2. A New Zealand company produces 10,000 ounces of gold per year. It uses a quar

Question

2. A New Zealand company produces 10,000 ounces of gold per year. It uses a quarter of its production for making gold jewelry sold at a fixed price through stores in Australia and New Zealand, and the rest is sold on the market, where the gold price is determined in US dollars. Australia’s profits are repatriated to New Zealand. The company’s CEO wants to use futures contractc to hedge the entire production. He calls you to seeks your opinion. Recommend a seinsble hedge stragtegy that would be in line with the CEO’s wishes (assume x is the quantity used for making gold jewelry in the New Zealand).

Explanation / Answer

Ans

The Gold sold in Australia, price of which is determined in US dollar, is prone to exchange rate risk when repatriated to Newzealand.The exporter gains when the foriegn currecy appreciates and vice versa. However, in this case, CEO wants to hedge any volatility in the exchange rate and keep his forex exposure to minimum.

Hedging tools available include

1. Forward

2. Futures

3. Swaps.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.