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International Finance
Exchange Rate Movements for the U.S. And Australian Dollar and Hedging
On the 9th June 2013 the initial $90,000 investment was worth $94,724.9. Knowing that the exchange rate on that date was AU $1.0525 to the U.S. dollar, meaning that U.S. $1 would purchase $1.0525, it is possible to determine that the total investment had purchased AU $99,697.96 (Oanda, 2013).
On the 7th June the exchange rate has changed to $1.1019, with the given fund value of AU $99,697.96, the change leaves a fund that is worth U.S. $90,478.23 (Oanda, 2013).
It is possible to look at the exchange rate movements over a period of time taking data from Oanda (2013). The tables below present that value for the last week, the last week of 2013 and the last week of 2011.
Part A
Table 1; Exchange rates for 1st - 7th July 2013
Exchange rate
7th July 2013
$1.1019
6th July 2013
$1.0964
5th July 2013
$1.0957
4th July 2013
$1.0991
3rd July 2013
$1.0884
2nd July 2013
$1.0882
1st July 2013
$1.0934
Part B
Table 2; Exchange rate 25th Dec 2012-31st Dec 2012
Exchange rate
31st Dec 2012
$0.9640
30th Dec 2012
$0.9640
29th Dec 2012
$0.9634
28th Dec 2012
$0.9643
27th Dec 2012
$0.9649
26th Dec 2012
$0.9645
25th Dec 2012
$0.9621
Part C
Table 3; Exchange rate 25th Dec 2011-31st Dec 2011
Exchange rate
31st...
firm is doing business with an Australian firm and will need to use Australian dollars, there is an open position where a firm will need to buy a commodity (in this case AU $) at some point in the future, but the price could change before that purchase is made. A tool often used by firms to minimise that risk is heading. Hedging involves the purchase of a contract that will fix the price of the commodity in advance. The contract will use derivatives; it may be the use of a future which binds the firm to the agreed price for the currency, with the firm obliged to by AU dollars at the agreed price on the agreed date. The price which is set for the commodity will reflect the markets expectations. If the spot price changes due to the Australian dollar appreciating against the U.S. dollar, the firm will gain, as the agreement will have been made while the Australian dollar is at a lower price. However, if the Australian dollar depreciates against the U.S. dollar, the firm may not benefit from hedging, as the spot price would have been lower than the contract price. To overcome the potential to loose out, a more common approach to hedging is the use of options; these are contracts where the firm purchasing the contract has the right to buy the currency at an agreed price o the agreed date, but they are not bound to that purchase; they are buying the option to make the purchase at the agreed price.
To determine whether or not the…
References
Bychuk, Oleg V; Haughey, Brian, (2011), Hedging Market Exposures: Identifying and Managing Market Risks, Wiley Finance
Giddy, (2002), Homepage, [online] retrieved from http://giddy.org/giddyonline/index.htm
Oanda.com, (2013), OANDA, the Currency Site, [online], retrieved from http://www.oanda.com/convert/fxhistory
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