Foreign Exchange Exposure, Hedging Strategies, and Exporting Products

Answer1 The foreign exchange exposure of SSI in Ringgit and AUD has been provided as under: Value of Import Quarterly Import Sl No Particular Amount 1 Quantity 600000 2 Cost per Unit in Ringgit 1000 3 Purchase Value in Ringgit 600000000 4 Quarter Exposure 150000000 Value of Export Ringgit Export Sl No Particular Amount 1 Quantity 180000 2 Cost per Unit in Ringgit 2200 3 Sales Value in Ringgit 396000000 4 Quarter Exposure 99000000 Value of Export AUD Export Sl No Particular Amount 1 Quantity 200000 2 Sales per unit in AUD 800 3 Sales Value in AUD 160000000 4 Quarter Exposure 40000000 Net Exposure in Ringgit and AUD Sl No Particular Amount 1 Net Exposure in Ringgit 51000000 2 Net Exposure in AUD 40000000 Ringgit Exposure isfor payment and AUD payment isfor receipt, Answer 2 The three hedging strategies are forward rate exchange, money market hedge and option hedging. The receipt under three hedging strategies has been provided as under: Forward Rate Sl No Particular Amount 1 90 Day forward Rate 0.781 2 Quarter Exposure 40000000 3 Receipt in US 31240000 Money Market Sl No Particular Amount 1 Amount Borrowed in AUD 39850560.4 2 Amount in USD at spot 31083437.11 3 Amount invested in USD 31223313 Option Sl No Particular Amount 1 Put option exercise 0.7809 2 Pay 31236000 3 Premium cost 200000 4 Net Receipt 31036000 5 Lockin Rate 0.7759 Unhedged Sl No Particular Amount 1 Quarter Exposure 40000000 2 Expected Rate 0.78097 3 Net receipt 31238800 The highest payment isunder forward rate contract and hence the company should use the same to hedge the exposure. Answer 3 The advantage of money market hedge isthat there isno upfront cost involved in such hedging and helps to fix the rate of exchange. There isflexibility under this method in relation to the amount of cover. Further, this method isconsidered appropriate when there isno forward rate exchange in the market. In addition, the disadvantages of this method are as under: (a) Complicated as itinvolves borrowing and lending; (b) Fixes the rate of future no advantage ifrate isin favour The advantage of the option contract isthat there isaright but no obligation to execute the contract and provides protection against downside. If the prices rises in future than the holder of the instrument can avail the benefit of upside. The drawbacks are contracts are standardised and the upfront cost isinvolved. Answer 4 The two strategies of hedging are forward rate exchange and money market hedge. The computation isas under: Forward Rate Sl No Particular Amount 1 90 Day forward Rate 0.2488 2 Net Exposure in Ringgit 51000000 3 Payment in US$ 12688800 Money Market Sl No Particular Amount 1 Amount Invested in Ringgit 50545094.15 2 Amount in USD at spot 12636274 3 Amount borrowed in USD 12699455 Unhedged Sl No Particular Amount 1 Net Exposure in Ringgit 51000000 2 Expected Rate 0.24881 3 Net Paid 12689310 The best instrument or strategy isforward hedge as the outflow under the said methodology isleast under the available actions. Probability Spot Rate for MYR in 90 Days Spot Rate for AUD in 90 Days 5% 0.247 0.7796 15% 0.248 0.78 30% 0.2485 0.7806 30% 0.249 0.7812 15% 0.25 0.782 5% 0.2502 0.783 Expected Price 0.24881 0.78097 Question 5 Yes, company could benefit from financial or operating hedging. For instance import and export exposure of acountry can be set off to remove any unwanted exposure. Further, company may also enter into fix rate contract wherein invoice is made in domestic currency to avoid exchange exposure. Question 6 The benefits of exporting product to foreign market is extra demand for the product along with higher price realisation. It helps company to find an additional market for range of product and services of the company. Thus, itincreases revenue and profit of the company. The drawback is that there is foreign currency exposure if billing is done in currency other than domestic company and there isdefault risk also. Thus, risk of market and foreign exchange exposure exists.