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 firm's 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. 

 

Question:

1) In the discussion, 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. 

2) Particularly, you need to discuss the potential impacts of high inflation and interest rate hike on the firm's business.