Using the double-entry accounting system, show how the following transactions will generate credits and debits in the Australian Balance of Payments (BoP) accounts. Please specify clearly which category (and sub-category) within the BoP accounts each credit or debit will appear. For example, a debit can appear in the Current Account, sub-category Goods.

(i) An Australian bank lends AUD 5,000,000 to a Japanese firm. The bank deposits these funds into the firm's account with the bank.

(ii) An Australian firm sells 15% of the shares to a Singaporean tech company. The tech company pays for the shares using deposits it has in a bank in Singapore.

(iii) An Australian resident receives a watch worth of AUD 1000 as a birthday gift from her grandma who lives in India.

Part (b)

The following exchange rates are quoted: S(AUD/USD) 1.540 S(JPY/USD) 145.50 S(JPY/AUD) 93.80

(i) Is there a possibility for three-point arbitrage? If so, what is the profitable sequence? If a trader has access to AUD 1,000,000 available for this purpose, how much profit will he make?

(ii) How do the three exchange rates as mentioned above change as a result of arbitrage?

Answer rating: 100% (QA)

Part a BoP Transactions i Australian bank lends AUD 5000000 to a Japanese firm Current Account Credi... View the full answer