You need to order US $100,000 worth of reams of paper from China to complete an...

You need to order US $100,000 worth of reams of paper from China to complete an order from an important commercial customer in 30 days. The current rate of exchange is USD/CNY = 6.5766.

Ignoring other transaction expenses associated with the order, how many Yuan would you need to pay the Chinese supplier?
Define the meaning of foreign exchange. Assuming that you have the choice to pay immediately or in 30 days, define, describe, and provide examples of how you may use each of the following to complete the transaction:
- Definition and use of foreign currency derivatives
- Spot, forward, and futures currency contracts
- Bid/ask spreads
- Definition and use of currency options

Expert Solution

Yuan needed to pay = $100,000 * 6.5766 = 657,660 Yuan

Foreign exchange is the conversion of one currency into another

If there is a choice to pay in 30 days :

A forward contract can be entered into to exchange dollars into Yuan after 30 days. The exchange rate at which the exchange will happen after 30 days is locked in today. For example, if the price of the forward contract is 6.5774, then the forward contract can be sold, and this is the rate at which the exchange will take place

A futures contract can be entered into to exchange dollars into Yuan after 30 days. The exchange rate at which the exchange will happen after 30 days is locked in today.

Foreign currency derivatives are instruments whose value is dependent on the value of the underlying currency. Derivatives such as forwards, futures and options are used to hedge/manage foreign exchange risk

jeff jeffy answered 2 years ago

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