Globetel's Financial Strategy: Analyzing Cash Flow and Hedging FX Risk

This assignment provides a comprehensive financial analysis of Globetel, focusing on net cash flow forecasts and currency hedging strategies. It examines the impact of JPY exchange rates on Globetel's cash flow and suggests strategies to mitigate economic exposure by shifting costs to Japan. The assignment also discusses purchasing power parity theory, analyzing currency valuations in Australia and New Zealand, and explores reasons for deviations in exchange rates. Furthermore, it calculates the depreciation on the Euro and evaluates different hedging strategies for Blades USA Limited, including forward hedging, money market hedging, and put option hedging, ultimately determining that forward hedging is the most appropriate strategy due to its highest expected value. The analysis compares hedging and unhedged strategies, recommending hedging based on superior future receivables. Desklib offers a wealth of similar solved assignments and past papers to aid students in their studies.

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Contents
Task:................................................................................................................................................3
Q4....................................................................................................................................................3
Q5....................................................................................................................................................4
Q6....................................................................................................................................................5
Q7....................................................................................................................................................6
References.......................................................................................................................................8
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Task:
Q4.
Forecasted Net Cash flow for Globetel
(In Millions)
JPY
80
JPY
85
JPY
90
Sale
s
Australia 100 110 125
Japan 312.5 294.12 277.78
Total 412.50 404.12 402.78
Cost of Material
Japan 200.00 200.00 200.00
Australia 50.00 47.06 44.44
Total 250.00 247.06 244.44
Operating Expenses
Australia Fixed 30.00 30.00 30.00
Australia
Variable (20%
of sales)
82.50 80.82 80.56
Total 112.50 110.82 110.56
Interest Expenses
Australia 20.00 20.00 20.00
Total 20.00 20.00 20.00
Net Cash flow 30.00 26.24 27.78
It can be stated with the help of the income statement that there is the effect of the JPY over the
cash flow. It can be seen that the inflow of JPY is much higher than the Outflow of the JPY due
to which it is affected by the exchange rate. The company can take possible steps to reduce the
exposure by shifting the cost and the expenses to Japan which will not affect the revenue also.
The outflow payment that is being done in Japan will be same as the Inflow payments received
resulting in the balance of amount and reducing the economic exposure.
Q5.
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Inflation Rate in Australia – 1.9%
Inflation Rate in New Zealand – 1.6%
Percentage change in value – (-0.71%)
It can be stated with the help of the Purchasing power parity theory that purchasing power of the
country affects the exchange rates of currencies. It can be seen that there are different prices for
the same product in different countries which need to be analyzed. Some product is undervalued
or overvalued in different countries. For e.g. Big Mac in America valued at the price of $5.28
whereas at $3.17 in China. It can be stated with this example that the Chinese currency Yuan was
undervalued by a margin of 40% at a time (S.D.H. and R.L.W., 2018). It can be seen that the
currency of Australia with respect to the example is less undervalued than New Zealand but the
change in currency is not as expected. The reason for the deviation can be due to incomplete
exchange rate pass through (Trade Economics, 2018). The Exchange rate index of the country is
affected by the incomplete exchange rate leading to the deviation. Pass through can be defined as
the measurement of import and export on the basis of the exchange rate. The interest rate also
affects the change in the exchange rate that led to the deviation (Knoema, 2018).
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Q6.
a.
The depreciation on the Euro should be 1.90 per cent in one year.
The Spot Rate would be $1.10 x (1-1.90%) = $1.079
b.
Conversion of dollars in Euros: $100000/$1.10 = €90,909.09
Investment of Euros for 1 year and receive €90,909.09 × 1.05 = €95,454.55.
Converting euros back to dollars will result €95,454.55 × $1.00 = $95,454.55
Return percentage = $95454.55/$100000 – 1 = -4.55%
c.
Convert dollars to euros: $100,000/$1.10 = €90,909.092.
Invest euros for one year and receive €90,909.09 × 1.05 = €95,454.553.
Convert euros back to dollars and receive €95,454.55 × $1.08 = $103,090.91
The percentage return is $103,090.91/$100,000 – 1 = 3.09%
d.
The Spot rate to be successful for the Mathew will be $1.079 to be successful for the euro in 1
year.
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Q7.
Forward Hedging
One year forward rate of NZD = USD 0.52
Future receivables = NZD 4,000,000
Blades USA limited will receive = 4000000*0.52
= $2080000
Money market hedge
Borrow = Future receivable / (1+borrowing Interest rate)
4,000,000 /1.08
=NZD3703703.7
Convert the borrowed money = Borrowed money * current spot rate
3703703.7 * 0.54
= $2000000
Put option hedge (Exercise price = $.52; premium = $.03)
Possible
Spot Rate
Option
premium
per unit
Exercise Amount
received per
unit
Total
Amount
received
Probability Expected
Value
0.50 0.03 Yes 0.47 1880000 20% 376000
0.51 0.03 Yes or No 0.48 1920000 50% 960000
0.53 0.03 No 0.50 2000000 30% 600000
Total 5800000 1936000
The forward hedging is the most appropriate as the expected value is the highest in it. There is
the probability that it will be able to provide maximum realizable value.
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Un hedge Strategy
Possible
Spot Rate
Future
receivables
Total
Amount
received
Probabilit
y
Expecte
d Value
0.50 4000000 2000000 20% 400000
0.51 2040000 50% 1020000
0.53 2120000 30% 636000
Total 6160000 2056000
It can be stated with the help of the receivables that the company should opt for the hedging. The
receivables in the future hedging are more than the future receivables in the Unhedged strategy.
The receivables in unhedged strategy are $2056000 whereas it is $2080000 in forwarding
hedging.
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References:
 D.H. & R.L.W., (2018). The Big Mac index. Also available at
https://www.economist.com/content/big-mac-indexs
 Knoema, (2018). New Zealand - Average consumer prices inflation rate.
https://knoema.com/atlas/New-Zealand/Inflation-rate
 Trade Economics, (2018). Australia Inflation Rate.
https://tradingeconomics.com/australia/inflation-cpi
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