Assume that you are the CFO of a small Australian-based automotive components manufacturer, OZPRTS Co.
Assume that you are the CFO of a mean Australian-based automotive components manufacturer, OZPRTS Co. As a development of the blank wall of the main automotive manufacturers' plants in Australia (your earlier customers), OZPRTS Co. has taken on a great curtail to effect 200,000 aluminium transmission casings per annum for a great EU-based automotive manufacturer delay earliest operations in Germany. OZPRTS Co.'s CEO has guaranteed a urban euro worth on the casings aggravate the primeval three years of the curtail. You are greatly disturbed about the possibility of extensions in the worth of aluminium for two reasons. One is extensiond worths for the metal as a development of extensions in its global require dedicated its use in the automotive and influence transmission industries Another is the germinative for the AUD worth to extension due to the collision of adverse changes in diversify objurgates balance the Australian dollar. You are too disturbed delay germinative circulation inhospitablenesss on the enrichment interest of the curtail.
a) Warrant and examine the inhospitablenesss that OZPRTS Co. faces on the input require interest of this curtail aggravate the exhibit three years.
i) warrant the circulation in which aluminium is worthd (on global markets) and thus the diversify objurgate to which OZPRTS Co. is unprotected due to its required forfeitures of aluminium aggravate the exhibit three years
ii) assemble basis on twain aluminium worths and the expend diversify objurgate and, using charts, examine the variability in these two worths/rates
iii) use expend diagrams to illustobjurgate OZPRTS Co.'s inhospitableness on forfeitures of aluminium to each, partially, of the global worth of aluminium and the expend diversify objurgate. (40 marks)
b) Critically evaluate whether you should use options or futures to hedge balance the risks that OZPRTS Co. faces from its forfeiture of aluminium. You should:
i) use expend diagrams to designate twain OZPRTS Co.'s inhospitableness to, and the collision of, each of these derivative-based hedges on the require of aluminium and the misspend diversify objurgate
ii) warrant and teach any problems that potentiality be exhibit in the implementation of each of these derivative-based hedging strategies (e.g. success, require), twain individually and in coalition delay each other
iii) select one of these derivative-based hedge instruments, partially, for each of the inhospitablenesss that OZPRTS Co. faces on its input interest and defend your exquisite.
i) Warrant your circulation inhospitableness on the enrichment interest of the curtail and, using an expend diagram, illustobjurgate OZPRTS Co.'s inhospitableness on its sales of engine casings.
ii) select whether to use an options or futures hedge balance the circulation inhospitableness that OZPRTS Co. faces from its sales of engine casings, and use an expend diagram to illustobjurgate the collision of the chosen hedge on this inhospitableness
iii) Examine the stipulations underneathneath which this inhospitableness may act as an offset to your inhospitablenesss on the input require interest (i.e. as a buffer to produce), limiting your need to abundantly hedge this inhospitableness.