Company X is a Company based in the United States

Dr. Ali Sheikhbahaei | MONASH UNIVERSITY
You are a consultant 1 that is often hired by Company X1. Company X is a Company based in the
United States. It recently purchased raw materials worth MXN 500 million from a Mexican
commodity firm, payable 1 year. Mexico is one of the fast-growing emerging markets in Latin
America. The purchase was made at the beginning of May. Company X has a weighted average
cost of capital (WACC) of 6%.
The CEO of Company X has contacted you to say that she has just seen the following headline in
a well-respected newspaper:
“Mexican Peso to continue to fall against the US dollar over the next few years.”
She has asked you to compile a report advising on:
1. The likelihood that this prediction proves to be correct. For this purpose, you must justify
your prediction by considering all FX determinants and drivers you have learnt in
International Finance.
2. Based on your prediction, you must prescribe an instrument to hedge the contract knowing
that the CEO has the appetite to take risk and speculate in the spot market while being
hedged. List of available derivatives can be found in the appendix.
a. Explain the economic rationale for choosing the type of hedging instrument.
b. Show or calculate the cost of using this instrument.
c. Demonstrate what happens (net proceeds or cost) if your prediction is correct. Use
an arbitrary rate for a correct prediction.
d. Demonstrate what happens (net proceeds or cost) if your prediction is wrong. Use
an arbitrary rate for a wrong prediction.
1 Create your own names for these organisations if you wish.
BFC3240 International Finance
Individual Assignment- S1 2020
Dr. Ali Sheikhbahaei | MONASH UNIVERSITY
Appendix:

Contract Specs
• Contract Unit: One option contract for 500,000 Mexican Pesos
• Rate/price quotation: U.S dollar per Mexican peso
• Exercise style: European style
• Expiration: May 2021
2 USD per contract premium.
3 USD amount to exchange with 500,00 Mexican peso by exercising the option in 1 year.
Dr. Ali Sheikhbahaei | MONASH UNIVERSITY
Guidelines and handy hints
Word count :
You are limited to 1000 words, with a buffer of 5% less/more words to accommodate the necessary
adjustments.
Format
Your assignment should be in a report-style format. Up front, after the cover page, you should have
a table of contents page, then an executive summary. A bibliography should appear at the end of
the document, before any appendices. Divide your assignment into numbered sections. Spacing
should be 1.5, and you should use a standard font such as Times New Roman 12-point. (The word
count excludes these sections of the report – the executive summary, contents list,
bibliography/referencing, and any appendices.)
Presentation
Presentation is important. Make your report look good and more importantly, it must read well.
Leave yourselves enough time to edit it for typos, grammar, punctuation, clarity and brevity.
Warning: editing a document properly takes a lot of time. Graphs and figures are useful for getting
points across succinctly. Tables can be useful too, unless they’re very large, in which case they
should be in the appendix.
Submission
Submit a pdf file using the provided submission link in moodle. Further details to be provided
closer to the due date.
Research
The best and most reliable information available to you is proprietary – from academic journals,
other journals and periodicals, and newspapers. Some of this may be available free on the net, but
a lot of it is not. You have a fantastic library here at Monash. Familiarise yourself with the library’s
online services in particular. One of the most accurate database for your Macro rates is
“PASSPORT” which is available for free for Monash student through library gate. Do not cite
wikipedia, investopedia or similar websites.
How to find PASSPORT:
Library>Databases
Referencing
● Websites, magazine/newspapers
I prefer references to websites and magazines/newspapers as footnotes (footnotes not endnotes).
For websites, include the full link and also the date accessed. (You don’t also need to put these in
the bibliography.) If you paste in a graph/figure/table from some other document or website, you
must provide full information on the source. If you create a table or graph from data that you have
found on a website (or elsewhere), you must provide the data source.
● Academic articles/books
When referring to academic sources in your assignment, use the name of the author(s) and the year
of publication. For example: “Murray (1995) reports that…”; “…as Jones and Smith (2001)
argue….” If there are more than three authors, you should state the first author followed by et al.,
Dr. Ali Sheikhbahaei | MONASH UNIVERSITY
for example “…La Porta et al. (1998).” (The full list of authors must be included in the
bibliography).
Examples of suggested format to be used in the bibliography:
● Journal article
Froot, K.A., Scharfstein, J.S. and Stein, J.C. (1993). Risk management: coordinating corporate
investment and financing policies. Journal of Finance, 48(5), 1629-1658.
● Book
Oxelheim, L. and Wihlborg, C. (2005) Corporate Performance and the Exposure to
Macroeconomic Fluctuations. Norstedts Academic Publishers, Stockholm.

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