laws and regulations such as GDPR or CCPA. This involves securing data through encryption, access controls, and proper storage practices. To address legal concerns, organizations should obtain informed consent from employees regarding data collection and usage, and anonymize data where necessary to protect sensitive information.
Legal compliance is another important consideration. Organizations need to ensure that their data analytics practices adhere to employment laws, anti-discrimination laws, and data protection regulations. Regular audits, staff training, and clear policies and procedures can help maintain compliance. Seeking legal advice from experts in employment and data protection laws can provide further guidance.
Lastly, ethical use of data should be prioritized. Organizations should promote transparency, fairness, and non-discriminatory practices in their data collection, analysis, and decision-making processes. Clear guidelines for data usage, transparent communication of analytics purposes and outcomes, and opportunities for employee feedback can foster ethical data practices. Implementing ethical frameworks and obtaining ethical review for specific analytics projects can further ensure ethical considerations are met.
By addressing data privacy and security, legal compliance, and ethical use of data, organizations can incorporate 'big data' analytics into their strategic HR function while mitigating potential legal concerns and upholding ethical standards.
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Which written report delivery method ensures that the audience receives a copy in the desired format?
Multiple Choice
O Both in person and via mail or another courier
O In person only
O Via mail or another courier only
O Via attachment to email
O As a download from a cloud-based server
The written report delivery method that ensures the audience receives a copy in the desired format is via attachment to email.
When the report is sent as an attachment to an email, the sender can ensure that the document is in the correct format and that it can be easily accessed and opened by the recipients.
This method allows for direct distribution to individuals or a group of recipients, and it eliminates the need for physical delivery or reliance on external factors such as mail or courier services.
By attaching the report to an email, the audience can receive the document promptly and conveniently. They can save it on their devices, print it if necessary, or refer to it as needed. This method also allows for quick and efficient communication, as any additional information or clarifications can be included in the email itself.
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EXERCISE 6–14 Working with a Segmented Income Statement [LO4] Marple Associates is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices—one in Houston and one in Dallas. The firm classifies the direct costs of consulting jobs as variable costs. A segmented contribution format income statement for the company’s most recent year is given below: Office Total Company Houston Dallas Sales . . . . . . . . . . . . . . . . . . . . . . . $750,000 100.0% $150,000 100% $600,000 100% Variable expenses. . . . . . . . . . . . 405,000 54.0 45,000 30 360,000 60 Contribution margin . . . . . . . . . . . 345,000 46.0 105,000 70 240,000 40 Traceable fi xed expenses. . . . . . . 168,000 22.4 78,000 52 90,000 15 Office segment margin . . . . . . . . . 177,000 23.6 $ 27,000 18% $150,000 25% Common fi xed expenses not traceable to offices . . . . . . . 120,000 16.0 Net operating income . . . . . . . . . . $ 57,000 7.6% Required: 1. By how much would the company’s net operating income increase if Dallas increased its sales by $75,000 per year? Assume no change in cost behavior patterns. 2. Refer to the original data. Assume that sales in Houston increase by $50,000 next year and that sales in Dallas remain unchanged. Assume no change in fixed costs. a. Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages. b. Observe from the income statement you have prepared that the CM ratio for Houston has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment margin ratio?
If Dallas increases its sales by $75,000 per year, the net operating income of the company will increase by $30,000.
1) To calculate the increase in net operating income if Dallas increases its sales by $75,000 per year, we need to consider the contribution margin ratio for the Dallas office.
Contribution margin ratio = (Contribution margin / Sales) * 100
For Dallas:
Contribution margin ratio = ($240,000 / $600,000) * 100 = 40%
Increase in sales for Dallas = $75,000
Increase in contribution margin for Dallas = Contribution margin ratio * Increase in sales
Increase in contribution margin for Dallas = 40% * $75,000 = $30,000
Since all fixed costs are traceable to the offices, the increase in contribution margin will directly increase the net operating income. Therefore, the net operating income will increase by $30,000 if Dallas increases its sales by $75,000 per year.
2) a. To prepare a new segmented income statement for the company with an increase of $50,000 in sales for Houston while keeping Dallas sales unchanged, we need to calculate the new figures.
New Houston sales = $150,000 + $50,000 = $200,000
New Dallas sales = $600,000
New variable expenses for Houston = (Variable expenses / Sales) * New Houston sales
New variable expenses for Houston = (54% / 100%) * $200,000 = $108,000
Variable expenses for Dallas remain unchanged at $360,000.
