QUESTION 3 [Total: 25 marks] a) The net export of Lovely DaVida, a well-established US firm from numerous foreign currencies reported in the following table: Currency Net Inflow or Outflow Spot Exchange Net Inflow or Outflow (USD) Rate Canadian dollars (C$) C$28,000,000Inflow $.95 26,600,000 Inflow Australian dollars (NZ$) AUD$4,000,000 Inflow .60 2,400,000 Inflow 180,000 Inflow MXP1,000,000Inflow .18 Mexican pesos (MXP) Singapore dollars (SS) S$4,000,000Outflow .65 2,600,000 Outflow The company has predicted that the future spot rate would be equal to today's spot rate. If the company's prediction went wrong, the forecasted net cash flows in dollars for each of the foreign currency would be inaccurate. The company realized that Mexican Peso, Singapore dollars and Australian dollars are moving in tandem against the U.S. while the movement of the Canadian dollar is independent from the movements of the other currencies. As a risk analyst of the company, do you observe any currency diversification effects? Explain. (5 marks) b) Based on information in a), if the company hedges its Canadian dollars cash flows using a forward contract at a rate of $0.97, what is gain or loss in dollar cash flows to the company? Explain whether the decision to hedge using forward is reasonable. (4 marks) QUESTION 3 [Total: 25 marks] a) The net export of Lovely DaVida, a well-established US firm from numerous foreign currencies reported in the following table: Currency Net Inflow or Outflow Spot Exchange Net Inflow or Outflow (USD) Rate Canadian dollars (C$) C$28,000,000Inflow $.95 26,600,000 Inflow Australian dollars (NZ$) AUD$4,000,000 Inflow .60 2,400,000 Inflow 180,000 Inflow MXP1,000,000Inflow .18 Mexican pesos (MXP) Singapore dollars (SS) S$4,000,000Outflow .65 2,600,000 Outflow The company has predicted that the future spot rate would be equal to today's spot rate. If the company's prediction went wrong, the forecasted net cash flows in dollars for each of the foreign currency would be inaccurate. The company realized that Mexican Peso, Singapore dollars and Australian dollars are moving in tandem against the U.S. while the movement of the Canadian dollar is independent from the movements of the other currencies. As a risk analyst of the company, do you observe any currency diversification effects? Explain. (5 marks) b) Based on information in a), if the company hedges its Canadian dollars cash flows using a forward contract at a rate of $0.97, what is gain or loss in dollar cash flows to the company? Explain whether the decision to hedge using forward is reasonable. (4 marks)