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An Australian exporter WA Co. will receive 5.67 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the
An Australian exporter WA Co. will receive 5.67 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 minimise its exchange rate risk for the Australian dollar (A$) cash flow. TABLE 1 For Chinese yuan (CNY): Spot rate A$0.4075/CNY One-year forward rate A$0.6000/CNY One-year CNY deposit and borrowing rate 7.35% One-year call options Exercise price = A$0.61 Premium = A$0.03 One-year put options Exercise price = A$0.57 Premium = A$0.06 For Australian dollar (A$): Spot rate CNY3.4287/A$ One-year forward rate CNY2.2171/A$ One-year A$ deposit and borrowing rate 4.98% One-year call options Exercise price = CNY1.51 Premium = CNY0.19 One-year put options Exercise price = CNY1.80 Premium = CNY0.12 1. Calculate the A$ proceeds from the forward hedging strategy based on the information in Table 1. 2. Calculate the A$ proceeds for the money market hedging strategy using the market information in Table 1. 3. Calculate the minimum A$ proceeds for the options hedging strategy based on the market information in Table 1
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