Scenario 2: annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to Considering the calculations, you have done so far, you need to attend to a number of import and ex- 2.687%/4 interest rate port transactions for goods that companies in the United States expressed interest in. Bank applies 360 day-count convention to all currencies. Explanation - e.g. 3 month borrowing rate on The first transaction is for the import of good quality wines from Australia, since a retail liquor trading $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the inter- chain customer in the United States, for who you have been doing imports over the past five years has est rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Fur- a very large order this time. The producer in Australia informed you that the current cost of the wine thermore, note that these are the rates at which your company borrows and invests. The rates that you want to import is AUD$2,500,000. The producer in Australia will only ship goods in three are not borrowing and investment rates from a bank perspective. months' time due to seasonal differences but payment will have to be conducted six months from now. Table 4: Australia import cost with option hedge: (8 marks) The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where Type option it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be re- Total premium cost for import Total cost of option in $ (Strike plus premium) rate Option hedge breakeven exchange Show Call ceived nine months from now. answers in option You consider different transaction hedges, namely forwards, options and money market hedges. You this row: 17315.54 1821190.54 0.72847 are provided with the following quotes from your bank, which is an international bank with branches in 0.00688x2.5x(1+0.02687/4)x10^6 all the countries: 0.72155x2.5x10*6+17315.54 1821190.54/2500000 Forward rates: working $ premium x total AUD value of import x Currencies Spot 3 month (90 6 month (180 days) 9 month (270 days) 12 month (380 days) (1+i) Total cost of option in $/ days) (Strike price x total AUD value of Total AUD value of $/CAD 0.76465 0.72390 0.76559 0.72516 0.77475 0.72641 0.76748 transaction $/AUD 0.72766 0.76843 import) + total premium 0.72892 Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).Annual borrowing and investment rates for your com- c. Compare the forward quotes, money market hedges and options with each other to determine the pany: best exchange rate hedges for Australia (Complete Table 5 on the separate answer sheet) Country 3 month rates 9 month rates Borrow Invest 6 months rates 12 month rates Borrow Inves Borrow Inves Borrow Inves United States 2.687% 2.580% 2.766% 2.633% Table 5: Australia: Exchange rate hedges compared: (3 marks) Canada 2. 177% 2.554% 2.713% 2.740% 2.069% 2. 198% 2.090% 2.220% 2.607% 2.112% 2.241% 2.133% Forward rate Money market hedge Option hedge Australia 1.973% 1.875% 1.992% 1.894% 2.012% 1.914% 2.031% 1.933% locked in exchange breakeven exchange Option prices: rate rate S/AUD Currencies 3 month options 6 month options Call option Put option Call option Put option Strike Premium in Strike Premium in Strike Premium in Strike Premium in $/CAD $0.76292 $0.00392 50.76828 $0.00392 $0.77205 $0.00387 50.77747 $0.00387 $/AUD $0.72155 $0.00690 50.72843 50.00690 $0.72279 $0.00688 50.72969 50.00688 Which hedging technique should be applied? (3 marks) End of document 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 $