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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