Hedging Strategies for Australian Firms in China
Added on 2020-05-16
10 Pages2335 Words112 Views
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Running head: INTERNATIONAL FINANCEInternational FinanceName of the Student:Name of the University:Authors Note:
INTERNATIONAL FINANCE1Table of Contents1. Explaining how you would decide between the two alternatives:.........................................22. Explaining the structure to swap transaction today:..............................................................23.a Assuming that interest rate parity exists and depict whether hedging with forward ratewill be beneficial:.......................................................................................................................33.b Explaining whether money market hedge be beneficial if spot rate is expected to decline:43.c Depicting whether the Chinese Yuan will appreciate or decline assuming the real interestrate:.............................................................................................................................................43.d Explaining how business would like to be affected if Chinese interest rate are lowered:...53.e Depicting whether Chinese interest rate will not entice Australian investors:.....................64.a Explaining whether relevant concern should be conducted regarding the exposure:..........64.b Explaining and illustrating other instruments that can be used in hedging future cashremittance to Australia:..............................................................................................................7Reference:..................................................................................................................................9
INTERNATIONAL FINANCE21. Explaining how you would decide between the two alternatives:From the valuation it could be identified that funds accumulated in China need to beestimated by the company to identify how much profit will be obtained from the investmentsin Chinese interest rate. Estimation of the overall profits needs to be conducted to identify thereturns that will be generated after one year. Interest rates in China a relatively high, whichcould provide the company with fixed amount of return. However, without the estimation ofthe actual profits expenses conducted in next fiscal year will not be possible. the secondoption is relatively to invest in US coco bonds, which has a steady rate of coupon paymentconducted each year. The overall profits obtained in China needs to be converted to US dollarwhere adequate currency exposure is present. In addition, after the completion of the bondreturns needs to be c converted in Chinese currency for the organization to utilize it in nextfiscal year.Nevertheless, ignoring the US bond is much more profitable, as currencyconversion risk is relatively present in continuing this method. Therefore, the companyshould invest in Chinese interest rates, which has a fixed return and are not hindered orinfluenced by external forces.2. Explaining the structure to swap transaction today:The currency swap transaction is mainly an adequate measure for reducing thedepreciation on specific currency. The Australian company could eventually use the currencyswap to adequately support its Chinese subsidiary in their operations. The Australiancompany can take out a loan in China with the help of Chinese company for the amountneeded by the Chinese subsidiary. This amount will directly be delivered to the Chinesesubsidiary for smoothening their operations. On the same instance, relevant deposits needs tobe conducted in Australian Bank to accumulate adequate interest from the deposit. Thismessage mainly needs an arbitrary bank, which helps the organization to adequately acquire
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