The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to s 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: Currencies Spot 3 month (90 6 month (180 9 month (270 12 month (360 days) days) days days) $/CA 0.76465 0.76559 0.77475 0.76748 0.76843 S/AUD 0.72390 0.72516 0.72641 0.72766 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 company- Country 3 month rates 6 months rates 9 month rates 12 month rates Borrow Invest Borrow Invest Borrow Inves Borrow Invest United States 2.6879 2.554% 2.713% 2.5805% 2.7409 2.60796 2.7663 2.63396 Canada 2.1779% 2.069% 2.198% 2.090% 2.220% 2.11296 2.2419% 2.13396 Australia 1.973% 1.875% 1.99296 1.894% 2.012% 1.914% 2.0319% 1.933%% Bank applies 360 day-count convention to all currencies. Explanation - e-g. 3 month borrowing rate on $ = 2.687%%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 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. Option prices: Currencies 3 month options 6 month options Call option Put option Call option Put option Strike Premium Strike Premium Strike Premium Strike Premium in S n's in S in S S/CAD $0.76292 $0.00392 $0.76828 $0.00392 $0.77205 $0.00387 | $0.77747 $0.00387 $/AUD $0.72155 $0.00690 $0.72843 $0.00690 | $0.72279 $0.00688 | $0.72969 $0.00688 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 month $ option premium is subject to 2.6879%/4 interest rate.) 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 time 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 2.6879%/4 = 0.67175%). Calculate the total cost of using options as hedging instrument for the import from Australia (Complete Table 4) Table 4: Australia import cost with option hedge: (8 marks) Type of Total cost of option Option hedge option (Call Total premium in $ (Strike plus breakeven or put?) cost for import premium) exchange rate Show answers in this row: Show your workings in the columns below the (Strike price x total answers $ premium x total AUD value of Total cost of option AUD value of import) + total in $/ Total AUD import x (1+i) premium value of transaction
