Babolat is a French tennis and squash equipment company headquartered in Lyon. It is best known for its strings and tennis racquets which are used by several top players. The company has made strings since 1875, when Pierre Babolat created the first strings made of natural gut. Babolat exports its products to Singapore invoiced in Singapore dollars. The national and official currency of France is the euro. The company recently hired a new Treasurer whose main duties include identifying and mitigating against financial risks. The Treasurer must decide each month whether to hedge the receivables using forward contracts for the following month. He believes that if the International Fisher Effect (IFE) holds, the Singapore dollar's value should change, on average, by an amount that reflects the differential between the interest rates of the two countries of concern (France and Singapore). The Treasurer argues that since the forward premium reflects that same interest rate differential, the results from hedging should equal the results from not hedging, on average.

Question: Do you think the Treasurer should spend time trying to decide whether to hedge the receivables each month, or do you believe that the results would be the same, on average, whether he hedged or not? Critically discuss.

Answer rating: 100% (QA)

YES I think the Treasurer should spend time evaluating the specific circumstances and risks facing Babolat Factors such as exchange rate volatility he... View the full answer