The budget rate is B= 1.4493 AUD / Euro. The budget rate is a benchmark for the company. An exchange rate below B is acceptable whereas an exchange rate above B will erode the margins of the company and force them to renegotiate contracts with suppliers.

The four (4) month FEC (Foreign Exchange Forward contract) is AUD/EUR 0.6910 (spot of 0.6980 less 70 forward points). (you need to reverse the rate to AUD per 1EUR)

1. Assume that the company has a payable of Euro 15 million in 4 months. If they hedge that position with the above forward contract, what is the cost of the payable in AUD (after hedging).(5) Is this an acceptable deal when compared to the budget rate? (5)