FINS5516 - International Corporate Finance
Term 1, 2024
Group Case Study
Written report DUE: Monday 15 April 2024, 0:00 (Sydney, Australia time)
(Sunday 14 April 2024, 12pm)
Weighting
This assessment is worth 30% of your final grade for FINS5516. This assignment is group work. Each group consists of 5-7 students. All members inside a group enjoy the same grade.
Assignment Learning Objectives
Students are assigned to a case study related to practical issues faced by financial managers of multinational companies. Students are required to analyze the issues described in the case study and submit a written report as a group. At the end of the term, each group will have a professional presentation of their work to classmates.
For the particular case of “ F.Mayer Imports: Hedging Foreign Currency Risk” , the case places students in the chief financial officer’s situation in order to:
- Appreciate volatility in foreign currencies and how it may impact a company’s profit margin and competitive advantage in the marketplace;
- Understand and evaluate various foreign currency risk-hedging strategies by using payoff diagrams; and,
- Understand that there are costs to every hedging strategy – risks versus rewards. Even when a hedging strategy is named “zero cost,” there is a hidden cost in the structure.
Written report:
Each group should submit a written report. Maximum 10 pages (cover page, reference, figures and appendix excluded). The written report must be submitted by one of the group members to Moodle only. Please pay attention to the format and typos. Penalization will be applied.
Group presentation:
Each group will deliver a presentation in their section in Week 10. Each student will need to be present in person and speak at least 1 minute. Each presentation lasts for 15-20min including Q&A. During the presentation section there will be an inter-group vote. Students will vote the best presentation except their own group.
In the report as well as in the presentation, please make it complete: begin with a background introduction and give a concluding remark at the end.
The overall grading will be based on the group voting and instructor judgement.
FINS5516 - Case questions
Students are required to read the case “ F.Mayer Imports: Hedging Foreign Currency Risk” and answer the following four questions:
Question 1: Hedging
• A) For somehow, you know that the AUD/EUR would go up to and stay at 0.800 for a year. Should you hedge at 0.6900? If yes, how much would you pay for the hedge? (Assume that you cannot adjust the product price in Australia).
• B) For somehow, you know that the AUD/EUR would go down to and stay at 0.600 for a year. Should you hedge at 0.6900? If yes, how much would you pay for this hedge? (Assume that you cannot adjust the product price in Australia)
Question 2: Macroeconomics
• A) If the ECB started more monetary stimulus, what would happen to AUD/EUR? Would the value of hedging increase or decrease? Explain.
• B) Suppose that one-year interest rates in Europe and Australia are 3.6% and 6%,
respectively. Given the spot rate of 0.6980 and the four-month forward rate of 0.6910, do you find any arbitrage strategy?
Question 3: Hedging strategies
We have learned various hedging instruments, namely, forward and options. You are asked to draw the payoff diagram (profit on the y-axis and currency rate on the x-axis) to illustrate the payoff of each strategy: (note that the budget rate is 0.6900 which gives us zero profit)
• A) No hedge;
• B) Using the four-month FEC in Exhibit 3;
• C) Purchasing an AUD put/EUR call option
Can you come up with alternative more complicate strategies? (optional)
Question 4: Hedging Payoffs
• A) Calculate the gain/loss of
• (1) using the four-month FEC in Exhibit 3 and
• (2) purchasing an AUD put/EUR call option: (ignore the transaction costs and margins)
• When the rate reaches 0.800;
• When the rate reaches 0.600;
• B) What is the break-even spot price on the option contract? On the futures contract?