Question

You are the risk manager for your company. In three months it will receive a payment of A$50 million. The three month forward rate is AUDUSD 0.9015.

a. In your opinion, should you hedge Australian $ revenue (that is, lock in your US dollar inflow today using the forward price)?

b. Suppose you do decide to hedge the exposure. What is your hedged USD revenue?

c. Suppose the actual exchange rate turns out to be AUDUSD 0.9259. Did you have an opportunity cost? If so, how much?

Answer 1

a. Company is due to receiving AS$ 50 million in 3 months. It is facing the risk of USD appreciating. Therefore, we should hedge the exposure

b. If hedged using the forward price at Aud USD 0.9015, then we would receive $ 55,463,117. ($50 Million/0.9015).

c. If not hedged, then we would receive $54,001,512. (A$50 Million/0.9259). We don't have oppurtunity cost as we could gain more if hedged through forward. If we have not hedged ourselves we would be at a loss of 1,461,605. (55,463,117 - 54,001,512).