You are an Australian exporter of goods and will receive USD1million for the goods in three months time. You decide to hedge your position by using forward contracts since you believe the AUD may increase in value compared to the USD over the next three months. The spot exchange rate is AUD1.000/1USD. The 90 day forward rate is AUD.9879/1USD.

i.Will you enter into a buy or sell forward contract?In what currency?Why? (3 marks)

ii.Suppose the spot rate is AUD.9977/1USD after 90 days. Compare the two amounts in AUD that you will get if you hedge with the forward contract that you decided on in i. above and if you do not hedge. Show your calculations in detail