Question 5

A manufacturing company is exporting goods to Malaysia. To understand the impact of exchange rate risk, it needs to calculate the cross-rate. A FX dealer quotes the following rates:

USD/AUD 1.3212-42

USD/MYR 4.152061

Calculate the AUD /MYR cross rate.

The company is expecting to receive a payment in MYR in 30 days and is concerned at its exposure to foreign exchange risk. The management is considering using a forward exchange contract. Given the following data, calculate the forward rate offered by the bank. Both countries use a 365-day year; assume 30-day contract.

Assuming the spot rate: MYR/AUD 0.3157

One-month Malaysian interest rate: 4.20% p.a.

One-month Australian interest rate: 3.00% p.a.

[4+4] = 8 marks