QUESTION 8 A US compamy holds a volatile portfolio of Australian stocks which is

Question

QUESTION 8 A US compamy holds a volatile portfolio of Australian stocks which is expected to be sold in one year with a procced of AUD 2 million. Current spot rate: SS/AUD $0.7630AUD; Interest rate is 0. 3% in US and 1.00% in Australia You are asked to using the tools learned from FIN178 to hodge the currency risk for the company, Please specify your action plans and their noultas Swap: What is your roadmap (by step plan) to convert such floating rate AUD exposure to a fixod rate S one? The retum from the AUD stock porfolio is offet by the fixedate AUD yield through the ewhy swap The fixed-rate AUD yield of is offset by the floating-rale S yield through the currency rate swap The floating-rate S yield is offset by the fixed-rate S yield hrough the interest rate swap The return tomthe AUD stock portfolio is omet by the fixed-rate AUD yieldthroughthrouityswap The fixed-rate AUD yield of is offiet by the fix-rate S yield throagh the currency rate swap The fix-rate S yield is offiet by the floating rate S yield through the interest rate swap The return from the AUD stock portfolio is offset by the fixed-rate AUD yield through the equity sp The flxed-rate AUD yield ofis ofhet by the noatingnie S yield through the interest me swap The floating-rate S yield is offiet by the fixed-rate S yield through the currency rate swp The return thon the AUD stock portfolio is oftet by the floating 'ate AUD yield through the The flosing-rate AUD yield of s offet by the flosting rae S yiweld through the currency nate wa The floating-rate S yield is offiet by the fixed-rate S yield through the intcrest rate swap

Explanation / Answer

Steps to Hedge:

1.) The return from AUD Stock portfolio is offset by the fixed rate AUD yield through the equity swap.

2.) The fixed rate AUD yield is offset by the floating rate $ yield through the currency rate swap.

3.) The floating rate $ yield is offset by the fixed rate $ yield through the interest Rate swap.

Hence, Option-(a) is the right answer.

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