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AussieGold Ltd., an Australian gold mining company, sells gold to U.S. clients in USD. The company...

AussieGold Ltd., an Australian gold mining company, sells gold to U.S. clients in USD. The company has not hedged its gold price or foreign exchange risk. The current spot exchange rate is AUD$ 1.00 = USD$ 0.677 and the current gold spot price is USD$ 1522 per ounce.

Which of the following scenarios represents the best possible outcome for AussieGold Ltd. over the next year?

a)AUD weakens relative to the USD, and the gold spot price rises.

b)AUD strengthens relative to the USD, and the gold spot price rises.

c)AUD weakens relative to the USD, and the gold spot price falls.

d)AUD strengthens relative to the USD, and the gold spot price falls.

e)There is no change in the AUD/USD exchange rate and no change in the gold spot price.

Solutions

Expert Solution

The best possible outcome is when the company receives the highest amount per ounce. It occurs when

a)AUD weakens relative to the USD and the gold spot price rises

When price rises, the firm will receive more money in USD and when AUD weakens, it will get more AUD while converting USD to AUD

And hence, it will be the best possible outcome for AussieGold

jeff jeffy answered 2 years ago
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