16 points) You have started an international business and buy some of your produ

Question

16 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. a. 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? b. c.

Explanation / Answer

a)

Amount in dollars today = 100,000 * 0.16137= $ 16,137

b)

If Yuan in devaluing against dollar, it will be advantageous to you as you now have to pay lesser dollars for the same amount of Yuan. So there is no need to hedge in this case considering better deal for you in the future anyways. However if the dollar is depreciating against Yuan , you may consider entering into a futures contract to hedge the falling dollar.

c)

Dollar value of futures contract = 0.16005 * 100,000 = $ 16,005

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