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Protection alternatives; IntAid's Annual
Subscription
IntAid received the following letter from their
parent organisation in Washington:
Dear Australian Associate,
We have recently received your annual subscription of Australian
Dollars 10,000,000. We have left your budgeted subscription for next
year unchanged at US$5 million. We would be pleased to received
another A$ 10 million or US$ 5 million from you in 12 months time.
Yours sincerely, Headquarters
The current exchange rate is 0.5200. What should
IntAid do?
Some of its alternatives are:
-
Plan to send A$ 10 million in 12 months time.
-
Convert Australian Dollars to US$ 5 million now
using a forward exchange contract (see protection strategies). As
at the time of writing, the rate for such a contract would be
around 0.5100 and the US$ would cost around A$ 9,804,000.
-
Purchase foreign exchange insurance to fix the
worst ever rate in one year's time to 0.5100 and allow IntAid to
benefit from any exchange rate rises. At the time of writing, he
cost of this would be around A$ 300,000. The most that IntAid
would pay for the US$ 5 million would therefore be A$
10,104,000 ($9,804,000 plus $300,000 insurance premium). On
the other hand, if the A$/US$ rate appreciated to 0.6000 at the
time that the US$ was to be paid, the A$ cost would be A$
8,633,000 ($8,333,000 plus $300,000 premium).
Alternative 2 would cost IntAid A$ 196,000 less
than alternative 1 for an equally acceptable result to head office
with zero exposure to changes in the exchange rate. These funds could
then be deployed elsewhere.
Alternative 3 would cost a maximum of A$ 104,000
more than alternative 1, but give Helpalot the opportunity to partake
in the gains if the A$/US$ rate were to appreciate and finish any
higher than 0.5100 in one year's time. Back
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