You are the Financial Manager of Walmart in U.S. and Walmart has recently startedexporting food products to an Australian company, Woolworths. The exports arecurrently invoiced in Australian dollars (AUD). Suppose further that Walmart shippedan order to Woolworths invoiced at AUD100 million at the end of 2018. Walmartexpects payment in a year's time. Suppose that the spot exchange rate at the end of2018 was AUD1.3036/USD and that the mean and standard deviation of theAUD/USD historical percentage changes are u=0.28% and o=9.95%, respectively.What are the conditional mean and conditional volatility of the future spotAUD/USD exchange rate in a year's time?OConditional mean AUDO.365/USD, and conditional volatility AUDO.14/USDO Conditional mean AUD1.3073/USD, and conditional volatility AUD13/USDConditional mean AUD1.3073/USD, and conditional volatility AUDO.13/USDConditional mean AUDO.004/USD, and conditional volatility AUDO.78/USD

For calculating conditional mean, We use the formula conditional mean = spot rate(1+mean)…

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What are the conditional mean and conditional volatility of the future spot AUD/USD exchange rate in a year's time?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 3P

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

You are the Financial Manager of Walmart in U.S. and Walmart has recently started
exporting food products to an Australian company, Woolworths. The exports are
currently invoiced in Australian dollars (AUD). Suppose further that Walmart shipped
an order to Woolworths invoiced at AUD100 million at the end of 2018. Walmart
expects payment in a year's time. Suppose that the spot exchange rate at the end of
2018 was AUD1.3036/USD and that the mean and standard deviation of the
AUD/USD historical percentage changes are u=0.28% and o=9.95%, respectively.
What are the conditional mean and conditional volatility of the future spot
AUD/USD exchange rate in a year's time?
OConditional mean AUDO.365/USD, and conditional volatility AUDO.14/USD
O Conditional mean AUD1.3073/USD, and conditional volatility AUD13/USD
Conditional mean AUD1.3073/USD, and conditional volatility AUDO.13/USD
Conditional mean AUDO.004/USD, and conditional volatility AUDO.78/USD

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