Reference no: EM132950112

Question - David Jones is an Australian retail chain which has operations in all over Australia. They import 65% of their goods from China. But due to current situation in the world, they are unable to import from China and planning to import from Indonesia. However, there are some obstacles. Chinese currency Renminbi (CNY) was a highly exchanged currency and somewhat stable whereas Indonesian Rupaiya (IDR) is a volatile currency. They are contemplating that they will have to deal with exchange rate risk if they deal in Indonesian Rupaiya. They have researched the Indonesian Financial Market and the findings are below:

1. There is no active derivatives market in Indonesia. So, it's not possible to hedge against Indonesian Rupaiya.

2. Indonesian suppliers are very strict in their payment policy. They do not like altering in terms of dates.

3. They are reluctant to deal with any other currencies than Indonesian Rupaiya.

4. Reserve Bank of Australia (Central Bank) restricted all the banks to lend any money to the companies for the time being.

David Jones really wants to do business with Indonesian companies as it will be cheaper and similar quality as China. While doing business with China, they used to reduce the exchange rate risk by purchasing call options on Renminbi (CNY) which is not possible with Indonesia.

Required - Describe a strategy David Jones can apply to reduce exchange rate risk in Indonesian Rupaiya against Australian Dollars. State your answer in reference to the strategies of "International Financial Management" course.