. The primary reason for crash risks is related to the fact that carry trades are leveraged: The low-yield currency is borrowed, with proceeds invested in the high-yield currency. The leverage magnifies the effect of losses and gains relative to the investors’ equity base. In low-volatility markets, investors can become complacent and allow positions to grow large in a search for yield. This crowded positioning tends to unwind rapidly when a market shock occurs because many traders try to exit their positions almost simultaneously before the leverage effects wipe out their equity. Stop-loss orders are triggered, and given the market uncertainty, there is a flight to safety that further increases demand for the low-yield currency.
. Another factor that accelerates selling is that traders often have stop-loss orders in place that are triggered when price declines reach a certain level. This can lead to cascades of selling in which position liquidation begets further position liquidation.
. During periods of market turmoil, there is generally a flight to safety into assets and currencies that seem to offer the most protection during times of uncer- tainty—typically low interest rate currencies.

Swift’s functional currency is the AUD because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. Under IFRS, when the subsidiary’s functional currency is the local currency, translations are done using the current rate method. Thus, Swift will use the current rate method for converting its financial statements.
The use of the current rate method depends on the identification of the functional currency, not on the local currency. Translations from the functional currency to the presentation currency is done using the current rate method. The local currency has an impact on translation only where it differs from the functional currency. In these cases, the translation from the local to the functional currency is done using the temporal method.
Swift’s functional currency is the AUD, not the USD, because sales are generated in AUD and the company operates within the competitive and regulatory environment of Australia. If it were the USD this answer would be correct.

An HHI greater than 1,800 indicates that an industry is highly concentrated. Should the HHI in a highly concentrated industry change by 50 or more, a governmental challenge to a particular business combination is very likely. In this instance, the industry is highly concentrated and the HHI changes by 90, making Whelan’s second conclusion incorrect. A government challenge is likely.
Whelan’s second conclusion is not correct.
Whelan’s conclusion that the industry is highly concentrated is correct.

1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD).
2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date.
3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points.
I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296
II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD).
4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774.
The present value of the cash flow was not calculated (step 4 of
calculation).
The cash flow was calculated using the bid rate instead of the offer rate.
1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252
2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.

Hollingsworth;s preferred method of calculating the GDP growth rate is the Solow growth accounting equation, and the rate is calculated as follows:
ΔY/Y = ΔA/A + α(ΔK/K) + (1 – α)(ΔL/L) where
ΔY/Y = Growth in gross domestic product, GDP ΔA/A = Growth in total factor productivity = 1/5% ΔK/K = Growth rate of capital = 3.2%
ΔL/L = Growth rate of labor = 0.4%
α = Output elasticity of capital = 0.3
1 – α = Output elasticity of labor = 0.7
Thus, ΔY/Y = 1.5 + (0.3 × 3.2) + (0.7 × 0.4) = 1.5 + 0.96 + 0.28 = 2.74. The calculation did not apply (1 – α).
ΔY/Y = 1.5 + (0.3 × 3.2) + 0.4 = 1.5 + 0.96 + 0.4 = 2.86
The inflation rate was incorrectly used in place of TFP in the calculation.
ΔY/Y = 1.7 + (0.3 × 3.2) + (0.7 × 0.4) = 1.7 + 0.96 + 0.28 = 2.94