TREASURY & RISK MANAGEMENT

Treasury & Risk Management

Treasury & Risk Management

Question 1

(a)

Buying of 10 million by Australian exporter =

10000000x0.47

=

4700000

10000000

+

4700000

=

14700000

14700000

x

1

=

14700000

Buying of 5 million by importer =

5000000 x 0.053 x 0.25

=

66250

5000000

+

66250

=

5066250

5066250

x

1.062

=

5380358

(b)

From the above calculation of buying of 10 million by Australian exporter and buying of 5 million by importer, it can be said that in context of forward exchange contract, the importer will be in benefit as he has to pay less interest in comparison to Australian exporter.

(c)

In context of the statements or comment that are “the country with the higher interest rate will weaken in the forward market” and “the country with the higher interest rate will attract international funds and the currency will appreciate”, it can be said that these statements are correct. The reason of this is that the high interest rate attracts the foreign investors as the high interest rate indicates that the return on the investment will be high which will also affect the currency of the country in positive manner that is the currency will appreciate. Investment in what is sought is the highest interest rate, so that the resources we put into a particular institution will increase significantly. However, in this case involved another variable inflation. It is pointless for the nominal rate, the public offering investor institutions is 8%, if inflation is 105. This difference implies loss of purchasing power, that is, purchasing power is lost. So the important thing is to look at the real interest rate, which is the difference between the nominal interest rate and inflation rate. It can be obtained three types of results. In this context, positive real interest rate is the perfect investment; it means that a gain above inflation and you can buy a larger quantity of goods and services. You gain purchasing power. Moreover, negative ...