Question

Question one (10 marks) TT Foods Ltd. (TTFL) has a payable of A$10,000,000 due in 90 days to an Australian food company in connection with a shipment of cheese and butter. The current exchange rate is A$1.05/US$. Currency analysts are forecasting that the dollar will weaken against the A$ by 1% over the next 90 days, and that the standard deviation of 90-day forecasts of the percentage rate of depreciation of the US dollar relative to the AS is 4%. A. Provide a qualitative description of TTFL 's transaction exchange risk. (3 marks) B. If TTFL chooses not to hedge its transaction exchange risk, what is the firm's expected US dollar revenue? (3 marks) C. If the receivables are not hedged, what is the range of possible dollar revenues that incorporates 95.45% of the possibilities (assuming a normal distribution)? (4 marks)

Answer 1

Please find the attachment for Ans.

A.If company paid based on the current rate it will earn a more profit than 90 days later. Calculation shows the value.

B. If Company is not going to hedge, still company will gain. PFB for the same.

C. If receivable is not hedged still company can earn profit. PFB for the same.

ABC - Microsoft Excel (Product Activation Failed) - 2 X x Review View - = = £ Autosum * General Wrap Text Merge & Center - $ % 0. Formation are pre insert Delete X 22-01-15 File Home Insert Page Layout Formulas Data * Cut Times New Roman - 11 - AA = Ea Copy Paste Format Painter BI U BO A Clipboard Font D9 fc =+B7-D7 A 1 Total payable 10000000 2 Exchange rate IUSD =1.05AD 3 decrese in $ 1% 4 Depreciation 4% AutoSum Fill - Sort & Find & 2 Clear Filter Select Editing Formatting as Table Styles Styles Alignment Number Cells J K L M Current Date Exchange rate Current payable Dep amount (1%) 90 days later payable 4% Dep 90 days later payable 10000000 1.05 9523809.524 96200.0962 9620009.62 99206.34921 9920634.921 9 Transction Risk(Profit) 476190.4762 379990.38 79365.07937 4988.899698 498889.9698 3981.041173 398104.1173 831.483283 83148.3283 95.45| Sheet1 Sheet2 Sheet30 Ready Type here to search type here to searen o H o e e W @ o 9 BOU 100% 11:11 AM ^ ( 0) 12/1/2019 %