Table 1: Foreign currency Forecasts: Source NAB September 28, 2020

Exchange rate forecast

	Dec-20	Mar-21	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22
Majors
AUD/USD	0.74	0.76	0.77	0.77	0.78	0.79	0.80	0.80
NZD/USD	0.66	0.67	0.68	0.69	0.70	0.70	0.72	0.72
USD/JPY	103	103	100	100	100	99	98	98
EUR/USD	1.22	1.23	1.25	1.26	1.27	1.28	1.30	1.31
GBP/USD	1.36	1.40	1.40	1.43	1.44	1.45	1.47	1.48
USD/CHF	0.91	0.91	0.91	0.91	0.91	0.92	0.91	0.91
USD/CAD	1.32	1.29	1.28	1.28	1.27	1.26	1.25	1.25
USD/CNY	6.70	6.60	6.55	6.50	6.45	6.40	6.35	6.30
Australian Cross Rates
AUD/NZD	1.13	1.13	1.13	1.12	1.11	1.12	1.11	1.11
AUD/JPY	76	78	77	77	78	78	78	78
AUD/EUR	0.61	0.61	0.62	0.61	0.62	0.62	0.61	0.61
AUD/GBP	0.54	0.54	0.55	0.54	0.54	0.54	0.54	0.54
AUD/CHF	0.67	0.69	0.70	0.71	0.71	0.72	0.73	0.73
AUD/CAD	0.97	0.98	0.99	0.99	0.99	0.99	1.00	1.00
AUD/CNY	4.96	4.99	5.04	5.03	5.05	5.04	5.06	5.04

Question 2

You are a CFO of an Australian company with a liability of USD 1 million due in December 2021. You have receivables of 10 million Japanese yen due in December 2021. Assuming that the forecasts given in table 1 are accurate and using the forward rates for AUD/USD and AUD/JPY, does it make sense to hedge

a) your payable in USD;

b) your receivable in JPY? Illustrate with data obtained from internet sources / IRESS trading room. You may use forwards/futures/options on the relevant currency pairs (if available).

Question 3

a) In generating their forex forecasts, NAB economists would have made a number of assumptions. These may or may not hold. For instance, take the AUD/USD forecast. Outline factors or events that may render the forecasts inaccurate.

b) In question 2, we looked at exposures of an Australian company in major currencies such as USD and JPY. If the firm had exposures in currencies such as Brazilian Real or Indonesian Rupiah, what options does the firm have in terms of hedging/foreign exchange risk management?