Explain the reasons for regulatory control over financial markets.

In the case study, Sanders is faced with the decision to sell his company to Brown and Massey for $2,000,000 in cash. However, there are several issues raised concerning Sanders’ approach in connection with this sale.

First, Sanders may have considered other options for the sale of his company. One option could have been to retain a portion of the company and continue to be involved in the business as a minority shareholder. This would have allowed Sanders to continue to benefit from the company’s success while also receiving a significant payout for the sale. Another option could have been to seek out other potential buyers and negotiate a higher price for the company. By not exploring these options, Sanders may have missed out on a better deal.

Second, there are regulatory controls in place over financial markets. These regulations are put in place to ensure fair and transparent transactions. Sanders’ decision to sell his company to Brown and Massey may have been subject to scrutiny by regulatory bodies, and it is important that Sanders ensures that the sale is in compliance with all laws and regulations.

In terms of the loan scenario, the American bank could lose on this transaction if the Canadian dollar appreciates against the U.S. dollar. If the spot exchange rate at the time of repayment is higher than the rate at the time of the loan, the bank will have to pay more U.S. dollars to obtain the Canadian dollars to repay the loan.

However, if the bank hedges with the forward contract, the maximum amount it can lose is the difference between the forward rate and the spot rate at the time of repayment. In this case, the bank would have locked in a rate of $0.8930/Canadian dollar, meaning that even if the spot rate is higher at the time of repayment, the bank will only have to pay $0.8930/Canadian dollar for the Canadian dollars to repay the loan. This limits the potential loss for the bank.

In summary, Sanders’ approach to the sale of his company raises concerns about exploring other options and adhering to regulatory controls. The loan scenario highlights the potential for losses in foreign exchange transactions and the importance of hedging to limit those losses. It is important for businesses to consider all available options and comply with regulations to make sound financial decisions.