1. An Australian exporter WA Co. will receive 5.75 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the different hedging strategies (forward, money market, and options) using the market information in the following Table 1 to minimize its exchange rate risk for the Australian dollar (A$) cash flow.

After analyzing the different hedging strategies, WA Co. found that none of these hedging strategies (forward, money market, and options) provides the expected A$ proceeds and wants to receive A$ rather than CNY in one year. Therefore, WA Co. proposed Sing Tao to pay WA Co. A$2.09 million instead of the initial an agreed amount of CNY5.75 million. As an importer before signing a new agreement, Sing Tao analyses the different hedging strategies using the market information in Table 1 to minimize its exchange rate risk for the payment of A$2.09 million.

Calculate the maximum CNY costs for the options hedging strategy using the information in Table 1.

TABLE 1 For Chinese yuan (CNY) Spot rate A$0.3755/CNY One-year forward rate A$0.5381/CNY One-year CNY deposit and borrowing rate 8.48% One-year call options Exercise price = A$0.52 Premium = A$0.03 One-year put options Exercise price = A$0.58 Premium = A$0.06 For Australian dollar (A$) Spot rate CNY3.5909/A$ CNY1.9180/A$ One-year forward rate One-year A$ deposit and borrowing rate 4.71% One-year call options Exercise price = CNY1.64 Premium = CNYO.17 One-year put options Exercise price = CNY1.65 Premium = CNYO.14 TABLE 1 For Chinese yuan (CNY) Spot rate A$0.3755/CNY One-year forward rate A$0.5381/CNY One-year CNY deposit and borrowing rate 8.48% One-year call options Exercise price = A$0.52 Premium = A$0.03 One-year put options Exercise price = A$0.58 Premium = A$0.06 For Australian dollar (A$) Spot rate CNY3.5909/A$ CNY1.9180/A$ One-year forward rate One-year A$ deposit and borrowing rate 4.71% One-year call options Exercise price = CNY1.64 Premium = CNYO.17 One-year put options Exercise price = CNY1.65 Premium = CNYO.14