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Question - 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.
-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?
Other things being equal, at what forward exchange rate would Rockport be indifferent between the two hedging methods?
-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.
question for each of the subsequent situations shows whether the organization could recognize the described contributed
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