You must answer ALL questions in this section. This section is worth 20 marks. Write your answers in the space(s) provided.
1. Between 2010 and 2014, the price for a superior room at the Grand Hyatt Kuala Lumpur, Malaysia rose from 430 MYR to 550 MYR. At the same time, the exchange rate went from 1 AUD = 4.30 MYR in 2010 to 1 AUD = 2.50 MYR in 2014. (The currency in Malaysia is the Malaysian Ringgit and is referred to as MYR) a. By how much has the Australian dollar cost of a superior room at the Grand Hyatt Kuala Lumpur, Malaysia changed over this period? b. What has been the percentage (%) change in the value of the Australian dollar against the Malaysian Ringgit during this period? Please clearly specify whether AUD has appreciated or depreciated against MYR You are given the following spot quotations: 1 USD = 1.5485 AUD 1 USD = 1.7935 EUR 1 GBP = 1.6325 USD a. What is the value of 1 AUD in terms of EUR (1 AUD =? EUR)? What is the value of 1 GBP in terms of EUR (1 GBP =? EUR)? What is the value of 1 EUR in terms of USD (1EUR =? USD)? Clearly distinguish between the activities of hedging and speculating.
2. Spot rate is 1 AUD = 69 JPY. The six-month forward rate is 1 AUD = 67 JPY. The treasurer forecasts that JPY will strengthen to 1 AUD = 65 JPY in the next six months. a. If the treasurer enters the forward market to gain protection from unanticipated changes in the rate between AUD and JPY, will (s)he buy or sell JPY? Give reasons for your answer. b. Given the forecast rate and the cost of forward cover, should the treasurer hedge in the forward market? Give reasons for your answer. c. Suppose the treasure hedges and the forecast rate proves correct. Will the treasurer gain or lose AND by how much in terms of AUD? d. Suppose the treasurer hedges but instead of the forecast rate of 1 AUD = 65 JPY, the future spot rate moves to 1 AUD = 75 JPY. Under this new scenario, will the treasurer gain or lose AND by how much in terms of AUD?
3. Identify AND describe three internal based techniques a company’s treasurer could use to hedge against foreign exchange risk.
4. Swindle Co. exports 80 percent of its total production of goods in Victoria to various countries in Asia. Swinton Co. sells all goods it produces in Australia, but it has a subsidiary in Malaysia that usually generates about 30 percent of its total earnings. Compare the translation exposure of these two Australian firms.
5. Yara Valley Clothing is a major children’s clothing company in Australia. All the inputs for clothing are sourced domestically and the company sells the final products throughout Australia. Does Yara Valley Clothing face a foreign exchange exposure? Clearly explain.
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