Assume that you are the CFO of a small Australian-based automotive components manufacturer, OZPRTS Co. As a result of the closure of the major automotive manufacturers' plants in Australia (your former customers), OZPRTS Co. has taken on a large contract to produce 200,000 aluminium transmission casings per annum for a large EU-based automotive manufacturer with primary operations in Germany. OZPRTS Co.'s CEO has guaranteed a fixed euro price on the casings over the first three years of the contract. You are greatly concerned about the possibility of increases in the price of aluminium for two reasons. One is increased prices for the metal as a result of increases in its global demand given its use in the automotive and power transmission industries Another is the potential for the AUD price to increase due to the impact of adverse changes in exchange rates against the Australian dollar. You are also concerned with potential currency exposures on the revenue side of the contract.<\/p>
<\/p>
a)<\/strong> Identify and discuss the exposures that OZPRTS Co. faces on the input cost side of this contract over the next three years.<\/p> You should:<\/p> i) identify the currency in which aluminium is priced (on global markets) and thus the exchange rate to which OZPRTS Co. is exposed due to its required purchases of aluminium over the next three years<\/p> ii) collect data on both aluminium prices and the appropriate exchange rate and, using charts, discuss the variability in these two prices\/rates<\/p> iii) use appropriate diagrams to illustrate OZPRTS Co.'s exposure on purchases of aluminium to each, separately, of the global price of aluminium and the appropriate exchange rate. (40 marks)<\/p> <\/p> b)<\/strong> Critically evaluate whether you should use options or futures to hedge against the risks that OZPRTS Co. faces from its purchase of aluminium. You should:<\/p> i) use appropriate diagrams to indicate both OZPRTS Co.'s exposure to, and the impact of, each of these derivative-based hedges on the cost of aluminium and the relevant exchange rate<\/p> ii) identify and explain any problems that might be present in the implementation of each of these derivative-based hedging strategies (e.g. accuracy, cost), both individually and in combination with each other<\/p> iii) choose one of these derivative-based hedge instruments, separately, for each of the exposures that OZPRTS Co. faces on its input side and justify your choice.<\/p> <\/p> c)<\/strong><\/p> i) Identify your currency exposure on the revenue side of the contract and, using an appropriate diagram, illustrate OZPRTS Co.'s exposure on its sales of engine casings.<\/p> ii) choose whether to use an options or futures hedge against the currency exposure that OZPRTS Co. faces from its sales of engine casings, and use an appropriate diagram to illustrate the impact of the chosen hedge on this exposure<\/p> iii) Discuss the conditions under which this exposure may act as an offset to your exposures on the input cost side (i.e. as a buffer to profits), limiting your need to fully hedge this exposure.<\/p>",
"transcribed_text": "",
"related_book": {
"title": "Microsoft Excel Data Analysis And Business Modeling",
"isbn": "0137613660, 9780137613663",
"edition": "7th Edition",
"authors": "Wayne Winston",
"cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/63fd8aced7297_24732.jpg",
"uri": "\/textbooks\/microsoft-excel-data-analysis-and-business-modeling-7th-edition-9780137613663",
"see_more_uri": ""
},
"free_related_book": {
"isbn": "1944548238",
"uri": "\/textbooks\/unmanned-aircraft-systems-in-the-cyber-domain-protecting-usa-s-advanced-air-assets-1st-edition-978-1944548230-359396",
"name": "Unmanned Aircraft Systems In The Cyber Domain Protecting USA S Advanced Air Assets",
"edition": "1st Edition"
},
"question_posted": "2024-06-06 17:04:40",
"see_more_questions_link": "\/study-help\/questions\/business-economics-2023-September-08",
"step_by_step_answer": "The Answer is in the image, click to view ...",
"students_also_viewed": [
{
"url": "\/siblings-inc-is-expected-to-maintain-a-constant-64-percent",
"description": "Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the...",
"stars": 3.5
},
{
"url": "\/study-help\/essentials-of-investments\/a-corporation-plans-to-issue-10-million-of-10year-bonds-1716558",
"description": "A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of eight years. The T-note futures contract is selling at F0 100...",
"stars": 3.5
},
{
"url": "\/study-help\/introduction-to-probability-statistics\/the-response-time-in-minutes-of-a-patient-to-a-1983933",
"description": "The response time (in minutes) of a patient to a new medical treatment for a disease is a continuous random variable X with distribution function F(x) = 1 (x + 1)ex, x > 0. (i) Obtain the density of...",
"stars": 3.5
},
