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Exchange Rates and Forward Contracts Analyses Essay

The appreciation of the Australian dollar would affect the investor in a positive manner. When the U. S. firm invested in Australian dollar in the Australian money market, consequently the returns would be in Australian dollar, there would be a gain on the side of the U. S firm.

This would mean that the return in U. S dollar would be greater after Australian dollar’s appreciation. When the U. S firm has to repay the borrowed money in Japanese yen, it needs more U. S dollars than how much it should have been if the Japanese yen did not appreciate.

This means a loss on foreign exchange transaction for the U. S firm. “Price it now and deliver later” is the underlying concept for “forward contracts” (Kolb, 2002) protecting parties from possible exchange rate fluctuations.

Since Wolfpack expects British pounds to be appreciating, and it is invoicing in this currency, it is better NOT to hedge its exports with a forward contract. Pricing at the current exchange rate means lesser US dollar returns as compared to the appreciated British pounds that can purchase more U. S dollars for Wolfpack in its home country.

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