You work for firm XYZ situated in the United States, 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 near future. You are asked to provide a report, which evaluates your firms exposure, the risk management implications for your firm, and possible hedging strategies. You are also required to provide a recommendation for what your firm should do.

Information about Firm XYZ:

1. Firm XYZ is a car manufacturer located in the United State.

2. The firm imports parts to USA from foreign suppliers in Japan and Germany.

3. The firm exports cars to Australia, New Zealand and the United Kingdom.

4. The firm has a payment of 500,000,000 JPY due in 2 months to their Supplier 1 in Japan,

a payment of 200,000,000 JPY due in 6 months to their Supplier 2 in Japan, a payment of 6,000,000 EUR due in 1 month to their Supplier 1 in Germany, and a payment of 10,000,000 EUR due in 3 months to their Supplier 2 in Germany.

5. The firm is due to receive 70,000,000 AUD from their customer in Australia in 3 months, 50,00,000NZD from their customer in New Zealand in 6 months, 80,000,000 GBP from their customer in the United Kingdom in 3 months.

6. At the moment, the firm imports tires from Japan. The firm hopes to manufacture their own tires. The management of the firm is in touch with a tire factory located in Canada about a potential takeover. At the same time, they are also evaluating the feasibility of establishing a tire factory in Poland. Based on the analyses performed in 2021, the net present values of these two projects are similar. The management has not decided between the two options.

7. The firm is concerned with the impacts of the high inflation rate globally on their business.

8. The firm is also concerned with the impacts of a series of potential interest rate rises ahead

in USA on the firm.

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

1. List the exchange rates that directly affect your firm and form a general market view for these exchange rates. You need to analyse the factors affecting these exchange rates and then form your market view.

2. Discuss the types of exposure your firm may face. Please also compare and discuss the potential risks of the two tire factory investment options.

3. Discuss the firms risk management implications given its exposure and your market view. Please design hedging strategies for the firm. You also need to evaluate the hedging outcome what will the outcome be if exposure is hedged and what will the outcome be if exposure is not hedged.

4. In your discussion, you should consider the effect of the current economic environment on foreign exchange market, demand for exports/imports, supply of exports/imports and other relevant economic indicators, and relate this to how this may impact the firm. Particularly, you need to discuss the potential impacts of high inflation and interest rate hike on the firms business.

Allocation of Marks

The assignment accounts for 40% (a total of 40 marks) of students final grade for BAFI1019 International Finance. This assessment will measure your ability to:

analyse factors affecting exchange rate (10 marks)

evaluate foreign exchange exposure (10 marks)

manage foreign exchange exposure (10 marks)

evaluate risk management outcomes (10 marks)