Using the data available to you, you are encouraged to use Excel. Include all your Excel tables/calculations in the Appendix and write your answer to question 1 inside the assignment explaining every step.
You are the Financial Manager of Walmart in the U.S. Walmart has recently started exporting food products to an Australian company, Woolworths. The exports are currently invoiced in the currency of the importer.
a) Calculate the mean and volatility of the yearly percentage changes (%) of the AUD/ USD exchange rate for the period 2007-2017. What risk does Walmart face if it chooses not to hedge its sales?
b) Walmart ships an order to Woolworths invoiced at AUD100 million on December 31, 2017. Walmart expects payment in a year’s time. Based on your predictions from the analysis above, at 95% confidence level, what do you expect the range for the future spot rate to be in a year’s time, and how would this impact the value of the receivables?
c) Suppose you conduct a currency carry trade by borrowing USD1 million at the start of each year and investing in Australian Dollars for one year. Using the one-year interest rates for US and Australia between 2007 – 2017 provided, compute the total dollar profits/losses from this carry trade for each individual year over the sample period. In your report show and explain the formula used and each step of the calculation.
d) What do we learn from and why is it useful to look at the distribution of historical percentage changes of the exchange rate?
Notes: To calculate the yearly percentage change use the formula: st = (St - St-1)/St-1 in % format. You do not need to apply any further transformation to the percentage changes or to interest rates.
SAUD/USD RAUD RUSD
2006 1.3271
2007 1.1918 6.13 3.34
2008 1.1714 6.67 0.37
2009 1.2615 2.59 0.47
2010 1.0870 4.26 0.29
2011 0.9679 4.75 0.12
2012 0.9653 3.63 0.16
2013 1.0327 2.75 0.13
2014 1.1069 2.41 0.25
2015 1.3294 2.03 0.65
2016 1.3432 1.92 0.85
2017 1.3036 1.71 1.76