You have started an international business and buy some of your products from ch

Question

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 10,000CNY that requires payment in one month. Consider each situation separately.

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

b. If the Yuan is devaluing against the dollar, would you want to hedge this situation? why?

c. What is the purpose and/or advantage of currency hedging?

Explanation / Answer

a) We have to pay in $16137 today for the product.

b) Yes we will hedge if yuan is devaluing agaist the Dollar because to offset the risk.

c)Purpose for currency hedging is to minimize and control the risks involved in foreign investment, particularly one that relates to foreign currency trading. This strategy aims to compensate for any movement in the value of the currency being used in the investment portfolio.

Advantage of Currency Hedging are:

1) The main advantage of this investment approach is to help reduce the risks and losses of the investor.

2) Hedging currencies can provide investors with more leverage when they put money in the very risky Forex

market.

3)Protect against inflation, interest rate changes, commodity price volatility and currency exchange rate

fluctuations

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