You work in the treasury department of a global consulting company that typically invoices its customer bills
Question:
You work in the treasury department of a global consulting company that typically invoices its customer bills in local currency. One of your company’s consulting teams has been working on a project in Australia that you expect will be completed within six months, at which time you expect to bill your client A$2,400,000. You are concerned that the Australian dollar will depreciate over the next six months and have decided to consider using currency futures contracts as a hedge.
You collect the following data:
S[AUD/USD] = 1.3261 June ‘21 Sept. ‘21
AUD futures contract prices: 1.3352 1.3449
Open interest (# of contracts:) 103 ,000 8,200
Contract notional amount: USD 100,000 Minimum tick size: .0001 per U.S. dollar increment
Assume today is March 15, 2021, and the September ’21 contract expires on September 15th. If 6-month U.S. Libor is .25% p.a., what is the approximate rate of Australian 6-month Libor expressed as an annual percentage rate [Note: assume both Libor rates are quoted on an actual days divided by 360 day basis]?
Using the September contract, calculate the amount of contracts you would use if you employed (i) a naive hedge and (ii) a delta hedge approach to minimize the difference in the change in the value of this hedge with the change in the value of the AUD2,400,000 receivable. Specify if you would buy or sell these contracts.
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley