You are the CFO of Toots, Toots, and Boots. You have collected income (in millions of $s) data of the past 20 years, and the corresponding average rates on the pound and yen. The data is provided below (Table 1) and in Moodle.

1a. Does the company suffer any Economic (Operating) exposure? How much against the British pound? The yen? What is the within-sample hedging effectiveness when hedging against the currencies? Use regression analysis on the data from Table 1 to answer these questions.

1b. Employ the hedge ratio of $/ from Table 1 to hedge the income for the next 5 years (Table 2). Find the hedging effectiveness for the next 5 years.

Table 1 (historic) Table 2 (future)

Time income $/ $/Yen Time Income $/ $/Yen

1 1 .97 1.21 21 -7 .99 1.09

2 17 .92 1.20 22 -2 .98 1.10

3 5 .97 .93 23 14 .93 1.03

4 2 1.10 .96 24 27 .92 1.01

5 11 .95 .96 25 2 .96 1.00

6 2 .97 .94

7 16 .93 .98

8 21 .92 1.01

9 3 .97 1.09

10 17 .95 1.11

11 2 .99 1.08

12 9 .97 1.10

13 18 .94 1.13

14 17 .95 1.10

15 2 .98 1.14

16 16 .96 1.09

17 17 .95 1.10

18 -3 1.08 0.95

19 16 .96 1.09

20 17 .95 1.10