QUESTION 7 (Continued) 9) All that is required is that the student lock into a forward rate and remove the uncertainty of the future AUD receipts This is called a forward exchange market hedge also covered ("perfect"or square") since no residual foreign exchange risk exists, ie funds to be received are matched by funds to be paid Simply sell USD forward at 0.5266 giving $1898975. This would reduce your exposure since you make your future receipt certain Why use 0.5266? For an indirect quote AUDl/USD0.5252-0.5266 means that the bank will at 5252 buy AUD or sell USD at 5266 sell AUD or buy USD f You will need buy USD 1 million in 6 months time and therefore, will need to sell aUD To minimise the foreign exchange risk, you should sell AUD forward at 0.5220. The amount to be sold is aud1 915 709 QUESTION 8 The spread is 5 points b) The quote is given from a dealer's perspective regard ing how much the dealer will buy and sell AUD for. If you are buying USD, you are selling AUD, therefore the dealer will be buying AUD. You must therefore look at the bid rate of USD0. 5815/ l. Cost=AUD 1719690 c) You are sell ing USD and, therefore, buying AUD. The dealer, on the other hand, is selling AUD so you need to use the offer rate of USDo. 5820/AUDI Cost=$4 295 533October 2003 QUESTION 7 (Continued) e) All that is required is that the student lock into a forward rate and remove the uncertainty of the future AUD receipts. This is called a forward exchange market hedge. It is also covered ("perfect" or "square") since no residual foreign exchange risk exists, ie funds to be received are matched by funds to be paid. Simply sell USD forward at 0.5266 giving $1 898 975. This would reduce your exposure since you make your future receipt certain. Why use 0.5266? For an indirect quote: AUD 1/USD 0.5252-0.5266 means that the bank will: at 5252 buy AUD or sell USD at 5266 sell AUD or buy USD. f) You will need buy USD 1 million in 6 months time and, therefore, will need to sell AUD. To minimise the foreign exchange risk, you should sell AUD forward at 0.5220. The amount to be sold is AUD 1 915 709. QUESTION 8 a) The spread is 5 points. b) The quote is given from a dealer’s perspective regarding how much the dealer will buy and sell AUD for. If you are buying USD, you are selling AUD, therefore the dealer will be buying AUD. You must therefore look at the bid rate of USD0.5815/AUD1. Cost = AUD 1 719 690. c) You are selling USD and, therefore, buying AUD. The dealer, on the other hand, is selling AUD so you need to use the offer rate of USD0.5820/AUD1. Cost = $4 295 533