Suppose you are a German investor. You just acquired Catch, an Australian online business. You are...
Suppose you are a German investor. You just acquired Catch, an Australian online business.
You are concerned with the EUR value of your foreign investment
As an economist, you estimate 3 scenarios for the future, as described in the table below:
|
Scenario |
Probability |
Forecast exchange rate (€/A$) |
Forecast asset value (in AUD) |
|
1 |
0.25 |
1.8517 |
AUD 350,000.00 |
|
2 |
0.3 |
1.8901 |
AUD 500,000.00 |
|
3 |
0.45 |
1.9102 |
AUD 710,000.00 |
(a) Estimate your exposure to the exchange risk.[6 MARKS]
(b)How would you hedge this exposure? Suppose the forward rate is 1.8895 EUR/AUD. Calculate the EUR value of the hedged portfolio under each of the scenarios above [4 MARKS]
IN YOUR CALCULATION, KEEP 4 DECIMAL POINTS FOR THE EXCHANGE RATES, AND NO DECIMAL POINTS FOR CURRENCY NUMBERS.
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