New contribution margin for Houston = New Houston sales - New variable expenses for Houston
New contribution margin for Houston = $200,000 - $108,000 = $92,000
New contribution margin for Dallas remains unchanged at $240,000.
New traceable fixed expenses for Houston = (Traceable fixed expenses / Sales) * New Houston sales
New traceable fixed expenses for Houston = (22.4% / 100%) * $200,000 = $44,800
Traceable fixed expenses for Dallas remain unchanged at $90,000.
New office segment margin for Houston = New contribution margin for Houston - New traceable fixed expenses for Houston
New office segment margin for Houston = $92,000 - $44,800 = $47,200
New office segment margin for Dallas remains unchanged at $150,000.
New common fixed expenses not traceable to offices remain unchanged at $120,000.
New net operating income = New office segment margin for Houston + New office segment margin for Dallas - New common fixed expenses
New net operating income = $47,200 + $150,000 - $120,000 = $77,200
b. The change in the segment margin ratio for Houston while keeping the CM ratio unchanged can be explained by the fact that the fixed expenses remain the same, but the increase in sales leads to a higher contribution margin for Houston. As a result, the segment margin ratio for Houston increases because the fixed expenses are spread over a larger contribution margin. This results in a higher profitability ratio for the Houston office.
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Suppose you obtain the following quotes:
Foreign exchange market:
Spot rate: SUS$/€ = 1.0623
180-day Forward rate: F180US$/€ = 1.0765
Money market (180-day):
RUS$ = 5.75% p.a.
R€ = 4.25% p.a.
Note: Keep your answers to 4 decimal points if necessary.
Based on the above information, is there any arbitrage opportunity? If yes, what should the commercial bank do to capture this arbitrage opportunity? If not, why? Explain.
The commercial bank should sell euros at the spot rate of 1.0623 and simultaneously enter into a forward contract to buy euros at the forward rate of 1.0765.
To determine if there is an arbitrage opportunity, we need to compare the spot rate and the forward rate. If the forward rate is different from the calculated forward rate using the spot rate and the interest rates in the respective currencies, an arbitrage opportunity exists.
In this case, the spot rate is SUS$/€ = 1.0623, and the 180-day forward rate is F180US$/€ = 1.0765. To calculate the theoretical forward rate, we use the interest rate parity formula:
F180US$/€ = Spot rate × (1 + R€) / (1 + RUS$)
Using the given interest rates (RUS$ = 5.75% p.a. and R€ = 4.25% p.a.), the theoretical forward rate is calculated as follows:
F180US$/€ = 1.0623 × (1 + 0.0425) / (1 + 0.0575) ≈ 1.0659
Since the actual forward rate (1.0765) is higher than the calculated forward rate (1.0659), there is an arbitrage opportunity. To capture this opportunity, the commercial bank should sell euros at the spot rate of 1.0623 and simultaneously enter into a forward contract to buy euros at the forward rate of 1.0765. By doing so, the bank can lock in a riskless profit from the discrepancy between the two rates.
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Akwaaba Trustees Limited (ATL) has been in operations since 2000 with big portfolios across Ghana and West Africa. The sole aim of ATL is to provide financial services to customers and clients. Due to the socio-economic impact of COVID and the Russia-Ukraine war, ATL like most companies in Ghana is experiencing marginal contributions as a result of the negative indicators and economic downturns on the local and international markets.
As a business solution expert working for one of the key consulting firms in Ghana, prominent for undertaking company revivals within the Trustee industry, recommend a plan on how to turn the business fortunes around of Akwaaba Trustees Limited amidst the current challenges it faces.
Develop a comprehensive business revival plan for Akwaaba Trustees Limited, focusing on diversifying revenue streams, cost reduction measures, strategic partnerships, and leveraging technology.
In order to turn around the business fortunes of Akwaaba Trustees Limited, a comprehensive business revival plan is recommended. Firstly, diversifying revenue streams by exploring new financial services or products can help mitigate the impact of economic downturns. Additionally, implementing cost reduction measures such as optimizing operational expenses and streamlining processes can improve profitability. Forming strategic partnerships with other financial institutions or industry players can provide access to new markets and resources. Lastly, leveraging technology through digital solutions and online platforms can enhance customer experience and operational efficiency. By combining these strategies, ATL can navigate through the challenges and position itself for growth and resilience in the Trustee industry.
