Reference no: EM132964760

Question: Australian Machinery Company (AMC) receives an order from a Malaysian manufacturing company for the purchase of machinery worth M$500,000 (M$ stands for the Malaysian currency). The machinery is delivered on 15 June 20x1 and the payment to be made in M$ is due three months later on 15 September 20x1.

The spot rate on 15 June is M$1=A$0.5000 (A$ is the Australian dollar). The three-month forward rate for settlement on 15 September is quoted at M$1=A$0.4850.

The following information is also available:

?The borrowing interest rate in Malaysia is 8 percent per annum.

?The investment interest rate in Australia is 6 percent per annum.

AMC's foreign exchange advisory service forecasts that the spot rate in three-month time on the settlement date is likely to be M$1=A$0.4700.

AMC has the following options:

A. Do nothing.
B. Hedge in the forward market.?
C. Hedge in the money market.

Question 1 (Create space below the question to write your answer)

Briefly describe the action (including dates) that should be taken when the firm chooses not to hedge. Compute the expected outcome. Show your working.?

Question 2 (Create space below the question to write your answer)

Briefly describe the action (including dates) that should be taken when hedging in the forward market. Compute the expected outcome from employing this hedging tool. Show your working.?????????

Question 3 (Create space below the question to write your answer)

Briefly describe the action (including dates) that should be taken when hedging in the money market. Compute the expected outcome from employing this hedging tool. Show your working.????????