An Indonesian student’s family purchased an apartment for AUD 1 million in the Melbourne CBD area for their son to stay in during his study at Monash College. The contract will be settled in 6 months. Which of the following statements is true regarding the exchange rate risk for the family?

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BlackTom AI · Accepted Answer

Question restatement: A Indonesian student’s family bought an apartment in Melbourne for AUD 1 million, with settlement in 6 months. The query asks which statement about exchange rate risk is true for the family.

Option a: 'The family will face the down-side exchange rate risk if the AUD appreciates against the Indonesian Rupiah.' This is correct reasoning. If the Australian dollar strengthens relative to the Indonesian rupiah, the rupiah cost to buy or settle the AUD 1 million increases. For a family earning or holding money in rupiah, this appreciation of AUD means a higher rupiah outlay in the future, which is a down-side risk.

Option b: 'The family will face the up-side exchange rate risk if the Indonesian Rupiah depreciates against the AUD.' This is inaccurate in wording. If the rupiah depreciates (weaker rupiah) relative to the AUD, the amount of rupiah needed to obtain the same AUD amount increases, which represents a cost increase in rupiah terms. That is also a down-side risk for the rupiah holders, not an up-side risk. The phrasing mixes up the direction of the gain with respect to the rupiah’s value.

Option c: 'The family will face no exchange rate risk if they sell the apartment once the student completes his study.' This ignores the fact that the exchange rate risk exists up to the settlement date. Any movements in the AUD/RUP rate during the 6 months could affect the amount of rupiah required at settlement, so assuming no risk after sale is incorrect. The risk is tied to the period until settlement, not entirely eliminated by selling later.

Option d: 'Both a and b' This would be true only if both a and b were correct. Since b is not correctly describing a no-upside-risk scenario and actually misstates the risk direction, this combined option is not accurate.

Thinking through the directional logic: the core concept is understanding that favorable or unfavorable shifts in the AUD/Rupiah pair during the settlement period translate into higher or lower rupiah costs for the family. A strengthening AUD raises rupiah cost (down-side for rupiah side), while a weakening AUD lowers rupiah cost (up-side for rupiah side). The statement in b confuses the direction of the upside/downside risk relative to the rupiah when rupiah depreciates. Therefore, only the sense expressed in a correctly captures the risk direction for the rupiah-denominated family, while c and d fail on other counts.

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