Quantitative and Conceptual ProblemQuestion 1 a An Australian firm needs to borrow 1 million AUD for 1 year. The interest rate in Australia is 8 percent and the interest rate in the US is 5 percent and the spot exchange rate is AUD/USD= .9000. Can the Australian firm achieve lower interest costs by borrowing offshore on a covered basis? (Quantitative and conceptualproblem) Question1 b Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and one-third in euros (Europe). In September Mattel delivers a large shipment of toys (primarily Barbies and Hot Wheels) to a major distributor in Antwerp. The receivable, 30 million EUR, is due in 90 days, standard terms for the toy industry in Europe. Mattels treasury team has collected the following currency and market quotes. The companys foreign exchange advisors believe the euro will be at about EUR/USD=1.4200 in 90 days. Mattels management does not use currency options in currency risk management activities. Advise Mattel on which hedging alternative is probably preferable. (Analysis of business situations) Question 2 a Operating and transaction exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed proactive policies? Explain how each of the four policies can offset operating exposure. (Conceptual problem) Question 2 b Hurte-Paroxysm Products, Inc. (HP) of the United States exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumor exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP Products faces a pricing decision which must be made before any actual devaluation: HP Products may either (1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or (2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the U.S. are 60% of the U.S. sales price.