Question

Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia informed you that the current cost of the wine that you want to import is AUD$2,500,000. The producer in Australia will only ship goods in three months’ time due to seasonal differences but payment will have to be conducted six months from now.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received nine months from now.

You consider different transaction hedges, namely forwards, options and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Currencies	Spot	3 month (90 days)	6 month (180 days)	9 month (270 days)	12 month (360 days)
$/CAD	0.76465	0.76559	0.77475	0.76748	0.76843
$/AUD	0.72390	0.72516	0.72641	0.72766	0.72892

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Country	3 month rates		6 months rates		9 month rates		12 month rates
	Borrow	Invest	Borrow	Invest	Borrow	Invest	Borrow	Invest
United States	2.687%	2.554%	2.713%	2.580%	2.740%	2.607%	2.766%	2.633%
Canada	2.177%	2.069%	2.198%	2.090%	2.220%	2.112%	2.241%	2.133%
Australia	1.973%	1.875%	1.992%	1.894%	2.012%	1.914%	2.031%	1.933%

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Currencies	3 month options				6 month options
	Call option		Put option		Call option		Put option
	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $
$/CAD	$0.76292	$0.00392	$0.76828	$0.00392	$0.77205	$0.00387	$0.77747	$0.00387
$/AUD	$0.72155	$0.00690	$0.72843	$0.00690	$0.72279	$0.00688	$0.72969	$0.00688

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

a. Calculate the cost of money market hedges for the imports from Australia (Complete Table 3 on the separate answer sheet)

Table 3: Australia import cost with money market hedge:

	PV of foreign currency to be invested	Converted at spot to $ and to be borrowed	$ amount to be repaid after period	Exchange rate locked in with transaction
Show answers in this row:
Show your workings in the columns below the answers

Answer 1

AUD 2,500,000 to be paid 6 months from now
The amount of AUD required now for paying after 6 months is the present value of AUD 2500000
The Period				6	months
Applicable Discount rate (1.894%/2)				0.9470%
Therefore PV of AUD to be invested in Australia for 6 months						= 2500000x(1/(1+0.947%))
	PV of Foreign curreency to be invested					=	2,476,547.099	AUD
Conversion of AUD 2476547.099 to USD at 0.72390 $/AUD   =						=AUD 2476547.099 x 0.7239 $/AUD
Conversion at Spot to $ and to be borrowed					=	$       1,792,772.44
The Borrowing Interest rate for 6 months in US					2.713%
The amount of USD to be repaid after period					= 1792772.44x(1+ 2.713%/2)
					=	$ 1,817,091.4032
	The locked in exchange rate				= (The $ amount to be repaid )/ (The AUD amount received from Investment)
					= $ 1817091.4032/ AUD 2500000		or	$ 0.72684	$ / AUD