PART 3 INTEGRATIVE PROBLEM: EXCHANGE RISK MANAGEMENT Rip Curl is an Australian company conducting a financial plan for the next year. It has no foreign subsidiaries, but more than half of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies over the next year are shown in the following table: The spot rates and one-year forward rates as of today are shown below: Currency CS NZ$ MXP Spot rate One-year forward rate A$0.90 A$0.60 AS0.18 AS0.65 AS0.93 AS0.59 AS0.15 AS0 64 Currency Canadian dollar (C$) New Zealand dollar (NZS) Mexican peso (MXP) Singapore dollar (SS) Total inflow Total outflow C$32,000,000 C$32,000,000 NZS5,000,000 NZS1,000,000 MXP10,000 S$8,000,000 NZ$5 MXP11,000,000 S$4,000,000 Questions Based on the information provided, determine Rip Curl's net exposure to each foreign currency in Australian dollars Assume that today's spot rate is used as a forecast of the future Assume that the Canadian dollar net inflows may range from C$20 million to C$40 million over the next year. Explain the risk of hedging C$30 million in net inflows. How can Rip Curl avoid such a risk? Is there any trade-off resulting from your strategy to avoid that risk? 1 spot rate one year from now. The New Zealand dollar, Mexican peso and Singapore dollar are expected to move in tandem against the Australian dollar over 5 Rip Curl recognises that its year-to-year hedging the next vear. The Canadian dollar's movements are expected to be unrelated to movements of the other currencies. Since exchange rates are difficult to predict, the forecast net Australian dollar cash flows per currency may be inaccurate. Do offsetting exchange rate effects from whatever exchange movements do occur? Explain. Given the forecast of the Canadian dollar along with the forward rate of the Canadian dollar, what is the expected increase or decrease in Australian dollar cash flows that would result from hedging the net cash flows in Canadian dollars? Would you hedge the Canadian dollar position? strategy hedges the risk only over a given year and does not insulate it from long-term trends in the Canadian dollar's value. It has considered establishing a subsidiary in Canada. The goods would be sent from Australia to the Canadian subsidiary and distributed by the subsidiary. The proceeds received would be reinvested by the Canadian subsidiary in Canada. In this way, Rip Curl would not have to convert Canadian dollars to Australian dollars each year. Has Rip Curl eliminated its exposure to exchange rate risk by using this strategy Explain. you anticipate any s