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You work for a US company that imports products from a Chinese factory.
You work for a US company that imports products from a Chinese factory.
- The US company received an invoice from the Chinese factory requesting a payment in the amount of CNY 100,000,000 due 90 days from today
CNYUSD Spot Rat is
Today's Spot Rate:
Dec. 11, 2018 Actual
Spot Rate = USDCNY 6.90566
Inverse Spot Rate = CNYUSD 0.1448
I CNY = 0.144813 USD
CAD 100,000,000 = USD 14,480,000
The 90-day Forward Rate is
3 Month Forward Rate
MAR. 11, 2019 Forecast
Remember, USD is not the base
1 CNY = USD 0.144813
Inverse Forecasted Spot Rate = CNYUSD 0.1445
CNY 100,000,000 = USD 14,450,000
The implied Chinese 3 month interest rate is
Spot Rate x ((1+ implied Chinese interest rate) / (1+ US interest rate)) = Forward Rate
Spot Rate x (1 + x) / (1+ 0.0235) = Forward Rate
0.1448 x (1 + x) / (1 + 0.0235) = 0.1445
0.1448 + 0.1448 x / 1.0235 = 0.1445
0.1448 + 0.1448 x = 0.1445 * 1.0235
0.1448 x = 0.1478 - 0.1448
X = 0.00309 / 0.1448
X = 0.0213397 or 2.13%
· Actual 3-month US Treasury Bill rate = 2.35%
· Implied 3-month Chinese interest rate =
4) To execute a Money Market Hedge, the Present Value of the CNY 100,000,000 payable is
PV of the foreign currency payable is
Chinese Treasury Bill 3 Month December 11, 2018: 2.13%
In 90 days, CNY 100,000,000 is due and payable
· What is the PV of CNY 100,000,000, at 2.13% rate?
· FV / (1 + Rate) = PV
· 100,000,000 / 1.0213 = CNY 97,914,422
CNY 97,914,422 today equals this value of USD today
Use Inverse Spot Rate = CNYUSD 0.1448
· CNY 97,914,422 x 0.1448 = USD 14,178,008
· Withdraw USD 14,178,008 from US bank account
· Convert to CNY 97,914,422
· Deposit CNY 97,914,422 into Chinese bank, investing in a 3-month Chinese Treasury Bill paying 2.13%
· Over the next 90 days the CNY 97,914,422 deposit will grow 2.13% to CAD 100,000,000
o 97,914,422 x 1.0213 = 99,999,999.2
· Withdraw CNY 99,999,999.2 from the Chinese bank on Mar. 11, 2019
· Pay the Chinese factory the CNY 99,999,999.2 on Mar. 11, 2019
The USD value today of the CNY value is
1 USD = 6.90566 CNY
1 CNY = 0.144813 USD
· CNY 97,914,422 x 0.1448 = USD 14,178,008
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