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the type of advertising used for an experience good is
The type of advertising used for an experience good is informative advertising. Informative advertising provides detailed information about the product's features, benefits, and qualities to educate consumers and create awareness.
It focuses on conveying the unique aspects of the experience good to differentiate it from other alternatives in the market. The explanation will provide a deeper understanding of informative advertising for experience goods.
Experience goods are products or services that require firsthand consumption or usage to fully understand their value and benefits. Unlike search goods where consumers can assess quality before purchase, experience goods rely on post-purchase experience to evaluate their value.
Therefore, the type of advertising used for experience goods is typically informative advertising. Informative advertising aims to provide detailed and relevant information about the product, its features, and its benefits. This form of advertising helps consumers understand the unique qualities of the experience good, its performance, and how it can satisfy their needs or desires. By conveying this information, informative advertising helps build consumer awareness and knowledge, enhancing the perceived value and desirability of the experience good.
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Business law
1
(a) Explain the following terms with ONE (1) relevant case study. (1) Conflict of Interest (ii) Insider Trading
In business law, two important concepts to understand are conflict of interest and insider trading.
Conflict of interest refers to a situation where an individual or entity has competing interests or loyalties that could potentially compromise their objectivity, decision-making, or duty to act in the best interest of another party.
Insider trading, on the other hand, involves the buying or selling of securities based on material non-public information, giving the trader an unfair advantage over other investors. To provide a relevant case study for each term, examples will be discussed in the following paragraphs.
Conflict of Interest: A notable case illustrating conflict of interest is the Enron scandal. Enron Corporation, once a prominent energy company, collapsed in 2001 due to accounting fraud and unethical practices. Key executives, including the CEO, had significant conflicts of interest. They were involved in off-balance sheet partnerships and used them to manipulate financial statements, inflate profits, and hide debt. These executives had personal financial interests in these partnerships, creating a conflict between their duty to the company and their personal gains. The conflict of interest compromised their ethical and legal responsibilities, leading to severe consequences for the company, its shareholders, and employees.
Insider Trading: A well-known case demonstrating insider trading is the Martha Stewart case. In 2004, Martha Stewart, a prominent businesswoman and television personality, was convicted for her involvement in an insider trading scheme. She sold shares of a biopharmaceutical company, ImClone Systems, based on material non-public information that she received from her broker. Prior to the public announcement of negative news that would significantly impact the company's stock price, Stewart sold her shares to avoid financial losses.
Her actions were deemed illegal as she traded on privileged information not available to the public, giving her an unfair advantage over other investors. The case highlighted the importance of insider trading laws in ensuring fair and transparent markets and holding individuals accountable for exploiting non-public information for personal gain.
In conclusion, conflict of interest and insider trading are critical concepts in business law. The Enron scandal demonstrates the severe consequences that can arise from conflicts of interest when individuals prioritize personal gain over their fiduciary duties. The Martha Stewart case serves as a prominent example of the legal ramifications associated with insider trading and the importance of maintaining fair and equal access to information in financial markets.
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Regarding impairment of intangible assets, which of the following statements is incorrect?
A) If any impairment occurs, the company records a loss in the period in which the intangible asset was aquired
B) Impairment occurs when the fair value of an intangible asset is less than the book value
C) Intangible assets with an indefinite life are tested for impairment annually
D) Intangible assets are impaired when there has been a permanent decline in the value of the asset
The incorrect statement regarding the impairment of intangible assets is option A) "If any impairment occurs, the company records a loss in the period in which the intangible asset was acquired."
Impairment of intangible assets refers to a situation where the value of an intangible asset decreases, requiring a reduction in its book value. The correct statements about impairment are:
Impairment occurs when the fair value of an intangible asset is less than the book value. When the fair value is lower, the asset's value needs to be adjusted.
Intangible assets with an indefinite life are tested for impairment annually. Assets with an indefinite life, such as trademarks or brand names, need to be assessed regularly for any indication of impairment.
Intangible assets are impaired when there has been a permanent decline in the value of the asset. If there is a permanent loss of value due to factors like obsolescence or loss of competitive advantage, the asset's value is impaired.
Option A is incorrect because impairment losses are recorded when the fair value of the asset is lower than its carrying value, not necessarily in the period of acquisition. Impairment losses are recognized when they occur, regardless of when the asset was acquired
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A retail analyst follows a bottom-up approach to forecast a retail company's sales. Which of the following steps is most likely used in the bottom-up approach?
a Obtain forecast for expected GDP growth rate.
b Use regression models to determine historical relationship between the economic growth rate and industry growth rate
c Use time series model to extrapolate historical sales growth to forecast future sales
The most likely step used in the bottom-up approach for forecasting a retail company's sales is: c) Use time series model to extrapolate historical sales growth to forecast future sales. Correct option is C .
