Chapter 19, Problem 1OR

Summary Introduction

Scenario: Company ANZ recorded 28% increase in the year 2013 which is roughly $100 million despite they recorded only 4% increase in operating revenue. The currency hedging program incurred loss of $46 million the previous year but added $3 million to the revenue the following year which is the program accounted $49 million.

Many companies try to hedge the risk of multiple currencies by investing in financial instruments like forward, future contracts and options. To determine the quantity of financial instruments a firm should use, it must estimate the revenues it would receive and expenses it will pay in multiple currencies.

To determine: The impact of rise in Country N currency on airline profits.

Explanation of Solution

Impact of rise in Country N currency on airline profits:

The profit of the airlines will increase when the currency of country N rises. The rise in currency value of country NZ will decrease the operating cost for the company which in turn will increase the profit of the company.