In: Accounting
Answers
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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
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Step by step explanation
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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