Question

In: Accounting

An Australian exporter WA Co. will receive 5.67 million Chinese yuan (CNY) from a Chinese importer...

An Australian exporter WA Co. will receive 5.67 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$0.4075/CNY
One-year forward rate
A$0.6000/CNY
One-year CNY deposit and borrowing rate
7.35%
One-year call options
Exercise price = A$0.61
Premium = A$0.03
One-year put options
Exercise price = A$0.57
Premium = A$0.06
For Australian dollar (A$)
Spot rate
CNY3.4287/A$
One-year forward rate
CNY2.2171/A$
One-year A$ deposit and borrowing rate
4.98%
One-year call options
Exercise price = CNY1.51
Premium = CNY0.19
One-year put options
Exercise price = CNY1.80
Premium = CNY0.12
1. Calculate the A$ proceeds from the forward hedging strategy based on the information in Table 1.
2.Calculate the A$ proceeds for the money market hedging strategy using the market information in Table 1.
3. Calculate the minimum A$ proceeds for the options hedging strategy based on the market information in Table 1.
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$2.77 million instead of the initial an agreed amount of CNY5.67 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$2.77 million.
What is the CNY costs for the forward hedging strategy based on the information in Table 1?
5. What is the CNY costs for the money market hedging strategy based on the information in Table 1?
6. Calculate the maximum CNY costs for the options hedging strategy using the information in Table 1.

Solutions

Expert Solution

Answers

.

1) A$ proceeds from the forward hedging strategy = 5.67/2.2171 = A$ 2.5574 million

2) Money Market Hedging

The A$ proceeds are 1.6172 million

3) Option hedging : Minimum A$ proceeds for the options hedging A$ 2.8917 mill

4) CNY OUTFLOW with the forward hedging strategy = 2.77m/0.6 = CNY 4.6167 million

5) Money Market Hedging The CNY OUTFLOW = CNY 6.9510 million

6) Option hedging Maximum CNY OUTFLOW = CNY 4.709 million

.

Step by step explanation

.

1)

Proceeds if Forward cover has been availed

Amount receivable = CYN 5.67 m

One year Forward rate = AUD 0.6

A$ proceeds from the forward hedging strategy = 5.67/2.2171 = A$ 2.5574 million

2)

Money Market Hedging (Receivables)

Identify : Foreign Currency is an asset so create a liability against it.

BORRW Present value of CNY so when your debtor pays you, repay the borrowing

Borrow CNY 5.67 m / (1.0735) = CNY 5.2818 for 1 year @7.35%

Immediately converts the foreign loan into domestic currency at spot 3.4287 getting 5.2818/3.4287 = A$ 1.5405 million

Make deposit in domestic market to earn interest @4.98% ie Deposit A$ 1.5405 million for 1 year

After a year exporter will receive CNY 5.67 million and will repay the borrowing (CNY 5.2818*1.0735 = 5.67 million

The value of deposit now is A$ 1.5405*(1.0498) =AU$ 1.6172 m , exporter will realized this deposit and get A$ 1.6172 million

So Net inflow under this hedging strategy is A$ 1.6172 million

Effective exchange rate = 5.67/1.6172 = CNY 3.5061

The A$ proceeds are 1.6172 million

3)

Option hedging

We have receivable of CNY, so will buy a put option of CNY ( ie selling CNY at specified rate) or will buy a call option for AU$ (ie buying A$ at specified rate)

Buy put option (CNY) ie selling CNY

Exercise price = A$0.57

Premium = A$ 0.06

Will sell CNY for A$ 0.57 - 0.06 = A$ 0.51

Will get 5.67 million * 0.51 = A$ 2.8917

OR

Buying Call option A$

Exercise Price = CNY 1.51

Premium = CNY 0.19

Will buy A$ 1 with paying CNY 1.70 (ie 1.51 + 0.19 )

Getting 5.67/1.70 = A$ 3.3353 million

Minimum A$ proceeds for the options hedging A$ 2.8917 million

From importer Sing Tao s perspective

4)

Payment if Forward cover has been availed

Amount payable = A$ 2.77 million

One year Forward rate = 0.6

CNY OUTFLOW with the forward hedging strategy = 2.77m/0.6 = CNY 4.6167 million

5)

Money Market Hedging (Payble)

Identify : Foreign Currency is a liability so create FC asset

Sing will make a deposit of foreign currency with such amount that The principle plus interest receipt at the end of deposit period must equal the amount to be paid so that when the deposit period ends, the proceeds from bank are used to pay the supplier. This means the foreign deposit is the present value of foreign payment.

