Annual borrowing and investment rates for your company: Bank applies 360 day-count convention to all currencies. Explanation - e.g, 3 month borrowing rate on S=2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months, the interest rate is 2.687%/4=0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective. d. Calculate the exchange rates that will apply if the money market hedges are used for the exports to Canada (Complete Table 6 on the separate answer sheet) e. Compare the forward quotes and money market hedges with each other to determine the best exchange rate hedges for Canada (Complete Table 7 on the separate answer sheet) f. Assume you entered the forward hedge for the import from Australia. Four months have passed since you entered the hedge. Interest rates are the same as before. The spot exchange rate of the S/AUD is 0.72551 . Calculate the value of your forward position. Please use a 360 day-count II convention, since the bank also used a 360 day-count convention with the forward quotes provided to you. Also remember for interest rates use risk free rates provided under scenario 1 . Show your calculation in Table 8 on the separate answer sheet. Option prices: Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on uS \$ annual borrowing interest rates for applicable time periods e.g., 3 months $ option premium is subject to 2.687%/4 interest rate.) a. Calculate the cost of money market hedges for the imports from Australia (Complete Table 3 on the separate answer sheet) b. Determine the option types that you will consider based on the exchange rate quotes provided by your bank. Remember we will long or short the base currencies (in this case study the currencies that are not \$) and the FV of premium cost is based on the borrowing cost of $ for the period of the option. For example, if it is a 3 -month option, then the interest rate that should be applied is United States 3 month borrowing rate of 2.687%/4=0.67175% ). Calculate the total cost of using options as hedging instrument for the import from Australia (Complete Table 4 on the separate answer sheet) c. Compare the forward quotes, money market hedges and options with each other to determine the best exchange rate hedges for Australia (Complete Table 5 on the separate answer sheet) Scenario 2: Considering the calculations that you have done so far; you need to attend to several import and export transactions for goods that companies in the United States expressed interest in. The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia informed you that the current cost of the wine that you want to import is AUD\$2,500,000. The producer in Australia will only ship goods in three months' time due to seasonal differences but payment will have to be conducted six months from now. The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received nine months from now. You consider different transaction hedges, namely forwards, options and money market hedges. You are provided with the following quotes from your bank, which is an international bank with branches in all the countries: Forward rates: Bank applies 360 day-count convention to all currencies (tor this assignment apply 360 days in all calculations]
