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ABC is an Australian firm. Assume the following: 1. ABC needs 100M HKD for 12 months 2. After 12 months, ABC wishes to sell the

ABC is an Australian firm. Assume the following: 1. ABC needs 100M HKD for 12 months 2. After 12 months, ABC wishes to sell the HKD 3. The firm currently does not hold any HKD assets 4. The firm is risk-averse and wishes to minimize transaction costs 5. The current spot rate is EAUD/HKD=0.22 What should be ABC's strategy?

A.

Enter into a swap with a counterparty: ABC pays 22M AUD to receive 100M HKD now. After 12 months, ABC sells 100M HKD for 21.8M AUD.

B.

Purchase 100M HKD at EAUD/HKD =0.22 now. Enter into a forward contract now to sell 100M HKD after 12 months at FAUD/HKD=0.215

C.

Purchase 100M HKD at EAUD/HKD =0.22 now. After 12 months, sell 100M HKD at the prevailing spot exchange rate.

D.

Strategies mentioned in A) and B) are equally as attractive

E.

None of the above

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