An Australian expert WA Co. will receive 5.75 million Chinese yuan (CNY) from a Chinese importer Sing
Question:
An Australian expert 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 using the market information in the following table 1 to minimise its exchange rate risk for the Australian dollar (A$) cash flow. 1) Calculate the A$ proceeds from the forward hedging strategy based on the information in table 1 (attached) 2) Calculate the A$ proceeds for the money market hedging strategy using the market information in table 1 (attached) 3) Calculate the minimum A$ proceeds for the options hedging strategy based on the market information in table 1 (attached)After analysing the different hedging strategies, WA Co. found that none of these hedging strategies 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$ 2.45million instead of the initial agreed amount of CNY 5.75million. As an importer before signing a new agreement, Sing Tao analyses the different hedging strategies using the market information in Table 1 (attached) to minimise its exchange rate risk for the payment of A$ 2.45million. 4) What is the CNY costs for the forward hedging strategy based on the information in Table 1 (attached) 5) What is the CNY costs for the money market hedging strategy based on the information in Table 1 (attached) 6) Calculate the maximum CNY costs for the options hedging strategy using the information in Table 1 (attached)
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