Current State
The current state of the Eurozone shows that after the European Central Bank reduced its benchmark interest rate by 10 basis points to a new record of 0.05% and putting in place the asset-backed securities purchase program, there were high hopes of unblocking lending. The program was also meant to fight the levels of deflation in the Eurozone ( Allayannis & Weston, 20 1 1) . These hopes have become eminent with the recovery of the gross domestic product and inflation rates. The major setbacks to the recovery include the fact that the economic revival in Italy was short-lived, while the economic powerhouse in Germany contracted with the stalling of the French economy. Political risks have also affected the stimulation of economic growth with the tensions between Ukraine and Russia further threatening the delicate recovery of the economy of the Eurozone. For example, Ukraine viewed to launch a full-scale war if Russia would send its troops to support the rebels in Moscow, which further threatens economic growth if possible sanctions were to be leveled against Russia ( Fan, 201 7 ) . The volatility of the Australian dollar (AUD) has also reduced the economic recovery of the Eurozone as its persistence has affected the profitability of business companies.
Efficacy
The current hedging practices at F. Mayer show that the company has a narrow window of opportunity to potentially protect the budget exchange rate. The company had its imports including the food products such as cheese procured in Euros ( Allayannis & Weston, 20 1 1) . With the drop of the Australian dollar to the Euro (AUD/EUR) drop from highs of 0.7 to lows of 0.6, the company can recover from the sporadic foreign exchange hedging practice. It was however unfortunate that the AUD/EUR had to rise to further limits after the company had adopted the sporadic foreign exchange hedging practice ( Hutson & Stevenson, 2010) . This means that the hedging practice is highly dependent on the exchange rates of the currencies, where the volatility of the AUD has made the company to feels as if the practice is trimming off their margins. With the consistent AUD/EUR trading at rates of higher than 0.8, the sporadic practice of hedging has led to higher-than-budget rates as well as higher profit margins as of now.
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Procurement
F. Mayer should leave its Euro procurement unhedged since the AUD/EUR has been trading well below the expected 0.6900 range. By not leaving the procurement unhedged, the company’s bottom line will be affected negatively ( Allayannis & Weston, 20 1 1) . This implies that at the current state where the AUD/EUR state of trading at below 0.6900, the procurement will hurt the company’s bottom line. On the other hand, the company will need to recommence the renegotiation of new wholesale prices if it is to evade the risk of erosion in margins.
Hedging Strategies
Assuming that the company does not leave the position unhedged, there are different hedging strategies that would be used to protect its investments. Firstly, the company should purchase and AUD put/EUR call option ( Fan, 201 7 ) . In this option, the company can buy the EUR and sell AUD at the strike rate especially at the expiry date. In this case, the prevalent spot AUD/EUR would be below the strike rate, where the company will exercise the right to deal at the highest strike rate ( Allayannis & Weston, 20 1 1) . The company may also buy AUD put/EUR call and sell AUD call/EUR put at zero premium ( Hutson & Stevenson, 2010 ) . This is the worst case rate, where the call strike would be 0.6942, while the put strike should be at 0.6810 ( Fan, 201 7 ) . The last option would be AUD/EUR knock-in forward, where it can buy a UAD put/EUR call, while it should sell an AUD call/EUR put with the up and in the trigger at zero premiums.
References
Allayannis, G., & Weston, J. P. (20 1 1). The use of foreign currency derivatives and firm market value. The review of financial studies , 14 (1), 243-276.
Fan, W . (201 7 ). F. Mayer Imports: Hedging Foreign Currency Risk. Publication of Richard Ivey School of Business Foundation , 150 (4), 26-29.
Hutson, E., & Stevenson, S. (2010). Openness, hedging incentives and foreign exchange exposure: A firm-level multi-country study. Journal of International Business Studies , 41 (1), 105-122.
