[6 points] You have started an international business and buy some of your produ

Question

[6 points] You have started an international business and buy some of your products from China. The Chinese company requests to be paid in Yuan (CNY). You recently placed an order costing 100,000CNY that requires payment in one month.

If the spot rate for CNY is currently $.16137/CNY, how much would you pay in $ today for the product?

If the Yuan is devaluing against the dollar, would you want to hedge this situation? Why or why not?

If the 30 day forward rate is $.16005/CNY, how much would you pay in $ for the products if you had purchased a 30 day futures contract and locked in the forward rate?

Explanation / Answer

a. Spot Rate = $ 1.6137/CNY

This implies 1 CNY = $ 1.6137

Payable in dollars = 1.6137* 100,000 = $ 161,370

b. If yuan devalues against the dollar, this means that the you can get more Yuan in exchange of a dollar. This will bring down the dollar outflow and hence no hedging should be done in such a case.

c. Forward rate = $ 1.6005/CNY

Payable 30 day forward = 100,000*1.6005 = $ 160,050

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