You work for firm ABC situated in Australia, and your boss has become concerned about the

current economic environment, especially as it is related to the different types of exposures that

your firm may face in the future. You are asked to provide a report, which evaluates your firm$$s

exposures, the risk management implications for your firm, and possible hedging strategies for

the next $6$ months. You are also required to provide a recommendation for what your firm

should do$.$

Information about Firm ABC:

$1.$ Firm ABC is an agricultural machinery manufacturer located in Australia.

$2.$ The firm imports parts from foreign suppliers in Japan, Germany, and the United States.

$3.$ The firm exports its products to New Zealand, Canada, the United Kingdom, and Italy.

$4.$ The firm has three payments of $300,000,000$ JPY due in every $2$ months to their supplier in

Japan over the next $6$ months, and two payments of $3,000,000$ EUR due in every $3$ months

to their supplier in Germany over the next $6$ months, a payment of $8,000,000$ USD due in

$4$ months to their supplier in the United States.

$5.$ The firm is due to receive two payments of $5,000,000$ NZD from their customer in New

Zealand in $3$ months and then in $6$ months, a payment of $6,000,000$ CAD from their

customer in Canada in $4$ months, a payment of $7,000,000$ GBP from their customer in the

United Kingdom in $3$ months, a payment of $4,000,000$ EUR from their customer in Italy in

$3$ months.

$6.$ The firm has$2,000,000$ EUR kept in a term deposit account earning an interest rate of $3\mathrm{.}5\%$

per annum in the United Kingdom. The term deposit matures in $3$ months.

$7.$ The firm is concerned about the impacts of global$-$wide high inflation rates, global$-$wide

interest rate hikes, and the global geopolitical environment on the prospects of their

business.

RMIT Classification: Trusted

You are required to prepare a report, which should contain the following information:

$1.$ List the future spot exchange rates $($the currency pair and the relevant month$)$ that

directly affect your firm and form a forecast $($a number is required$)$ for each of these

future spot exchange rates. You need to briefly analyse the factors affecting these

exchange rates and then form your forecasts.

$2.$ Discuss and evaluate the types of exposures your firm may face as well as the other

main concerns for your firm. In your discussion, you should consider the effects of the

current economic climate on the foreign exchange market and the competitiveness of

the products produced in Australia and relate this to how these may impact the firm.

$3.$ Design hedging strategies for the firm$$s foreign currency exposures. You need to

explain why your chosen hedging strategies are better than the other strategies by

calculating and then evaluating the hedging outcomes $$ what will the outcomes be if

exposures are hedged using your hedging strategies and what will the outcomes be if

exposures are not hedged or using other hedging strategies. Please also discuss the

impacts of hedging foreign currency exposures on the firm$$s cost of capital and firm

value.