What are the different types of foreign exchange risk WMC faces in its operations? How do they affect the company? Which exposures do they hedged, which ones did they decide not to hedge anymore?

There are many foreign exchange risks which the WMC was facing in its operations. The first risk is the transaction exposure. As most of the transactions of WMC involve US dollars. The second major foreign exchange risk exposure faced by the company is economic exposure. The transaction exposure risk & economic exposure risk have significant impact on the profitability of the company. The company managed the transaction exposure risk through hedging.

a)      Explain why borrowing in US dollars and forward sales of US dollar revenues by Australian mining companies in the 1980s had backfired. What about the 1990? You might want to research the evolution of the USD/AUD exchange rate

The borrowing in US dollars backfired because in 1980’s Australian dollar decline rapidly against US dollar. The Australian dollar decline increases the serving cost of US Debt (Melville 2017).

b)     WMC decided to borrow in a basket of currencies rather than exclusively in US dollars or Australian dollars. What are they trying to accomplish? What are the advantages and disadvantages of this course off action?

WMC decided to borrow basket of currencies because they want to diversify their risk. It is evident that if they are going to borrow in only one currency than the level of risk is higher. Investing in different currencies will minimize the risk because if one currency show sudden volatility than risk can be managed by securing profit from other currencies which are stable.

c)      Define economic exposure. How would you go about hedging WMC’s 20 7 economic exposure? What do you think of WMC’s decision not to hedge its economic exposure?

The economic exposure results from uncertainty in the foreign currency transactions because the organization is present in the specific market from a long term. The economic exposure can be managed through currency swaps (Robinson, et al. 2015).

References of International Financial

Robinson, Thomas R., Elaine Henry, Wendy L. Pirie, Michael A. Broihahn, and Anthony T. Cope. 2015. International Financial Statement Analysis, Third Edition (CFA Institute Investment Series) . 3. John Wiley & Sons.