An Australian firm exports machinery to Korea at the price of 200,000 Korean won. This amount...

 

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An Australian firm exports machinery to Korea at the price of 200,000 Korean won. This amount is however paid to the Australian firm only after six months. The Australian firm wishes to cover its exchange rate exposure. Using the information below, calculate its strategy of obtaining a forward contract or money market hedge will be equivalent. If not, which instrument will guarantee a higher dollar value at the end of six months. Explain how you would perform the forward contract and money market hedge. (7) Spot Rate: 3 won/$ Korean won interest rate: 41.64% p.a. Six-month forward rate: 3.5 won/$ Australian dollar interest rate: 4.04% p.a. An Australian firm exports machinery to Korea at the price of 200,000 Korean won. This amount is however paid to the Australian firm only after six months. The Australian firm wishes to cover its exchange rate exposure. Using the information below, calculate its strategy of obtaining a forward contract or money market hedge will be equivalent. If not, which instrument will guarantee a higher dollar value at the end of six months. Explain how you would perform the forward contract and money market hedge. (7) Spot Rate: 3 won/$ Korean won interest rate: 41.64% p.a. Six-month forward rate: 3.5 won/$ Australian dollar interest rate: 4.04% p.a.

Answer rating: 100% (QA)

To determine whether obtaining a forward contract or using a money market hedge will be equivalent for the Australian firm to cover its exchange rate exposure well compare the outcomes of both strateg... View the full answer