Question (12 marks)

Crystal Wave Ltd. (CWL) is a Sydney based company that manufactures electronic ear implants. CWL manufactures its ear implants in Australia and exports them to Europe, which accounts for more than half of its total revenue. On the 1^st of September 2019, CWL signs a contract with its European distributor in which CWL agrees to deliver 30,000 ear implants and receive EUR24 million on the 1^st of December 2019. The exchange rate at the time of signing the contract is 1 EUR = 1.4125 AUD. The gross profit margin based on this exchange rate is 30%.

Required:

(a) If CWL is concerned about the exchange risk, describe how it can hedge the risk using a futures or forward contract. (3 marks)

(b) Suppose the exchange rate changes to 1 EUR = 1.3785 AUD when CWL receives the Euro payment. In order to maintain the same profit margin, how much must it sell these ear implants for in Euro? (6 marks)

(c) Briefly explain why export-oriented countries want to devalue their currencies, especially in times of economic difficulty. (3 marks)