International finance strategies

BAFI1018

Final Assessment

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You work for firm XYZ situated in Australia, and your boss has become concerned about the current economic environment, especially as it relates to the different types of exposures that your firm may face in the near future. You are asked to provide a report, which evaluates how your firm is exposed, and what are possible hedging strategies. You are also to provide a recommendation for what your firm should do.

Report requirements:

  1. Due: 23 October 2020 by 23:59 AEST
  2. World limit: 1500 words max (but you should aim 1000 words).
  3. All figures/graphs/calculations should be in the appendix
  4. All calculations should be labeled. If we do not know what the calculation is for,we cannot evaluate it.

Below are some details about the financial/economic environment of the firm:

Firm XYZ:

  1. Your firm sells goods domestically and abroad.
  2. The firm has a payment due in 3 months time worth 400,000 EUR to foreignsupplier.
  3. A U.S. importer owes the firm 300,000 USD, due in 4 months.

Economic environment:

  1. RBA is considering implementing an expansionary monetary policy by loweringthe cash rate.
  2. Economic growth of your foreign markets, where you export your goods, hasdeclined relative to domestic economic growth.
  3. The firm is considering issuing 500,000 USD bonds with a maturity of 1 year.

Your job:

  1. Use the information above to consider the types of exposure your firm may face.
  2. “S” in the table below means spot rate: search for the current spot rate for theappropriate currency pair.
  3. Propose some hedging strategies, and evaluate the outcomes. Should the firm hedge?(see detailed marking guidelines below)
  4. The table below provides information on the forward rates, exercise rates (based on theS you find), as well as premiums.
  5. Use information on the economic environment to consider how S will be affected, relatethis to how this may impact the firm.

Additional information:

  1. Please use the rate information provided in the table. This means you will havedifferent rates, depending on when you source the information (e.g. exchangerates change continuously).
  2. Look for spot rate forecasts (banks/newspapers offer these) to use for calculatingthe profitability of a hedging strategy when you need a future spot rate. State why you are using this rate (e.g. such and such predict that AUD/USD = X in 3 months, and using this rate…)

Table 1: Relevant information

page2image59666816 page2image59660672 page2image59664128 page2image59659520 page2image59660096 page2image59670272 page2image59658176 page2image59658368Currency Price of pair call

Price of Exercise

Exercise Call

S – 0.15

S – 0.10

Fwd rate Spot rate

1.6 see current available*

1.35 see current available*

interest

see current available*

see current available*

put

Put

0.01 S+0.02 0.008 S+0.015

page2image59670080 page2image59669120 page2image59665856 page2image59663168 page2image59668352 page2image59658752 page2image59663936 page2image59660480 page2image59665472 page2image59667584 page2image59663552 page2image59660288page2image59659904 page2image59683584 page2image59677632 page2image59765888S(AUD/EUR)

S(AUD/USD)

0.007

0.006

page2image59752448 page2image59760128 page2image59767424 page2image59753408 page2image59761280 page2image59767616 page2image59753984 page2image59764352 page2image59759744 page2image59761088 page2image59754560 page2image59760512page2image59764160 page2image59755136 page2image59765120 page2image59755904 page2image59762240 page2image59761856 page2image59765312 page2image59768576 page2image59738368 page2image59740480 page2image59747008 page2image59744704* see current available = use a reliable source to find the data (e.g. Yahoo Finance)
Notes on the table:To determine the exercise rate of a put, for example for AUD/USD, search for the current spot rate for the currency pair, and then add 0.02 to the spot. ————————————

Additional notes:

  1. Executive summary not required
  2. Cover sheet not required
  3. Table of contents not required
  4. Must provide references

Submission:

  1. Online via Canvas
  2. Turnitin in required with the report
  3. Report should be in Microsoft word or pdf formats only!

Marking guidelines: 40 points of your final grade

  1. Exposure: show understanding of different types of exposure, specifically as itrelated to the firm (8 points)
  2. Hedging strategies: show knowledge of different strategies available in the market (5points)

a. Show calculation of hedge/no hedge decisions under different strategies (15

points)

page2image59533632 page2image59532096b. Use currently available information (3 points)
● For example, for interest rates you can find the central bank rate of the

foreign market
c. Show where you source your data from (2 points)

  1. Recommendation: which strategy should you use? Why? Use your analysis to provide the recommendation (5 points)
  2. Appendix: exempt from word limit, but should only include figures/data (2 points)
Student has agreed that all tutoring, explanations, and answers provided by the tutor will be used to help in the learning process and in accordance with Studypool’s honor code & terms of service.

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