1.

An Australian company owes a Swiss exporter

CHF250 000, due in six months. The following
information is available:
Spot exchange rate (AUD/CHF) 1.15
Australian six-month interest rate 10.5% p.a.
Swiss six-month interest rate 6.5% p.a.
(a) Calculate the Australian dollar value of payables
under a money market hedge.
(b) Calculate the implicit forward rate.
(c) If the spot exchange rate in six months is expected to
be 1.20, will the hedge be taken? What if it is 1.10?
The Australian dollar value of payables under the money market
hedge is:




(b) The implicit forward rate is:




(c) A decision to hedge is taken if the implicit forward rate is lower
than the expected spot rate. Therefore, a hedge decision will be
taken if the expected spot rate is 1.20, whereas a no-hedge
decision will be taken if it is 1.10.
069 293
2
065 . 0
1
2
105 . 0
1
15 . 1 000 250
1
1
*
0
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KS
1723 . 1
2
065 . 0
1
2
105 . 0
1
15 . 1
1
1
* 0
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2. A UK importer of Australian crocodile meat owes the
Australian exporting company a payment of GBP100
000, due in three months. The following information is
available:
Spot exchange rate (AUD/GBP) 2.60
Australian three-month interest rate 8% p.a.
UK three-month interest rate 10% p.a.
(a) Calculate the Australian dollar value of the
receivables under a money market hedge.
(b) Calculate the implicit forward rate.
(c) If the spot exchange rate in three months is
expected to be 2.65, will the hedge be taken? What if it
is 2.55?
The Australian dollar value of receivables under the money market
hedge is:





(b) The implicit forward rate is:




(c) A decision to hedge is taken if the implicit forward rate is higher
than the expected spot rate. Therefore, a no-hedge decision will
be taken if the expected spot rate is 2.65, whereas a hedge
decision will be taken if it is 2.55.
5873 . 2
4
10 . 0
1
4
08 . 0
1
60 . 2
1
1
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732 258
4
10 . 0
1
4
08 . 0
1
60 . 2 000 100
1
1
* 0
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KS
6. A British importer of Australian crocodile meat owes
the Australian exporting company a payment of
GBP100 000, due in three months. The following
information is available:
Spot exchange rate (AUD/GBP) 2.60
Three-month forward rate 2.62
(a) Calculate the Australian dollar value of receivables
under a forward hedge.
(b) If the spot exchange rate in three months is
expected to be 2.65, will the hedge be taken? What if it
is 2.55?
(a) Under a forward hedge, the Australian
dollar value of receivables is:




(b) A hedge decision will be taken if the forward
rate is higher than the expected spot rate.
Thus, a hedge decision will be taken if the
expected spot rate is 2.55 but not if it is 2.65.
000 262 62 . 2 000 100
0
= = KF
9. An Australian company importing French perfumes
owes the French exporting company EUR250 000, due
in three months. The following information is available:
Current spot exchange rate (AUD/EUR) 1.60
Expected spot exchange rate (AUD/EUR) 1.65 and
1.55, with probabilities of 0.4 and 0.6, respectively
Premium on EUR call option AUD0.01
Exercise exchange rate 1.61
Time to expiry 3 months
Calculate the expected value of payables in Australian
dollar terms under an option hedge. Will the decision to
hedge be taken?
The expected domestic currency value of payables under a call
option hedge is:




If the position is left unhedged the expected value of payables
is:




Since the expected value of payables under the hedge decision is
lower than otherwise, a hedge decision will be taken.
000 396 6 . 0 ) 01 . 0 55 . 1 ( 000 250 4 . 0 ) 01 . 0 61 . 1 ( 000 250 = + + + =
500 397 6 . 0 55 . 1 000 250 4 . 0 65 . 1 000 250 = +