QUESTION 3

3) A mining company in Australia has entered into a contract to export iron ore into China with delivery in three months time. The contract is denominated in Chinese Yuan, CNY and is valued at CNY 500 million. The current spot exchange rate is AUD/CNY 5.18. Assume that the expected spot rate in three months time is AUD/CNY 5.13. The three-month futures contract for Australian dollar and Chinese Yuan is trading at AUD/CNY 5.09. Should the mining company use the futures market to hedge the exchange rate exposure? Explain why or why not?