Suppose that two counterparties, A and B, enter a three-month forward contract on January 1st, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On March 1st, A decides it no longer needs to buy USD1 million on 31 March, so it enters a one-month forward contract to sell USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. a) Calculate the net cost to counterparty A, before transaction costs. b) Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. ?_0 (EUR/AUD) 0.60 Se (EUR/AUD) 0.50 (0.3) and 0.65 (0.7) Premium on AUD call option R = EUR0.02 Exercise exchange rate E = 0.62 Time to expiry 3 months 1) What is the expected spot rate? 2) What is the expected value of payables in AUD under hedge? 3) Will the option to hedge be undertaken on the basis of expected spot rate? Explain.
Suppose that two counterparties, A and B, enter a three-month forward contract on January 1st, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On March 1st, A decides it no longer needs to buy USD1 million on 31 March, so it enters a one-month forward contract to sell USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C.
a) Calculate the net cost to counterparty A, before transaction costs.
b) Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months.
|
?_0 (EUR/AUD) |
0.60 |
|
Se (EUR/AUD) |
0.50 (0.3) and 0.65 (0.7) |
|
Premium on AUD call option |
R = EUR0.02 |
|
Exercise exchange rate |
E = 0.62 |
|
Time to expiry |
3 months |
1) What is the expected spot rate?
2) What is the expected value of payables in AUD under hedge?
3) Will the option to hedge be undertaken on the basis of expected spot rate? Explain.
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