Deposit amount needed today (PV of Payble) = A$ 2.77 / (1.0498) = A$ 2.6386 m

To have this amount Toa will need CNY (spot) 2.6386 /0.4075 = CNY 6.4751 m

BORRW CNY 6.4751 m for 1 year @ 7.35%

Immediately converts in foreign currency at spot getting 6.4751*0.4075 getting A$2.6386 m

Make deposit in A$ market to earn interest ie Deposit A$ 2.6386 million for 1 year to earn 4.98%

After a year Tao will realize the deposit and get A$ 2.6386*(1.0498) = A$ 2.77 m

Will repay the borrowing with own funds = CNY 6.4751 * (1.0735) = CNY 6.9510 million

Effective exchange rate = 2.77/6.9510 = A$ 0.3985

The CNY OUTFLOW = 6.9510 million

6)

Option hedging

Tao have payble of A$, so will buy a call option for AU$ (ie buying A$ at specified rate) or put option of CNY ( ie selling CNY at specified rate)

Buying Call option A$

Exercise Price = CNY 1.51

Premium = CNY 0.19

Will buy A$ 1 with paying CNY 1.7 (ie 1.51 + 0.19 )

To get A$ 2.77 million

Will pay 2.77*1.7 = CNY 4.709 million

OR

Buy put option (CNY) ie selling CNY to get A$

Exercise price = A$0.61

Premium = A$ 0.03

Will pay CNY for A$ (0.61 - 0.03 = A$ 0.58)

Will pay 2.77 million / 0.58 = CNY 4.7759 million

Maximum CNY OUTFLOW = CNY 4.709 million


Related Solutions

An Australian exporter WA Co. will receive 5.04 million Chinese yuan (CNY) from a Chinese importer...
An Australian exporter WA Co. will receive 5.04 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$0.4100/CNY One-year forward rate A$0.5769/CNY One-year CNY deposit and borrowing rate 7.14% One-year call options Exercise price...
An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer...
An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the different hedging strategies (forward, money market and options) using the market information in the following Table 1 to minimise its exchange rate risk for the Australian dollar (A$) cash flow. TABLE 1 For Chinese yuan (CNY) Spot rate A$0.4696/CNY One-year forward rate A$0.5454/CNY One-year CNY deposit and borrowing rate 8.13% One-year call options Exercise price...
An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer...
An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the different hedging strategies (forward, money market and options) using the market information in the following Table 1 to minimise its exchange rate risk for the Australian dollar (A$) cash flow. TABLE 1 For Chinese yuan (CNY) Spot rate A$0.4696/CNY One-year forward rate A$0.5454/CNY One-year CNY deposit and borrowing rate 8.13% One-year call options Exercise price...
1. An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese...
1. An Australian exporter WA Co. will receive 5.34 million Chinese yuan (CNY) from a Chinese importer Sing Tao in one year. WA Co. analyses the different hedging strategies (forward, money market and options) using the market information in the following Table 1 to minimise its exchange rate risk for the Australian dollar (A$) 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...
Much has been written recently regarding the Chinese renminbi (RMB) or yuan (CNY), especially surrounding the...
Much has been written recently regarding the Chinese renminbi (RMB) or yuan (CNY), especially surrounding the news of its inclusion in the IMF's SDR basket. Write a 3-page essay (papers should be submitted in an essay format - not a list of answers to questions) addressing the following: 1) Explain the differences and/or similarities between RMB, CNY, CNH, and the CNY-NDF; 2) What is the purpose of the IMF, what is the SDR basket and do you think the recent...
Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60...
Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer: If the Spot rate were to rise to...
Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60...
Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer: If the Spot rate were to rise to...
How the depreciation of the Chinese yuan against the Australian dollar would affect the cost to...
How the depreciation of the Chinese yuan against the Australian dollar would affect the cost to an Australian company that borrowed Chinese yuan and used the proceeds for an Australian project. Select one: a. Australian company’s cost of borrowing will be lower b. Australian company’s cost of borrowing will be higher c. Chinese company’s cost of borrowing will be higher d. Chinese yuan company’s cost of borrowing will be lower
Question 5 Suppose an Australian importer has to make a €100,000 payment to a German exporter...
Question 5 Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer: If the Spot rate were to...
An Australian importer has received goods from India and will pay 2 million Indian rupees (INR)...
An Australian importer has received goods from India and will pay 2 million Indian rupees (INR) in one year. The importer expects that the value of the INR will appreciate by 20.57% against the Australian dollar from today’s spot rate of 0.2527 in one year. How much Australian dollar the importer will make a loss due to appreciation of INR after one year? (enter the whole number with no sign or symbol)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT