You work in China and your company is sending you to the U.S. for a business tri

Question

You work in China and your company is sending you to the U.S. for a business trip. The current spot rate for the U.S. dollar is $.16226/?1(CNY - Chinese Yuan Renminbi). The company will give you?735/day for expenses for each of the 10 days you are traveling. You will be traveling in the U.S. in 3 months and you believe the dollar will gain value against the CNY. The three month forward rate for the U.S. $ is $.15833/?1.

1. If you buy a futures contract now to purchase U.S. $ in three months when you receive the travel money from the company, how much will you receive in U.S. $ in three months (ignore currency exchange fees)?

2. The spot rate when you travel to the U.S. is $.1506/? 1. How much extra spending money in $ do you end up with by hedging the currency and buying the futures contract?

Explanation / Answer

1. Total money in yuan (10 days earnings) = 735*10 = 7350

forward rate = $0.15833/1 yuan

thus $s received after 3 months = 0.15833*7350 = 1,163.7255 ~ $1,163.73

2. Spot rate = $.1506/1

$s at spot rate = 0.1506*7350 = $1,106.91

Extra money earned due to hedging with forward contract = 1163.73 - 1106.91 = $56.82

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