{
"url": "\/1-write-a-brief-report-that-outlines-the-reasons-both",
"description": "1. Write a brief report that outlines the reasons (both internal and external) for Burgmasters demise, and whether operations management played a significant role in the demise. 2. Do you think that...",
"stars": 3
},
{
"url": "\/study-help\/questions\/suppose-that-alice-and-bob-want-to-share-a-privatekey-9923516",
"description": "Suppose that Alice and Bob want to share a private-key based on the Die-Hellman key exchange protocol. Let us assume that they have agreed on the domain parameters p = 6779 and g = 3, where p and g...",
"stars": 3
},
{
"url": "\/study-help\/questions\/effect-of-transactions-on-cash-flows-state-the-effect-cash-7951123",
"description": "Effect of Transactions on Cash Flows State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows: a- Retired $300,000 of bonds,...",
"stars": 3
},
{
"url": "\/study-help\/questions\/two-employees-are-arguing-loudly-in-the-hallway-about-their-4467122",
"description": "Two employees are arguing loudly in the hallway about their working relationship. One accuses the other of setting them up for failure and looking bad in front of their supervisor. Tensions escalate...",
"stars": 3
},
{
"url": "\/study-help\/questions\/pizza-land-operates-a-pizza-franchise-in-la-the-owner-4455291",
"description": "Pizza Land operates a pizza franchise in LA. The owner has provided the following budgeted data for next year. Revenue $11,838,000 Fixed Costs $3,198,000 Variable Costs (depends on the # of pizzas...",
"stars": 3
},
{
"url": "\/study-help\/questions\/an-executive-coach-started-working-with-employees-at-agency-x-3202455",
"description": "An executive coach started working with employees at Agency ???? ???? one month ago, and since then, Agency X ' \" id=\"MathJax-Element-2-Frame\" role=\"presentation\" style=\"font-size: 121%; position:...",
"stars": 3
},
{
"url": "\/study-help\/questions\/which-of-the-following-statements-is-not-true-for-a-3203925",
"description": "Which of the following statements IS NOT true for a stone attached to a string and swung in a uniform vertical circular motion? 1. The magnitude of resultant force acting on the stone changes...",
"stars": 3
},
{
"url": "\/study-help\/questions\/identify-an-example-of-a-vision-statement-for-an-automobile-3205894",
"description": "Identify an example of a vision statement for an automobile manufacturing company. Multiple choice question. To offer the best luxury cars in the country To increase the number of workers in the...",
"stars": 3
},
{
"url": "\/study-help\/questions\/compile-a-list-of-five-5-methodologies-that-help-troubleshoot-7013592",
"description": "Compile a list of five (5) methodologies that help troubleshoot a Linux system. Describe each of the five methods and provide a screenshot or description of each. You may need to search the public...",
"stars": 3
},
{
"url": "\/study-help\/leadership-and-management\/your-project-has-over-25-stakeholders-that-you-actively-involve-1552803",
"description": "Your project has over 25 stakeholders that you actively involve. With such a large group, you decide to use a formal stakeholder management process to handle these stakeholders. Preparing stakeholder...",
"stars": 3
},
{
"url": "\/study-help\/leadership-and-management\/a-press-gang-stakeholder-is-more-likely-to-be-a-1552800",
"description": "A Press Gang stakeholder is more likely to be: a. Low supportive and have low importance b. Extremely supportive and highly important c. Less supportive but highly important d. Highly supportive but...",
"stars": 3
},
{
"url": "\/study-help\/leadership-and-management\/your-sponsor-is-considered-a-political-shark-in-the-organization-1552799",
"description": "Your sponsor is considered a political shark in the organization. Which behaviour best reflects your sponsor? a. A sponsor who is spending a significant amount of time identifying new sub-projects to...",
"stars": 3
}
],
"next_back_navigation": {
"previous": "\/study-help\/questions\/please-explain-if-a-bad-boys-inc-is-evaluating-its-2378744",
"next": "\/study-help\/questions\/please-show-steps-3-find-the-exact-value-of-the-2378746"
},
"breadcrumbs": [
{
"name": "Study help",
"link": "https:\/\/www.solutioninn.com\/study-help\/questions-and-answers"
},
{
"name": "Business",
"link": "https:\/\/www.solutioninn.com\/study-help\/questions-and-answers\/business"
},
{
"name": "Finance",
"link": "https:\/\/www.solutioninn.com\/study-help\/questions\/business-finance"
},
{
"name": "Assume that you are the CFO of a small Australian-based automotive components",
"link": "https:\/\/www.solutioninn.com\/study-help\/questions\/assume-that-you-are-the-cfo-of-a-small-australianbased-2378745"
}
],
"skill_details": {
"skill_id": "13",
"skill_name": "Finance",
"parent_id": "1"
}
}: "1"
}
}