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Question24 Assume that we have:Spot exchange rate: AUD 1.50 per USDOne-year forward rate: AUD 1.55 per USDRisk-free interest rate in USD: 3% (annualized)Risk-free interest rate in AUD: 5% (annualized) (1) A company has to pay a cost of USD 1 million to its supplier next year. Should the company hedge with a forward contract or do the money market transaction? Present value of cost if using forward = AUD [input] million (1 point)Present value of cost if using money market transaction = AUD [input] million (1point)The company should choose[select: , Forward contract, Indifferent between the two, Money market transaction] (1 point) (2) A company will receive a revenue of USD 1 million from its customer next year. To better hedge the exchange risk, what can the company do (purchase forward contracts or hedge by money market transactions)? Present value of revenue if using forward = AUD [input]million (1 point)Present value of revenue if using money market transaction = AUD [input]million (1 point)The company should choose [select: , Money market transaction, Forward contract, Indifferent between the two] (1 point) Note: (1) Round your answers to 3 decimal places, unless the result is an integer.(2) Keep at least 4 decimal places during your calculations to ensure accurate rounding in the final results.(3) You will get 8 points if all the answers are correct. ResetMaximum marks: 8 Flag question undefined [input]

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Question recap: A company must pay USD 1,000,000 to a supplier next year. We are given the spot rate and forward rate, as well as risk-free interest rates in USD and AUD. Part (1) asks which hedging method yields a lower present value (in AUD) of the future USD payment, comparing a forward hedge versus a money market hedge. Part (2) asks the same for a USD revenue inflow next year, i.e., which hedge yields a higher present value (in AUD) for the future USD receipt. The provided answers (in the data) are: forward cost = AUD 1.550 million, money market cost = AUD 1.456 million, and the recommended choice for part (1) is Money market transaction. For part (2), revenue forward = AUD 1.550 million, revenue money market = AUD 1.456 million, and the recommended choice is Forward contract. Analysis of part (1): Consider the two hedges for a USD payment next year. - Forward contract option: Locking in an exchange rate via a forward at 1.55 AUD/USD means the company will pay 1,000,000 × 1.55 = 1.55 million AUD in one year. There is no exposure to exc......Login to view full explanation

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类似问题

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

Which of the following is cited as a good reason for NOT hedging currency exposures?

Question24 Assume that we have:Spot exchange rate: AUD 1.50 per USDOne-year forward rate: AUD 1.55 per USDRisk-free interest rate in USD: 3% (annualized)Risk-free interest rate in AUD: 5% (annualized) (1) A company has to pay a cost of USD 1 million to its supplier next year. Should the company hedge with a forward contract or do the money market transaction? Present value of cost if using forward = AUD [input] million (1 point)Present value of cost if using money market transaction = AUD [input] million (1point)The company should choose[select: , Forward contract, Indifferent between the two, Money market transaction] (1 point) (2) A company will receive a revenue of USD 1 million from its customer next year. To better hedge the exchange risk, what can the company do (purchase forward contracts or hedge by money market transactions)? Present value of revenue if using forward = AUD [input]million (1 point)Present value of revenue if using money market transaction = AUD [input]million (1 point)The company should choose [select: , Money market transaction, Forward contract, Indifferent between the two] (1 point) Note: (1) Round your answers to 3 decimal places, unless the result is an integer.(2) Keep at least 4 decimal places during your calculations to ensure accurate rounding in the final results.(3) You will get 8 points if all the answers are correct. ResetMaximum marks: 8 Unflag question undefined [select: , Money market transaction, Forward contract, Indifferent between the two]

Question24 Assume that we have:Spot exchange rate: AUD 1.50 per USDOne-year forward rate: AUD 1.55 per USDRisk-free interest rate in USD: 3% (annualized)Risk-free interest rate in AUD: 5% (annualized) (1) A company has to pay a cost of USD 1 million to its supplier next year. Should the company hedge with a forward contract or do the money market transaction? Present value of cost if using forward = AUD [input] million (1 point)Present value of cost if using money market transaction = AUD [input] million (1point)The company should choose[select: , Forward contract, Indifferent between the two, Money market transaction] (1 point) (2) A company will receive a revenue of USD 1 million from its customer next year. To better hedge the exchange risk, what can the company do (purchase forward contracts or hedge by money market transactions)? Present value of revenue if using forward = AUD [input]million (1 point)Present value of revenue if using money market transaction = AUD [input]million (1 point)The company should choose [select: , Money market transaction, Forward contract, Indifferent between the two] (1 point) Note: (1) Round your answers to 3 decimal places, unless the result is an integer.(2) Keep at least 4 decimal places during your calculations to ensure accurate rounding in the final results.(3) You will get 8 points if all the answers are correct. ResetMaximum marks: 8 Unflag question undefined [input]

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