Briefly analyse the factors affecting these exchange rates

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Reference no: EM133781845 , Length: word count:1500

International Finance

You work for firm XYZ situated in the United States, and your boss has become concerned about the current economic environment, especially as it is related to the different types of exposures that your firm may face in the future. You are asked to provide a report, which evaluates your firm's exposures, the risk management implications for your firm, and possible hedging strategies for the next 12 months. You are also required to provide a recommendation for what your firm should do.

Information about Firm XYZ:
Firm XYZ is a car manufacturer located in the United States.
The firm imports parts to USA from foreign suppliers in Germany, South Korea, and Japan.
The firm exports cars to Australia, UK, Norway, and Switzerland.
The firm has a payment of 5,000,000EUR due in 3 months and then another 5,000,000EUR due in 9 months to the supplier in Germany. The firm has a payment of 3,000,000,000 KRW due every 3 months to their supplier in South Korea over the next 12 months. The firm need to pay 300,000,000 JPY to their supplier in Japan in 9 months.
The firm is due to receive 2,000,000 AUD from their customer in Australia every 3 months
over the next 12 months. The firm is due to receive 3,000,000 GBP from their customer in UK every 3 months over the next 6 months and then 3,500,000 GBP every 3 months after 6 months. They will also receive a payment of 10,000,000 NOK from their customer in the Norway in 3 months and a payment of 5,000,000 CHF from their customer in Switzerland in 5 months.
The firm is concerned about the impacts of the interest rate cuts in US, not only on the foreign exchange exposure of the firm's receivables/payables but also on its overall business over the next 12 months.

You are required to prepare a report, which should contain the following information:
Discuss and evaluate the types of exposures your firm may face as well as the other main concerns for your firm. In your discussion, you should consider the effects of the current economic climate and central bank policies on the foreign exchange market and the competitiveness of the products produced in the United States and relate this to how these may impact the firm.

List the future spot exchange rates (the currency pair and the relevant month) that directly affect your firm and form a forecast (a number is required) for each of these future spot exchange rates. You need to briefly analyse the factors affecting these exchange rates and then form your forecasts.

Design hedging strategies for the firm's foreign currency exposures. You need to explain why your chosen hedging strategies are better than the other strategies by calculating and then evaluating the hedging outcomes - what will the outcomes be if exposures are hedged using your hedging strategies and what will the outcomes be if exposures are not hedged or using other hedging strategies. Please also discuss the impacts of hedging foreign currency exposures on the firm's cost of capital and firm value.

You need to navigate the digital landscape and use appropriate digital tools, e.g., LSEG Workspace, to find relevant information and data to complete the tasks. You need to provide the sources of data used in your report.

Analyse factors affecting exchange rate and form your forecasts
Evaluate the exposures
Manage exposures and evaluate the risk management outcomes
Provide solutions by utilizing and connecting a variety of relevant disciplinary tools and knowledge when solving problems
Communication
Digital Proficiency

Reference no: EM133781845

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