Question

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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