You work for firm XYZ situated in Britain, and your boss has become concerned about the current economic environment, especially as it is related to the different types of exposures that your firm may face in the near future. You are asked to provide a report, which evaluates how
your firm is exposed, the risk management implications for your firm, and possible hedging strategies. You are also required to provide a recommendation for what your firm should do.
Information about Firm XYZ:
1. The firm imports high quality wool to Britain from foreign suppliers located in Australia and the New Zealand.
2. The firm exports Jewellery to USA from Britain.
3. The firm exports designer clothes from Britain to Australia, New Zealand and Singapore.
4. The firm has a payment of 8,000,000 AUD due in 3 months to their supplier in Australia, a payment of 6,000,000 NZD due in 2 months to their supplier in New Zealand.
5. The firm is due to receive 9,000,000 AUD from their customer in Australia in 2 months, 4,000,000NZD from their customer in New Zealand in 2 months, 700,000 SGD from their customer in Singapore in 1 months, and 9,000,000 USD from their customer in USA in 2 months
6. The firm is concerned with the impacts of the potential high inflation rate due to the recent expansionary monetary policy globally in their exporting and importing business
You are required to prepare a report, which should contain the following information:
1. Use the information above to consider the types of exposure your firm may face.
2. Discuss the firm’s risk management implications given their exposure and design hedging strategies for the firm. You also need to evaluate the hedging outcome – what will the outcome be if exposure is hedged and what will the outcome be if exposure is not hedged.
3. You should consider the effect of the current economic environment on foreign exchange market, demand for exports/imports, supply of exports/imports and other relevant economic indicators, and relate this to how this may impact the firm. Particularly, you need to discuss the
potential impacts of high inflation in the relevant countries for the firm on the firm’s exporting and importing business.
Allocation of Marks
The assignment accounts for 40% (a total of 40 marks) of students’ final grade for BAFI1018 International Finance. Marks will be allocated as follows:
1. Exposure and risk management (10 marks)
Marks will be awarded based on your understanding of different types of exposure related to this firm and on your understanding of the importance of risk management and the available risk management measures including potential hedging strategies.
2. Discussion of the impact of economic environment (5 marks)
Marks will be awarded based on your understanding of the impact of the current economic environment and your ability to relate this to how this may affect the firm.
3. Design of hedging strategies (10 marks)
Marks will be awarded based on the relevance, the effectiveness and the cost of the proposed hedging strategies
4. Hedging outcome (10 marks)
Marks will be awarded based on your calculation and evaluation of the outcome if the company’s exposure is hedged using the proposed strategies as well as the outcome if the company’s exposure is not hedged.
5. Communication (5 marks)
Marks will be awarded based on how well the report communicates analysis, arguments and viewpoints and how well the report is written. Students are expected to provide accurate and complete citation and referencing where necessary.