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What could say about the expected future exchange rate

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Rockport, an Australian retail company, just signed a contract to sell some products to Casket, a German company. Casket will be billed €10 million which is payable in one year. The current spot exchange rate is AUD1.30/EUR and the one-year forward rate is AUD1.45/EUR. The annual deposit interest rate is 8.0% in Australia and 4.0% in Germany. Rockport is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.

Problem 1: It is considering two hedging alternatives: sell the euro proceeds from the sale forward, or use the money market hedge. Which alternative would you recommend? Why?

Problem 2: Other things being equal, at what forward exchange rate would Rockport be indifferent between the two hedging methods?

Problem 3: Assume the inflation rate in Australia is expected to decrease in the future. What could you say about the expected future exchange rate AUD/EUR and how should the company react to such change, if any.

Reference no: EM132895947

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