Question

Please answer all parts (a,b,c)

1.) Suppose a firm will receive 15,000,000 ¥ in 180 days.

a. [2 pts] If the forward rate is 0.143$/ ¥, what would be the value of receivables using the forward?

b. [4 pts] Suppose the dollar-renminbi exchange rate is uncertain. It could be:

0.13$/ ¥ with 12% probability

0.11$/ ¥ with 51% probability, or

0.17$/ ¥ with 37% probability.

What is the expected receivable with the expected exchange rate? Should the firm use the forward or take the risk?

c. [5 pts] If an option existed with a strike price of 0.16$/ ¥ and a premium of 0.02$/ ¥, should the firm use the option, the forward, or neither?

Answer 1

1)

Value of Receivables = Amount Receivables * Forward Exchange Rate

Value of Receivables = 15,000,000 ¥ * 0.143$/ ¥

Value of Receivables = $ 2,145,000.00

2)

Probability	Exchange Rate	Prob * Rate
0.12	0.13	0.0156
0.51	0.11	0.0561
0.37	0.17	0.0629
Expected Exchange Rate	0.1346	$/ ¥
Amount Receivables	15,000,000	¥
Amount Receivables In $	$ 2,019,000.00

Firm should use the forward excange rate to hedge the fund because amount receivable in forward rate is greater than expected rate by $ 2,145,000.00 -  $ 2,019,000.00 = $ 126,000.00

3)

Amount Paid In Premium = 15000000*0.02=	$   (300,000.00)
Amount Receivable using call option =0.16*15000000=	$ 2,400,000.00
Net Amount Receivable Using Call	$ 2,100,000.00

Particulars	Amount	Preference
Net Amount Receivable Using Forward	$ 2,145,000.00	1
Net Amount Receivable without Hedge	$ 2,019,000.00	3
Net Amount Receivable Using Call	$ 2,100,000.00	2

Firm should use the forward excange rate because it has highest receivable.

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