Wrae Test Number Merge Center You are selling mopeds to China. The importer owes you Yuan 6,000,000. It is due in 90 days. If US interest rates and your cost of capital are the same as above and the exchange rates and Chinese interest rates are as follows: 6,000,000 90 6.3240 Yuan/$ -3.00% Devaluation of Yuan -5.00% Devaluation of Yuan > Data Table Amount to be received in Yuan) 5 Days Spot - Forward rate premium/discount (calculate) Expected change in FX rate (calculate) Identify what kind of Option should be used 0 Premium - CALL Option 11 Premium - PUT Option 2 CALL Strike Price 23 PUT Strike Price 4 Identify which rate should be used 05 US borrowing AND investing rates 16 Chinese borrowing AND investing rates 17 Cost of Capital (WACC) 3% 5% 6.800 Yuan/s 6.800 Yuan/s Borrowing rate Investing rate 5% 3% 6% 10% 8% 19 Questions: 20 1. If you remain unhedged, how much will you collect in 90 days? 21 2. If you enter into a forward contract to sell the Yuan, how much will you pay? 37 3. If you create a money market hedge, how much will you collect? 23 4. If you were to exercise the option, how much will you pay and when will you exercise the option? 25 You are selling mopeds to China. The importer owes you Yuan 6,000,000. It is due in 90 days. If US interest rates and your cost of capital are the same as above and the exchange rates and Chinese interest rates are as follows: Data Table 4 Amount (to be received in Yuan) s Days 6,000,000 6 Spot 90 - Forward rate premium/discount (calculate) 6.3240 Yuan/$ Expected change in FX rate (calculate) -3.00% Devaluation of Yuan -5.00% Devaluation of Yuan 9 Identify what kind of Option should be used 10 Premium - CALL Option 3% 11 Premium - PUT Option 5% 12 CALL Strike Price 6.800 Yuan/$ 13 PUT Strike Price 6.800 Yuan/S 14 Identify which rate should be used Borrowing rate Investing rate 15 US borrowing AND investing rates 5% 3% 10 Chinese borrowing AND investing rates 8% 6% 17 Cost of Capital (WACC) 10% 11 19 Questions: 30 1. If you remain unhedged, how much will you collect in 90 days? 21 2. If you enter into a forward contract to sell the Yuan, how much will you pay? 32 3. If you create a money market hedge, how much will you collect? 23 4. If you were to exercise the option, how much will you pay and when will you exercise the option? Draw Page Layout Transaction exposure hedging practice Formulas Data Review View Toll me AN A A A B Number Las Merge Canis 5. If you create a money market hedge, how much will you collect? 3. If you were to exercise the option, how much will you pay and when will you exercise the option? Solution 1. Unhedged position ) Calculate the expected rate Translate AR to US dollars you will receive at Expected EX rato Using expected devaluation of Yuan, calculate the expected rate 2. Calculate proceeds from a forward hedge a) Calculate forward rate ) Translate to US dollars - the amount you will receive 3. Calculate proceeds from a money market hedge a) Find the amount you need to borrow today in Yuan 5) Translate the amount from a) to USD at current Spot rate ) Adjust amount in USD (from b) for the time value of money carry the amount from b) 90 days forward (find FV using WACC) Yuan 4. Option Hedge 3) What option should you buy Putor Call b) Option Striko price The amout to be received in USD at the strike rate d) Calculate cost of premium in USD b) Adjust for time value of money Calculate total amount that you will receive in USD if you exercise the option carry the amount from d 20 days forward (ind FV using WACC) Wrae Test Number Merge Center You are selling mopeds to China. The importer owes you Yuan 6,000,000. It is due in 90 days. If US interest rates and your cost of capital are the same as above and the exchange rates and Chinese interest rates are as follows: 6,000,000 90 6.3240 Yuan/$ -3.00% Devaluation of Yuan -5.00% Devaluation of Yuan > Data Table Amount to be received in Yuan) 5 Days Spot - Forward rate premium/discount (calculate) Expected change in FX rate (calculate) Identify what kind of Option should be used 0 Premium - CALL Option 11 Premium - PUT Option 2 CALL Strike Price 23 PUT Strike Price 4 Identify which rate should be used 05 US borrowing AND investing rates 16 Chinese borrowing AND investing rates 17 Cost of Capital (WACC) 3% 5% 6.800 Yuan/s 6.800 Yuan/s Borrowing rate Investing rate 5% 3% 6% 10% 8% 19 Questions: 20 1. If you remain unhedged, how much will you collect in 90 days? 21 2. If you enter into a forward contract to sell the Yuan, how much will you pay? 37 3. If you create a money market hedge, how much will you collect? 23 4. If you were to exercise the option, how much will you pay and when will you exercise the option? 25 You are selling mopeds to China. The importer owes you Yuan 6,000,000. It is due in 90 days. If US interest rates and your cost of capital are the same as above and the exchange rates and Chinese interest rates are as follows: Data Table 4 Amount (to be received in Yuan) s Days 6,000,000 6 Spot 90 - Forward rate premium/discount (calculate) 6.3240 Yuan/$ Expected change in FX rate (calculate) -3.00% Devaluation of Yuan -5.00% Devaluation of Yuan 9 Identify what kind of Option should be used 10 Premium - CALL Option 3% 11 Premium - PUT Option 5% 12 CALL Strike Price 6.800 Yuan/$ 13 PUT Strike Price 6.800 Yuan/S 14 Identify which rate should be used Borrowing rate Investing rate 15 US borrowing AND investing rates 5% 3% 10 Chinese borrowing AND investing rates 8% 6% 17 Cost of Capital (WACC) 10% 11 19 Questions: 30 1. If you remain unhedged, how much will you collect in 90 days? 21 2. If you enter into a forward contract to sell the Yuan, how much will you pay? 32 3. If you create a money market hedge, how much will you collect? 23 4. If you were to exercise the option, how much will you pay and when will you exercise the option? Draw Page Layout Transaction exposure hedging practice Formulas Data Review View Toll me AN A A A B Number Las Merge Canis 5. If you create a money market hedge, how much will you collect? 3. If you were to exercise the option, how much will you pay and when will you exercise the option? Solution 1. Unhedged position ) Calculate the expected rate Translate AR to US dollars you will receive at Expected EX rato Using expected devaluation of Yuan, calculate the expected rate 2. Calculate proceeds from a forward hedge a) Calculate forward rate ) Translate to US dollars - the amount you will receive 3. Calculate proceeds from a money market hedge a) Find the amount you need to borrow today in Yuan 5) Translate the amount from a) to USD at current Spot rate ) Adjust amount in USD (from b) for the time value of money carry the amount from b) 90 days forward (find FV using WACC) Yuan 4. Option Hedge 3) What option should you buy Putor Call b) Option Striko price The amout to be received in USD at the strike rate d) Calculate cost of premium in USD b) Adjust for time value of money Calculate total amount that you will receive in USD if you exercise the option carry the amount from d 20 days forward (ind FV using WACC)