BAFI1018 Final Assessment 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 foreign supplier.

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 lowering the cash rate

2. Economic growth of your foreign markets, where you export your goods, has declined 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 the appropriate 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 the S you find), as well as premiums.

5, Use information on the economic environment to consider how S will be affected, relate this to how this may impact the firm.

Additional information: 1. Please use the rate information provided in the table. This means you will have different rates, depending on when you source the information (e.g. exchange rates change continuously). 2. Look for spot rate forecasts (banksewspapers offer these) to use for calculating the 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 Currency Price of Price of Exercise Exercise Fwd rate Spot rate interest pair call put Put Call S(AUD/EUR) 0.007 0.01 S+0.02 S-0.15 1.6 see current see current available available S(AUD/USD) 0.006 0.008 S+0.015 S - 0.10 1.35 see current see current available available * 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 information: 1. Please use the rate information provided in the table. This means you will have different rates, depending on when you source the information (e.g. exchange rates change continuously). 2. Look for spot rate forecasts (banksewspapers offer these) to use for calculating the 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 Currency Price of Price of Exercise Exercise Fwd rate Spot rate interest pair call put Put Call S(AUD/EUR) 0.007 0.01 S+0.02 S-0.15 1.6 see current see current available available S(AUD/USD) 0.006 0.008 S+0.015 S - 0.10 1.35 see current see current available available * 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