The bottom-up approach focuses on analyzing individual components of a company's sales, such as store-level data, product categories, customer segments, and geographic regions.
It involves collecting and analyzing detailed information at a granular level to understand the drivers of sales and make accurate forecasts. Time series models, such as moving averages, exponential smoothing, or
ARIMA (Autoregressive Integrated Moving Average), are commonly used in the bottom-up approach to analyze historical sales data and project future sales trends.
By extrapolating historical sales growth patterns, the analyst can estimate future sales performance for specific products, stores, or regions, providing a more detailed and bottom-up perspective on the company's sales forecast.
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Instructions: Use four decimal places for your calculations. Show your answers by rounding the calculation results to two decimal places if answers are in dollars. For example, if your calculation results in $100.1265, show your answer as $100.13. If you need to show your answers as a percent, take four decimal places from your calculation, converting them into a percent. For example, if your calculation results in 0.4567, show 45.67%, not 46%. To set your Texas Instrument BA II PLUS calculator at 4 decimal places, press [2ND] FORMAT 4 [ENTER]. Please follow the instructions for homework assignments on the syllabus.
The present value of $500 per vear for 20 years at 10%. Assume that payments are made at the end of each year.
The present value of $500 per year for 20 years at 10%. Assume that payments are made at the beginning of each year.
The future value of $600 each 6 months for 5 years at nominal rate of 8%, compounded semiannually. Assume that payments are made at the end of each semiannual period.
The future value of $300 each 3 months for 5 years at nominal rate of 8%, compounded quarterly. Assume that payments are made at the end of each quarter.
However, when presenting the final answers, I will round them to two decimal places for values in dollars and convert percentages to four decimal places.
I will ensure to follow the instructions provided for homework assignments on the syllabus. If necessary, I will also set the Texas Instrument BA II PLUS calculator to display results with four decimal places by pressing [2ND] FORMAT 4 [ENTER].Show your answers by rounding the calculation results to two decimal places if answers are in dollars. For example, if your calculation results in $100.1265, show your answer as $100.13. If you need to show your answers as a percent, take four decimal places from your calculation, converting them into a percent. Understood. When performing calculations, I will use four decimal places for accuracy.
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A company with an all-cash sales policy has monthly unit sales of 1,740 a month for $245 each. $179 in variable costs are incurred for each unit sold. The company is negotiating with a new retailer to sell their product with credit terms of net 30 days. Company policy requires a a rate of return to 0.9%. The business plan that has been prepared shows that by switching to this new retailer, their sales will increase to 1,790 units per month. Finally, the unit selling price will increase to $250 to cover the increase in variable costs to $184. (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ signs and commas in your response.) For example: enter 123456 and NOT $123,456 or 123,456 How much is the monthly cash flow from the current policy? What will be the monthly cash flow from the new policy be? How much is the monthly incremental cash flow? How much is the present value of the future incremental cash flows? How much is the cost of switching credit policies? Based on the prepared analysis, what is the NPV of switching policies?
Monthly cash flow from the current policy is $69,930.00. Monthly cash flow from the new policy is $72,750.00. The monthly incremental cash flow is $2,820.00. The present value of the future incremental cash flows is $22,685.94. The cost of switching credit policies is -$22,685.94. The NPV of switching policies is -$22,685.94.
The monthly cash flow from the current policy is calculated by subtracting the variable costs per unit ($179) from the unit selling price ($245) and multiplying it by the number of units sold per month (1,740). This gives us $69,930.00.
The monthly cash flow from the new policy is calculated in a similar way. We subtract the increased variable costs per unit ($184) from the increased unit selling price ($250) and multiply it by the increased number of units sold per month (1,790). This gives us $72,750.00.
The monthly incremental cash flow is the difference between the cash flow from the new policy and the cash flow from the current policy, which is $2,820.00 ($72,750.00 - $69,930.00).
To calculate the present value of the future incremental cash flows, we need to discount the incremental cash flow at the required rate of return (0.9%). Using the formula for present value, we calculate the present value of the monthly incremental cash flow for a period of 30 days, which results in $22,685.94.
The cost of switching credit policies is the negative present value of the future incremental cash flows, which is -$22,685.94.
