We are all familiar with and fearful of the eventful economic impacts of the COVID and geo-political changes and Russia-Ukraine war on financial
markets, institutions, and businesses. The treasury departments of financial and non-financial firms are facing mounting challenges to manage their financial risks. Looks like Black swans hit the markets in unison. No financial risk management tool seems to work.

I am a part of the Treasury Risk Assessment Division (TRAD) in ABC Corporation, an Australian producer of grains, fruits, and dairy products. Its Head Office is in Sydney with Sales and Distribution Centres in Dubai, Istanbul, Singapore, Tokyo, London, and New York. ABC has already clinched sales order worth of US$500,000,000 for 2022 from customers of the above markets. World food shortage due to COVID could trigger an additional sales order of US$300,000,000 in the near future. To facilitate its production and harvesting, ABC must import agricultural and farming equipment from Japan to the value of ¥100,000,000 by June 2022.

My boss is unsure about hedging FX exposure and has asked me to consider the FX risk hedging tools only for the sales order it clinched and for the imports from Japan but leave the additional sales of USD300 million unhedged.

 

Do you think it is a right decision to exclude hedging instruments for the additional potential sales? Why or why not?

Answer rating: 100% (QA)

As a member of the Treasury Risk Assessment Division the main role is to analyze and evaluate the ri... View the full answer