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ACFI3140 International Finance
Individual Assignment
Due date: Monday 27th May 23:59
IMPORTANT INFORMATION
- The assignment must be attempted and completed individually. Due Monday week 12.
- The assignment is out of 30 and contributes 30% to your course assessment.
- Upload the report through Turnitin on Canvas. Use the university cover page when submitting reports
- The word limit is 2,000 words in total to be written using Microsoft MS word. The table of contents and reference section are not included in the word count.
- Use times new roman font with size 11.
- To provide the supporting data for your report you will be required to record any calculation using Microsoft Excel
- Make and state any assumptions if the given information is insufficient to justify your answer.
Scenario - Hedge, Speculate, or take an Arbitrage position
Amanda Butler, the CEO of AB Photography (ABP), a company in Melbourne, has made a contract on 31/12/2023 to deliver US$5,000,000 worth of products to a US company in six months (30/June/2024). To make the products, which are mainly high-end 360 degree cameras, ABP has ordered AUD$3,000,000 worth of materials such as batteries, lens, CMOS chips to be able to meet the delivery in six months. The payment for the raw materials will be made once the materials are delivered in one month.
To prepare for the payments of AUD$3,000,000 for the materials, Amanda is considering raising capital through debt with payments due semi-annually. The prospective bond is to last for one year and an independent credit rating company has rated ABP as an AAA company. In the past, Amanda paid SOFR + 2% per annum for the most recently retired debt. The CFO of ABP has indicated the maximum amount that can be raised through debt is AUD$5,000,000. Also, the CFO has been contacted by Epsilon Co. to discuss a possible swap contract among the two companies where the profits through the swap are to be shared equally.
Once the products are delivered six months later, the payment of US$5,000,000 should be transferred to ABP's Australian account. This requires an international currency exchange transaction. The board members of ABP do not want to take risk of a sudden change in the US dollar versus the Aus. dollar exchange rate.
Key Information and Figures
|
Quotes for Exchange rates (31/Dec/2023) |
|
Exchange rate |
|
Spot ($/A$) |
|
0.6826/29 |
|
One month forward($/A$) |
|
0.6903/08 |
|
Three months forward ($/A$) |
|
0.6955/62 |
|
Six months forward ($/A$) |
|
0.7014/24 |
|
Company Credit rating and interest payments in the Bond market |
||||
|
Assumptions |
|
AB Photography |
|
Epsilon |
|
Credit rating |
|
AAA |
|
BBB |
|
Past preference to borrow |
|
Floating |
|
Fixed |
|
Fixed-rate cost of borrowing (p.a.) |
|
8.500% |
|
12.500% |
|
Floating-rate cost of borrowing: (p.a.) |
|
|
|
|
|
SOFR (value is unimportant) |
|
5.500% |
|
5.500% |
|
Spread |
|
1.500% |
|
2.500% |
|
Total floating-rate |
|
7.000% |
|
8.000% |
|
Expected Economic Data from 31/Dec/2023~2024 |
|
Interest rate (p.a.) |
Inflation rate (p.a.) |
Unemployment rate |
|
US |
|
5.25% |
3.7% |
3.8% |
|
Australia |
|
4.00% |
4.5% |
3.9% |
Required: Question to Answer
As a consultant you were hired by Amanda to provide them with a summary report on exchange rate fluctuations and expectations. For the report you first decide to establish an exchange forecasting model which will be able to predict the six months ahead spot rate. Using the forecast and provided market data, you are tasked to search opportunities to hedge, speculate, or take arbitrage of the current financial market for the next six months. For each opportunity you should provide a justification of why the positions should be taken and how it would benefit ABP. Assume that the date today is 31/Dec/2023.
In your 2,000 word report you are to provide information of the following:
Explain the prediction model(s) you have established.
Explain how you collected the data for the models and what issues you faced in selecting the data.
Provide a prediction for the USD/AUD spot exchange rate for 30/Jun/2024 (six months from now)
How should ABP hedge the transaction exposure of US$5,000,000 receivable in six months?
Provide one speculative opportunity that ABP can take today with an investing period of six months.
What is the cheapest way to raise capital through debt or swaps for ABP to purchase the materials worth AU$3,000,000?
Suggested Report Structure
Your report should be structured in a professional manner, free from grammatical errors and include a References list.
Headings within your report could include:
A. Exchange Rate Prediction
1. Collection of data
2. Regression or Model of your choice
3. Prediction of USD/AUD spot rate
B. Foreign exchange strategies
1. Hedging the transaction exposure
2. FX rate speculation profits
3. Raising Capital
References
Use American Psychological Association (APA) 6th Edition. You can find helpful examples of APA 6th ed. citation in pp 27–41 of the 2015 NBS Postgraduate Student Manual as well as at http://www.apastyle.org/index.aspx.
Suggested Data Sources
Historical spot exchange rates, interest rates, economic data can be found using your FactSet account. Please contact your lecturer or course coordinator if you do not already have access to FACTSET.
A list of products used to calculate the Consumer Price Index (CPI) is in the following link:
Australian Bureau of Statistics (CPI explanation):
http://abs.gov.au/websitedbs/d3310114.nsf/home/Consumer+Price+Index+FAQs#Anchor13
Federal Reserve Bank of St. Louis
OECD database (economic projections):
http://stats.oecd.org/Index.aspx?DatasetCode=KEI#
Your use of data sources is not restricted to the abovementioned sources, and you may also use other reliable data sources.
Marks and Feedback
- The report is worth 30 marks. Results and feedback to be provided within two weeks of submission.
- Additional document available under the assignment on canvas containing the full marking criteria.