The net present value (NPV) of switching policies is the sum of the present value of the future incremental cash flows and the cost of switching credit policies. In this case, the NPV is -$22,685.94, indicating a negative net present value, which suggests that switching policies would not be financially beneficial.
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On 1 July 2015, Blinky Ltd leased a tyre-making machine from Bill Ltd. The machine cost Bill Ltd $130,000 to manufacture and had a fair value of $154,109 on 1 July 2015. The lease agreement contained the following provisions:
Lease term 4 years
Annual payment, payable in advance on 1 July each year $41,500
Residual value at end of the lease term $15,000
Residual guaranteed by lessee nil
Interest rate implicit in the lease 8%
The lease is cancellable only with the permission of the lessor.
The expected useful life of the machine is 6 years. Blinky Ltd intends to return the machine to the lessor at the end of the lease term. The annual payment includes an amount of $1500 per annum to cover the costs of maintenance and insurance paid by the lessor on behalf of the lessee.
Prepare all the journal entries to account for the lease transactions in the books of the lessee, Blinky Ltd for the financial year ended 30 June 2016. Do not do journal entries for 2017 or 2018.
Blinky Ltd's journal entries for the lease transactions in the financial year ended 30 June 2016 would include a debit to Lease Asset for $130,000, a credit to Lease Liability for $130,000, and an expense recognition for the maintenance and insurance costs of $1,500.
The initial journal entry would involve recognizing the lease asset at its cost of $130,000 and the corresponding lease liability for the same amount. This represents the present value of the lease payments over the lease term using the implicit interest rate of 8%. The maintenance and insurance costs paid by the lessor on behalf of the lessee would be recorded as an expense to recognize the benefit received.
The journal entries for the financial year ended 30 June 2016 would not include any adjustments related to the lease, as it is stated in the question that no entries are required for 2017 or 2018.
It's important to note that this answer is specific to the financial year ended 30 June 2016 and doesn't include subsequent years. The subsequent years would require adjustments for interest expense, lease liability reduction, and recognition of any potential impairment or depreciation of the leased asset.
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"Discuss the rationale of integrating sustainability in business
and how to embed sustainability in corporations.
Integrating sustainability in business is crucial for long-term success and societal well-being. By considering environmental, social, and governance (ESG) factors, companies can mitigate risks,
Enhance reputation, and tap into new market opportunities. Embedding sustainability involves aligning strategies, policies, and practices with sustainable principles. This can be achieved through setting clear sustainability goals, implementing eco-friendly practices, promoting responsible supply chains, engaging stakeholders, and measuring and reporting progress. Sustainable business practices not only address environmental challenges but also improve financial performance and foster innovation, making it a win-win for both businesses and the planet.
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Discuss the logic behind shift-share instruments typically used in the literature concerning labour market opportunities and migration. To what extent do these instruments overcome usual endogeneity concerns emerging in an OLS framework? (1500 Words)
Shift-share instruments address endogeneity concerns in the labor market and migration studies, providing more robust estimates of the causal relationship.
Introduction to shift-share instruments:
Shift-share instruments are econometric tools used to address endogeneity concerns in studies examining the relationship between labor market opportunities and migration. These instruments enable researchers to obtain unbiased estimates of the causal effect by taking into account the differential movements in labor market outcomes across regions or industries.
Endogeneity concerns in the OLS framework:
In the context of labor market opportunities and migration, endogeneity refers to the problem of reverse causality and omitted variable bias. In OLS models, disentangling the causal relationship between labor market opportunities and migration is often challenging due to the presence of endogeneity. For example, regions with better labor market opportunities may attract more migrants, but it is also possible that an influx of migrants can create better labor market conditions.
The concept of shift-share analysis:
The shift-share analysis is a method used to decompose changes in labor market outcomes, such as employment or wages, into different components. It allows researchers to isolate the contribution of regional or industry-specific factors from the overall changes observed in the labor market. The main idea behind shift-share analysis is to compare the observed changes in a particular region or industry with the changes that would have occurred if it had the average performance of the reference group (e.g., other regions or industries).
Construction of shift-share instruments:
To construct a shift-share instrument, researchers typically compare the observed migration flows or labor market outcomes in a particular region with the predicted values based on the average performance of other regions or industries. This predicted value represents the counterfactual scenario of what would have happened in the absence of the specific labor market conditions in the region of interest. The difference between the observed and predicted values constitutes the shift-share instrument.
