56 Long-term hedging Rebel Co., an Australian company, has a contract with the government of Malaysia and will receive payments of 100,000 Malaysian ringgit in exchange for consulting services at the end of each of the next 10 years. The annualised interest rate in Australia is 6 per cent regardless of the term to maturity. The annualised interest rate for the Malaysian ringgit is 6 per cent regardless of the term to maturity. Assume that you expect that the interest rates for the Australian dollar and the Malaysian ringgit will be the same at any future time, regardless of the term to maturity. Assume that interest rate parity exists. Rebel considers two alternative strategies:

• Strategy 1 It can use forward hedging one year in advance of the receivables, so that at the end of each year, it creates a new one-year forward hedge for the receivables.

• Strategy 2 It can establish a hedge today for all future receivables (a one-year forward hedge for receivables in one year, a two-year forward hedge for receivables in two years, and so on).

a Assume that the Malaysian ringgit depreciates consistently over the next 10 years. Will Strategy 1 result in higher, lower or the same cash flows for Rebel Co. as Strategy 2?

b Assume that the Malaysian ringgit appreciates consistently over the next 10 years. Will Strategy 1 result in higher, lower or the same cash flows for Rebel Co. as Strategy 2?