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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

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:image text in transcribed

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: 1 2 Data Table 3 4Amount (to be received in Yuan) Days 6Spot 7Forward rate premium/discount (calculate) Expected change in FX rate (calculate) 9Identify what kind of Option should be used 10 Premium- CALL Option uPremium PUT Option 12 CALL Strike Price 13 PUT Strike Price 6.000,000 90 6.3240 Yuan/S -3.00 % Devaluation of Yuan -5.00 % Devaluation of Yuan 3% 5% 6.800 Yuan/S 6.800 Yuan/S Borrowing rate Investing rate 3% 6% 14 Identify which rate should be used 15 US borrowing AND investing rates l Chinese borrowing 5% investing rates 8% 17 Cost of Capital (WACC) 10 % 19Questions: 21. 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? 3. If you create a money market hedge, how much will you collect? 2s 4. If you were to exercise the option, how much will you pay and when will you exercise the option? 24 25 26 Solution 1. Unhedged position 2s a) Calculate the expected rate 2b) Translate AR to US dollars you ill receive at Expected FX rate Using expected devaluation of Yuan, calculate the Expected rate 30 31 322. Calculate proceeds from a forward hedge 3 a) Calculate forward rate 34 b) Translate to US dollars the amount you will receive 35 36 37 3. Calculate proceeds from a money market hedge 38 a) Find the amount you need to borrow today in Yuan 39b) Translate the amount from a) to USD at current Spot rate c) Adjust amount in USD (from b) for the time value of money carry the amount from b) 90 days forward (find FV using WACC) 41 42 3 4. Option Hedge 4a) What option should you buy Put or Call 4b) Option Strike price c) The amoutn to be received in USD at the strike rate Yuan/S 7 d) Calculate cost of premium in USD carry the amount from d) 90 days forward (find FV using WACC) e) Adjust for time value of money f) Calculate total amount that you will receive in USD if you exercise the option 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: 1 2 Data Table 3 4Amount (to be received in Yuan) Days 6Spot 7Forward rate premium/discount (calculate) Expected change in FX rate (calculate) 9Identify what kind of Option should be used 10 Premium- CALL Option uPremium PUT Option 12 CALL Strike Price 13 PUT Strike Price 6.000,000 90 6.3240 Yuan/S -3.00 % Devaluation of Yuan -5.00 % Devaluation of Yuan 3% 5% 6.800 Yuan/S 6.800 Yuan/S Borrowing rate Investing rate 3% 6% 14 Identify which rate should be used 15 US borrowing AND investing rates l Chinese borrowing 5% investing rates 8% 17 Cost of Capital (WACC) 10 % 19Questions: 21. 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? 3. If you create a money market hedge, how much will you collect? 2s 4. If you were to exercise the option, how much will you pay and when will you exercise the option? 24 25 26 Solution 1. Unhedged position 2s a) Calculate the expected rate 2b) Translate AR to US dollars you ill receive at Expected FX rate Using expected devaluation of Yuan, calculate the Expected rate 30 31 322. Calculate proceeds from a forward hedge 3 a) Calculate forward rate 34 b) Translate to US dollars the amount you will receive 35 36 37 3. Calculate proceeds from a money market hedge 38 a) Find the amount you need to borrow today in Yuan 39b) Translate the amount from a) to USD at current Spot rate c) Adjust amount in USD (from b) for the time value of money carry the amount from b) 90 days forward (find FV using WACC) 41 42 3 4. Option Hedge 4a) What option should you buy Put or Call 4b) Option Strike price c) The amoutn to be received in USD at the strike rate Yuan/S 7 d) Calculate cost of premium in USD carry the amount from d) 90 days forward (find FV using WACC) e) Adjust for time value of money f) Calculate total amount that you will receive in USD if you exercise the option

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