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.

4. After 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?

5. What is the CNY costs for the money market hedging strategy based on the information in Table 1?

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