Reference no: EM131859577
1) The current Nov. ’17 forward rate for the Chinese Yuan (CNY) against the U.S. Dollar ($) is CNY 6.7/$. Your firm has a large expense in China coming up (CNY 3 million) and you want to lock in your dollar cost.
a. What is the current dollar cost of the expense?
b. What kind of future do you want to take out (CNY to $ or $ to CNY)?
c. Suppose that this transaction is denominated in Yuan, and the future is not deliverable. That is, the future is cash-settled. What is the notional value of the future you would ideally like? For future questions, assume that you can have this exact amount.
d. If the true exchange rate at maturity is CNY 0.14/$, what will be the profit or loss in yuan?
e. What will be the profit or loss in dollars?
f. What is the total number of dollars you owe when combining your expense and the profit/loss from the future?
g. Make two payoff graphs. The first is the payoff of this future denominated in yuan. The second is the payoff of this future denominated in dollars. The y-axis of these graphs should be the payoff and the x-axis should be the eventual spot rate. Plot values at least from an eventual spot rate of CNY5/$ and CNY8/$. (Note: This will require doing steps (e) and (f) above for many values between 5 and 8).
h. You should notice that one of these graphs is not linear. Which one is it and why is this true? How can you transform the graph so that it becomes linear?