BHP Australia. BHP, the Australian resource company, is evaluating an export sale of its coal with a prospective Indonesian distributor. The purchase would be for 1650 million Indonesian rupiah (Rp), which at the current spot exchange rate of Rp9450/A$, translates into nearly A$175000. Although not a big sale by company standards, company policy dictates that sales must be settled for at least a minimum gross margin, in this case, a cash settlement of A$168 000 on the sale. The current 90-day forward rate is Rp9950/A$. Although this rate appeared unattractive, BHP had to contact several major banks before even finding a forward quote on the rupiah will hold relatively steady, possibly falling to Rp 9400 over the coming 90 to 120 days. Analyse the prospective sale and make a hedging recommendation.
Sadia of Brazil. Sadia concordia SA of Brazil is a manufacturer of food products. Sadia has concluded an agreement with an Australian wheat producer who has agreed to deliver wheat one year from now for A$80 million. Although Sadia will make payment in Australian dollars, this poses the risk of currency exposure of inputs – it must pay foreign suppliers A$20 million worth for inputs on year from now (but they will be delivering the inputs throughout the year). The current spot rate on the Brazilian real (R$) in R$2.2420/A$, but it has been steadily appreciating against the Australian dollar over the past year. from a “low” of R$3200/A$ only a few months ago. Forward contracts between and R$ are difficult to acquire and considered expensive. Citibank Brazil has not explicitly provided Sadia with a forward rate quote, but has stated that it will probably be pricing a forward off the current 4.00% Australian dollar eurocurrency rate and the 14.00% Brazilian government deposit now. Advise Sadia on its currency exposure.
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