Question

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$0.4696/CNY
One-year forward rate	A$0.5454/CNY
One-year CNY deposit and borrowing rate	8.13%
One-year call options	Exercise price = A$0.53
	Premium = A$0.03
One-year put options	Exercise price = A$0.55
	Premium = A$0.05
For Australian dollar (A$)
Spot rate	CNY3.0462/A$
One-year forward rate	CNY1.8687/A$
One-year A$ deposit and borrowing rate	4.60%
One-year call options	Exercise price = CNY2.47
	Premium = CNY0.18
One-year put options	Exercise price = CNY2.19
	Premium = CNY0.14

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

(enter the whole number without sign and symbol).

Answer:

Question 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)

Answer:

Question 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)

Answer:

Question 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$2.48 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$2.48 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)

Answer:

Question 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)

Answer:

Question 6

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

Answer:

PLEASE PROVIDE ANSWERS IN FULL FIGURES NOT AFTER ROUNDING THEM IN MILLION. FOR EXAMPLE- 52,782,236

Answer 1

Answer 1 : Forward Strtegy

A$ Proceed from export bill under forward contract = Export Bill * Forward Rate

= CNY 5,340,000 *0.5454

= A$ 2,912,436

Answer 2 : Money Market Hedge Strategy

Step 1 : Borrow in CNY @ 8.13 % = 5,340,000 /1.0813 = CNY 4,938,500

Step 2 : Convert CNY into A$ at current spot rate = CNY 4,938,500 * 0.4696 = A$ 2,319,120

Step 3 : Invest A$ 2,319,120 @ 4.60%

Step 4 : After one year , realised the export bill CNY 5,340,000 and

pay CNY borrowing with interest = 4,938,500* 1.0813 = CNY 5,340,000

Step 5 : Realised A$ proceed from investment 2,319,120 *1.046 = A$ 2,425,800

Answer 3: Option Hedging Strategy

Since we are selling CNY , hence Put option will be used at strike price of A$ 0.55/ CNY

hence minimum proceed = 5,340,000* 0.55 = A$ 2,937,000

Premium cost = 5,340,000 *A$ 0.05 = A$ 267,000

Therfore Minimum proceed in A$ will be 2,937,000 -267,000 = A$2,670,000

Answer 4: Forward Hedging Strategy

A$ payable under forward contract = Import bill amount * forward Rate

= A$ 2,480,000 * 1.8687

= CNY 4,634,376

Answer 5 & 6 can be solve similar to 2 & 3