Question

German based company trading in Euros (€) wants to use money market hedging to reduce currency...

German based company trading in Euros (€) wants to use money market hedging to reduce currency risk for anticipated future cashflows in Australian Dollars (A$).

The cashflows are as follows:

  • A receipt of A$2m after 2 months
  • A payment of A$3.5m after 4 months

The current spot rates are A$1.7512 - 1.7578/€.

Q: If inflation in Australia(foreign) was 4% per annum and 7% in Germany(domestic) use the Fischer equation to calculate what the spot rates would have been on the transaction date?

Homework Answers

Answer #1

As per Fischer

Expected spot rate = Current spot rate * (1+inflation rate in Australia* no. of months/12)/(1+inflation rate in Germany*no. of months/12)

For receivables in Australian Dollar, we will use the Ask rate of the quote

So, Expected spot rate after 2 months

= 1.7578* (1+0.04*2/12)/(1+0.07*2/12)

=1.7491

So, spot rate after 2 months will be A$ 1.7491/Euro

Similarly, Expected spot rate after 4 months

= 1.7578* (1+0.04*4/12)/(1+0.07*4/12)

=1.7406

So, spot rate after 4 months will be A$ 1.7406/Euro

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
hedging transactions. Required: Complete journal entries to hedge an unrecognized foreign currency firm commitment as a...
hedging transactions. Required: Complete journal entries to hedge an unrecognized foreign currency firm commitment as a foreign currency fair value hedge. Use formulas to enter amounts and data. Show details of your calculations and processes. Explain each journal entry or why one was omitted. Information: 1. Push Corp. operates in the United States. It uses the Euro for local currency transactions. 2. On Oct 01, 20x7, Push Corp. orders inventory items from German Corporation. 3. Within 30 days, the delivery...
Foreign Exchange (FOREX) Problem Set 1. You in US have an accounts payable to a German...
Foreign Exchange (FOREX) Problem Set 1. You in US have an accounts payable to a German exporter for 200 Porsche Cayenne SUVs. The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30). Today the exchange rate is $1.40 per Euro. You notice that the 30 day forward rate for the $/Euro is $1.38. What should you do? Pay now with early payment discount or wait until end of...
Sarah has $2,500 that she wants to invest in a European certificate of deposit (CD). The...
Sarah has $2,500 that she wants to invest in a European certificate of deposit (CD). The spot exchange rate (dollars per euro) ise$/€=1.13 If the minimum investment required in the CD is €2,000, does Sarah have sufficient funds? If not, what is the shortfall (in Euros)? If so, how much surplus does Sarah have (in euros)? NOTE: This is not a multiple-choice problem. Show your work to receive credit for the problem. Suppose the euro/Australian dollar exchange rate increases from...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT