When the inflation rate in Australia is relative higher than the inflation rate in the USA, the value of the Australian dollar will increase relative to the US dollar. Comment on the above statement using the theory that explains the adjustment of foreign exchange rates.
ABC Engineering Australia is expected to pa\ ¼200,000 to a company in Germany for importing machinery three months from now. The spot e[change rate is A$/¼0.63. However, it is forecast that Australian dollars will depreciate, and the e[change rate ma\ more to A$/¼0.58inthree months when the company will need the Euro. The company is considering using either a forward hedge or an option hedge to mitigate the foreign exchange risk. Relevant information is provided below.
The 90 day forward rate as of today is A$/¼0.60.
A call option on ¼ that expires in 90 days has an exercise price of A$/¼0.61with a premium of A$0.01.
A put option on ¼ that expires in 90 days has an exercise price of A$/¼0.59 with a premium of A$0.01.Which is the best strategy for the company to mitigate the foreign exchange rate risk? Why?
