QUESTION 2 HAS TWO PARTS (A， B) FOR A TOTAL OF 9 MINUTES.

 

　　Iris Hamson is *uating international fixed income investments for Vacations Unlimited Inc.She notes that Standard & Poor‘s (S&P) assigns separate and distinct credit ratings to each national government’s local currency debt and foreign currency debt.

 

　　A. State whether a national government‘s local currency debt credit rating or foreign currency debt credit rating is generally lower. Justify your response with one reason why the default risk is higher on the type of debt that is generally lower-rated.

 

　　(3 minutes)

 

　　S&P uses several risk factor categories in determining sovereign credit ratings. Hamson contends that three S&P risk factor categories are most important： 1) income and economic structure， 2) fiscal flexibility， and 3) price stability. Based on her country research， she has compiled the following list of characteristics of Mexico：

 

　　1. National， regional， and local governments that generally possess competitive tax structures and the ability to control spending

 

　　2. A strong banking sector that reflects conservative lending practices and generally high asset quality

 

　　3. A history of prudent monetary and exchange-rate policies pursued by an independent central bank

 

　　4. An external balance sheet that is conservatively structured and an excellent track record of timely debt service payments

 

　　5. A recent Presidential election that was marked by wide voter participation in response to a popular platform of economic reforms

 

　　6. Favorable trends in foreign direct investment and export growth that appears to be sufficient to lessen any potential balance-of-payments pressures in the future

 

　　7. A market economy that exhibits average wealth levels overall but a concentration of wealth that results in a large difference between the rich and the poor

 

　　B. Select from Hamson’s list the characteristic of Mexico that most directly relates to each of the three S&P risk factor categories.

 

　　Note： Your selections should NOT include any characteristic more than once； only the characteristic reference numbers (1 through 7) are needed for your selections