Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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. For Chinese yuan (CNY)
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
aCalculate the A$ proceeds from the forward hedging strategy based on the information in Table 1.
bCalculate the A$ proceeds for the money market hedging strategy using the market information in Table 1.
cCalculate the minimum A$ proceeds for the options hedging strategy based on the market information in Table 1.
dAfter analysing 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$2.77 million instead of the initial an agreed amount of CNY5.67 million. As an importer before signing a new agreement, Sing Tao analyses the different hedging strategies using the market information in Table 1 to minimise its exchange rate risk for the payment of A$2.77 million.
What is the CNY costs for the forward hedging strategy based on the information in Table 1?
eWhat is the CNY costs for the money market hedging strategy based on the information in Table 1?
fCalculate the maximum CNY costs for the options hedging strategy using the information in Table 1.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Islamic FinanceA Practical Perspective

Authors: Nafis Alam, Lokesh Gupta, Bala Shanmugam

1st Edition

3319665588, 9783319665580

More Books

Students also viewed these Finance questions

Question

What are some of the topics they study?

Answered: 1 week ago