An Indonesian student’s family purchased an apartment for AUD 1 million in the Melbourne CBD area for their son to stay in during his study at Monash College. The contract will be settled in 6 months. Which of the following statements is true regarding the exchange rate risk for the family?

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BlackTom AI · Accepted Answer

The scenario involves a family committing to a fixed AUD payment (1 million)6 months from now, while their funds are in Indonesian Rupiah (IDR). The exchange rate between AUD and IDR can move over that period, creating currency risk for the family.
Option a: 'The family will face the down-side exchange rate risk if the AUD appreciates against the Indonesian Rupiah.' If the AUD strengthens relative to IDR, converting their IDR to AUD becomes more expensive, meaning they would need more IDR to buy the same 1 million AUD. This is a classic down-side risk: adverse movement (AUD up, IDR down) increases the IDR outlay. This statement is correct.
Option b: 'The family will face the up-side exchange rate risk if the Indonesian Rupiah depreciates against the AUD.' If IDR weakens relative to AUD, the amount of IDR needed to obtain 1 million AUD rises as well, since each AUD costs more IDR. This constitutes an up-side risk from the perspective of IDR expenditure. This statement is also correct.
Option c: 'The family will face no exchange rate risk if they sell the apartment once the student completes his study.' Waiting to sell after completion does not remove the exposure that occurs during the settlement period. The contract settles in 6 months, so before payment is made, exchange rate movements affect the cost in IDR. Therefore this statement is incorrect.
Option d: 'Both a and b.' Since both (a) and (b) accurately describe the exchange rate risks involved, this option correctly captures the full set of risks present in the scenario. This composite statement integrates the two true risk directions.

An Indonesian student’s family purchased an apartment for AUD 1 million in the Melbourne CBD area for their son to stay in during his study at Monash College. The contract will be settled in 6 months. Which of the following statements is true regarding the exchange rate risk for the family?

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