Question

1. An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the different hedging strategies (forward, money market and options) using the market information in the following Table 1 to minimise its exchange rate risk for the Australian dollar (A$) cash flow.

TABLE 1
For Chinese yuan (CNY)
Spot rate	A$0.3609/CNY
One-year forward rate	A$0.5815/CNY
One-year CNY deposit and borrowing rate	8.34%
One-year call options	Exercise price = A$0.56
	Premium = A$0.03
One-year put options	Exercise price = A$0.61
	Premium = A$0.05
For Australian dollar (A$)
Spot rate	CNY3.1747/A$
One-year forward rate	CNY1.8954/A$
One-year A$ deposit and borrowing rate	4.87%
One-year call options	Exercise price = CNY1.76
	Premium = CNY0.18
One-year put options	Exercise price = CNY1.83
	Premium = CNY0.10

Calculate the A$ proceeds from the forward hedging strategy based on the information in Table 1.

(enter the whole number without sign and symbol).

2. Calculate the A$ proceeds for the money market hedging strategy using the market information in Table 1.

(enter the whole number without sign and symbol)

3. Calculate the minimum A$ proceeds for the options hedging strategy based on the market information in Table 1.

(enter the whole number without sign and symbol)

4. After analysing the different hedging strategies, WA Co. found that none of these hedging strategies (forward, money market and options) provides the expected A$ proceeds and wants to receive A$ rather than CNY in one year.  Therefore, WA Co. proposed Sing Tao to pay WA Co. A$2.93 million instead of the initial an agreed amount of CNY5.34 million. As an importer before signing a new agreement, Sing Tao analyses the different hedging strategies using the market information in Table 1 to minimise its exchange rate risk for the payment of A$2.93 million.

What is the CNY costs for the forward hedging strategy based on the information in Table 1?

(enter the whole number without sign and symbol)

5. What is the CNY costs for the money market hedging strategy based on the information in Table 1?

(enter the whole number without sign or symbol)

6. Calculate the maximum CNY costs for the options hedging strategy using the information in Table 1.

Answer 1

A) Under Forward Hedging, WA Co can fix the rate of A$0.5815/CNY for receivables of 5.34 million CNY after one year

So, the A$ proceeds from the forward hedging strategy = 5.34 million CNY * A$0.5815/CNY = A$3.10521 million

or A$3,105,210

B) Under Money market hedging, CNY is borrowed such that maturity amount is 5.34 million CNY and the borrowed amount is converted to A$ and invested .

Amount to be borrowed in CNY = 5.34 million CNY/1.0834 = 4.928927 million CNY

This amount converted to A$ using Spot rate gives = 4.928927*0.3609 = A$1.77885 million

and invested in A$ for one year to become = A$1.77885*1.0487 million =A$1.86548 million or A$1865480

C) Minimum A$ proceeds will be from put options at A$0.61 strike with premium A$0.05

So, minimum A$ proceed per CNY = A$061- A$0.05 = A$0.56

So, for 5.34 million CNY, minimum A$ proceeds = 0.56*5.34 million = A$2.9904 million or A$2990400  

D) For Sing Tao, to pay A$2.93 million using forward hedging, cost will be CNY1.8954/A$

So total cost = A$2.93 million * 1.8954 = 5.553522 million CNY or 5,553,522 CNY