Managing foreign exchange exposure

Assignment Help Financial Management

Reference no: EM131851748

Managing Foreign Exchange Exposure. A client for who you provide financial advice has come to you for guidance over a foreign exchange transaction. The client’s company, based in Australia has sold US$2,000,000 of machine parts to a US customer. The payment has been deferred for six months. Spot exchange rate = US$1.0252/AU$ Six month forward rate = US$1.0468/AU$ Company’s cost of capital = 12.0% p.a. US 6-month deposit rate = 6.0% p.a. US 6 month borrow rate = 9.5% p.a. Australian 6-month borrowing rate = 7.0% p.a. Australian 6 month deposit rate = 4.0% p.a. Six month call option for US$2,000,000; strike price $1.055/AU$, premium price is 1.5% The company’s forecast for 6 month spot rate is $1.0500/AU$

Explain and calculate the process of hedging the transaction exposure using a money market hedge.(Show workings)

Explain the role of interest rate differentials in your calculation in d) and calculate the implicit interest rate that would make you indifferent between the forward exchange contract and the money market hedge.

Calculate and explain the process of covering the transaction’s exposure through the options market.

Based on your calculations above, which alternative would you recommend and why?

Reference no: EM131851748

Questions Cloud

Distinguish between global workers and expatriates : In the balance sheet approach to paying expats, most of total compensation is linked to costs of living. Some argue that expatriate pay resembles a traditional.

Future value of annuity : Future Value of Annuity. Stacey would like to have? $1 million available to her at retirement.

Conduct voluntary self evaluation of compensation practices : Your employer is considering whether to pursue business opportunities with the federal government. You have been asked to" determine what is required to conduct

Do you tend to side with management or unions : Do you tend to side with management or unions? Why? Why do you think Union membership is on the decline?

Managing foreign exchange exposure : A client for who you provide financial advice has come to you for guidance over a foreign exchange transaction.

Would you advise meeting with corporate counsel : You work at an upscale coffee shop that is part of a nationwide chain of 200 such stores. You started as a barista, but then you moved up.

Which exemption would be most relevant in the case : Is Ms. O'Neill exempt or nonexempt under the Fair Labor Standards Act? Which exemption would be most relevant in this case?

Manual ordering system with computerized system : You are considering replacing your manual ordering system with a computerized system, to make your operations more efficient and to increase sales.

What is the nature of government role in compensation : What is the nature of government's role in compensation? Explain why changes in minimum wage can affect higher-paid employees as well.

User Account

All Pages