Using the data provided in Table 1, determine the cost in Chinese yuan (CNY) when employing the forward market hedging strategy.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Masons intends to purchase goods valued at £2.09 million, with payment due in one year. To mitigate the exchange rate risk associated with the £2.09 million payment, Masons is considering the forward market hedging strategy.

Using the data provided in Table 1, determine the cost in Chinese yuan (CNY) when employing the forward market hedging strategy. (Please input the value as a whole number, excluding any signs or symbols).

TABLE 1

 For Chinese yuan (CNY)

 

 Spot rate

 £0.3755/CNY

 One-year forward rate

 £0.5381/CNY

 One-year CNY deposit and borrowing rate

 8.48%

 One-year call options

 Exercise price = £0.52

 Premium = £0.03

 One-year put options

 Exercise price = £0.58

 Premium = £0.06

 

 

For British Pound (£)

 

 Spot rate

 CNY3.5909/£

 One-year forward rate

 CNY1.918/£

 One-year £ deposit and borrowing rate

 4.71%

 One-year call options

 Exercise price = CNY1.64

 Premium = CNY0.17

 One-year put options

 Exercise price = CNY1.65

 Premium = CNY0.14

Expert Solution
Step 1: Analysing the question.

To determine the cost in Chinese yuan (CNY) when employing forward market hedging strategy, we can calculate it using forward rate. 

The forward rate is £0.5381/1 CNY for one year.

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