Instrumental variable estimation:
Once the shift-share instrument is constructed, it can be used in an instrumental variable (IV) estimation framework. IV estimation allows researchers to obtain consistent and unbiased estimates of the causal effect of labor market opportunities on migration by exploiting the exogenous variation provided by the instrument. The shift-share instrument acts as a proxy for the exogenous component of labor market opportunities that is unrelated to the endogenous factors.
Overcoming endogeneity concerns:
By using a shift-share instrument in an IV estimation framework, researchers can address the endogeneity concerns that arise in the OLS framework. The instrument helps to identify the causal effect of labor market opportunities on migration by isolating the exogenous variation in labor market outcomes from the endogenous factors. This approach provides more credible and reliable estimates of the causal relationship.
Limitations and considerations:
While shift-share instruments offer a valuable approach to overcoming endogeneity concerns, they are not immune to limitations. The instrument's validity relies on the assumption that the differential movements in labor market outcomes between the region of interest and the reference group are solely driven by exogenous factors.
If there are unobserved confounding factors that affect both labor market opportunities and migration, the instrument may still be biased. Additionally, the choice of the reference group and the construction of the instrument require careful consideration to ensure their relevance and reliability.
In conclusion, shift-share instruments are useful tools in labor market and migration studies as they help address endogeneity concerns arising in the OLS framework. By employing these instruments, researchers can obtain more reliable estimates of the causal effect of labor market.
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MSN Bank expects that the New Zealand dollar (NZD) will appreciate against the U.S. dollar (USD) from its spot rate of $.4565 to $.4785 in 90 days, but they do not want to bear exchange rate risk. The following interbank lending and borrowing rates exist: Annual borrowing rate Annual lending rate USD: 6.80% 6.50% NZD: 8.30% 8.20% MSN Bank considers borrowing 5 million (i.e., $5,000,000) U.S. dollars in the interbank market and investing the funds in NZD for 90 days. The 90-day forward rate is $.4500/NZ$. Estimate the profits (or losses) that could be earned if MSN implements Covered Interest Arbitrage. Should MSN Bank pursue this strategy? Show necessary calculations and discuss (50 words excluding calculations). Also, Calculate the no-arbitrage 90-day forward rate.
The Covered Interest Arbitrage would result in a loss of $75,892.76, therefore it would be in MSN Bank best interest not to pursue this strategy.
To calculate the potential profits or losses from Covered Interest Arbitrage, we need to compare the returns from borrowing in USD and investing in NZD, considering the forward rate and interest rates.
MSN Bank borrows $5,000,000 at the annual borrowing rate of 6.80%. For 90 days, the effective borrowing rate is calculated as follows:
Effective Borrowing Rate = (1 + Annual Borrowing Rate)[tex]^{(90/365)}[/tex] - 1
Effective Borrowing Rate = (1 + 6.80%)[tex]^{(90/365)}[/tex] - 1
Effective Borrowing Rate = 1.6861%
MSN Bank converts the borrowed USD to NZD at the spot rate of $0.4565/NZD and then invests it for 90 days at the annual lending rate of 8.20%. The effective lending rate is calculated similarly:
Effective Lending Rate = (1 + Annual Lending Rate)[tex]^{(90/365)}[/tex] - 1
Effective Lending Rate = (1 + 8.20%)[tex]^{(90/365)}[/tex] - 1
Effective Lending Rate = 2.0859%
The no-arbitrage condition assumes that the forward rate should equalize the interest rate differentials between the two currencies.
Forward Rate = Spot Rate × (1 + (Foreign Interest Rate / Domestic Interest Rate))[tex]^{(90/365)}[/tex]
Forward Rate = $0.4565 × (1 + (8.20% / 6.80%))[tex]^{(90/365)}[/tex]
Forward Rate = $0.4509/NZD
MSN Bank converts the NZD back to USD at the forward rate after 90 days:
Amount in NZD = $5,000,000 / $0.4565/NZD = 10,943,571.63 NZD
Amount in USD (at the forward rate) = 10,943,571.63 NZD × $0.4500/NZD
Amount in USD (at the forward rate) = $4,924,107.24
Profit/Loss = Amount in USD (at the forward rate) - Amount borrowed in USD
Profit/Loss = $4,924,107.24 - $5,000,000
Profit/Loss = -$75,892.76
The potential profit from Covered Interest Arbitrage in this case would be a loss of $75,892.76. Therefore, pursuing this strategy would result in a loss for MSN Bank.
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