Question
Jones recognizes that its year-to-year hedging strategy hedges the risk only over a given year, and does not insulate it from long-term trends in the
Jones recognizes that its year-to-year hedging strategy hedges the risk only over a given year, and does not insulate it from long-term trends in the A$s value. It has considered establishing a subsidiary in Australia. The goods would be sent from the U.S. to the Australian subsidiary and distributed by the subsidiary. The proceeds received would be reinvested by the Australian subsidiary in that country. As a result of implementing this strategy, Jones would not have to convert A$ to US$ each year. Has Jones totally eliminated its exposure to exchange rate risk by using this strategy? What other exchange related exposure might result from this strategy. Explain.
Currency | Total Inflow | Total Outflow | Total Inflow in USD | Total Outflow in USD | Net Foreign Exchange Exposure in USD |
Australia Dollars (A$) | 33,000,000 | $ 3,000,000 | $ 30,030,000 | $ 2,730,000 | $ 27,300,000 |
Canada Dollars (C$) | 6,000,000 | $ 2,000,000 | $ 3,660,000 | $ 1,220,000 | $ 2,440,000 |
Argentina Pesos (AP) | 12,000,000 | $ 11,000,000 | $ 2,280,000 | $ 2,090,000 | $ 190,000 |
Taiwan Dollars (T$) | 5,000,000 | $ 9,000,000 | $ 3,300,000 | $ 5,940,000 | $ (2,640,000) |
Currency | Spot Rate | One-Year Forward Rate |
A$ | $ 0.91 | $ 0.94 |
C$ | $ 0.61 | $ 0.60 |
AP | $ 0.19 | $ 0.16 |
T$ | $ 0.66 | $ 0.65 |
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