International Finance: Analyzing Currency Risk for Xinjiang Company

This assignment analyzes the currency exchange risk faced by Xinjiang, a company making payments in USD while based in China. It evaluates different hedging strategies, including forward rates, interest rates, and put options, to mitigate the risk of currency fluctuations. The analysis includes detailed calculations of potential gains and losses associated with each strategy, considering factors like spot rates, premiums, and interest received. The assignment recommends the use of option trading to generate higher revenue, and argues that managing foreign exchange risk is crucial for companies like Xinjiang to reduce losses and maintain profitability. The analysis also depicts the unrealized gains/losses faced by Xinjiang and whether the company should remain unhedged or not.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
a) Analysing the different alternatives:......................................................................................2
b) Justifying the recommendations:...........................................................................................4
c.i) Depicting the unrealised gain/loss faced by Xinjiang through the recommendations:........6
c.ii) Depicting the how the overall unrealised gain or loss happed in each period of
settlement:..................................................................................................................................7
d.i) Depicting whether managing the overall foreign exchange risk is worth the amount of
effort required:...........................................................................................................................8
d.ii) Depicting whether a company like Xinjiang should choose to remain unhedged:............8
Reference and Bibliography:....................................................................................................10

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a) Analysing the different alternatives:
Particulars Value
Total paid amount 50,000,000
Paid in December 2017 25,000,000
Paid in June 2018 25,000,000
Spot value 168,118,750
Paid in December 2017 165,583,750
Loss in currency exchange (2,535,000)
Spot value 168,118,750
Paid in June 2018 155,688,750
Loss in currency exchange (12,430,000)
Particulars Value
Total paid amount 50,000,000
Paid in December 2017 25,000,000
Paid in June 2018 25,000,000
Paid in December 2017 168,118,750
Paid in June 2018 168,118,750
Total amount to be paid in spot 336,237,500
U.S. 180-day interest rates 4.000%
Interest received 500,000
Paid in December 2017 25,000,000
Total amount received from bank 25,500,000
180-day Forward 25,382,737

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Profit from exchange of December 117,263
U.S. One year interest rates 4.255%
Interest received 1,063,750
Paid in June 2018 25,000,000
Total amount received from bank 26,063,750
360-day Forward 26,995,970
Loss from exchange of December (932,220)
Total loss from currency exchange (814,956)
Particulars Value
Total paid amount 50,000,000
Paid in December 2017 25,000,000
Paid in June 2018 25,000,000
Spot Exchange rate 6.72475
180-day Put Option 6.650
premium 0.05
180-day Forward 6.623
Profit from risk exchange 0.05
Profit from risk exchange 1,285,000
Paid in December 2017 25,000,000
Payment 25,382,737
Profit from exchange 902,263
Spot Exchange rate 6.72475

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360-day Put Option 6.25
premium 0.04
360-day Forward 6.228
Profit from risk exchange 0.46
Profit from risk exchange 11,430,000
Paid in June 2018 25,000,000
Payment 26,995,970
Profit from exchange 9,434,030
Total profit from exchange 10,336,294
b) Justifying the recommendations:
The evaluation of all the above tables could mainly help in depicting the relevant
recommendations, which might be used in reducing the currency exchange rate for Xinjiang.
In addition, the overall profits, which could be identified from the operations mainly depicts
the overall profits that might be generated from operations. There are three different types of
options, which could be conducted by Xinjiang for effectively reducing the overall risk of
currency exchange. Moreover, relevant payment needs to be paid in conducted in two
different dates, which is December and June. The overall strategies have different types of
losses and profits, which could be generated from operations. Hence, the evaluation of overall
options could eventually help in identifying the relevant options to reduce risk from
operations. However, from the relevant options the forward rate, interest rate and option
strategies could be evaluated, which could be used in reducing the risk from exchange.
Avdjiev, McCauley and Shin (2016) mentioned that use of adequate measures of hedging
could eventually help in reducing risk and improve profitability. On the other hand, Borio,

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Gambacorta and Hofmann (2017) criticises that hedging could increase risk, when investors
are not able to comprehend risk affecting operations.
In addition, the overall valuation and calculation mainly help in identifying the most
viable investment options, which could be adopted by Xinjiang for reducing the risk of
payments. Hence, the use of forward rate hedging process has mainly portrayed a relevant
loss for Xinjiang, as it might not be able to reduce the risk from currency expense if payment
is conducted on December and June. This relevant forward rate exchange methods could fix
currency value for Xinjiang. Moreover, use of forward rate might increase ht overall loss
from operations, as Xinjiang will need to pay $2,378,706 extra for purchases that is
conducted for rail cars. This relevant use of forward rate could eventually fix the overall
payments that will be conducted for the contract. Borst and Lardy (2015) mentioned that
forward rate mainly focus the overall payments, where any benefits or loss opted from the
currency exchange will mainly be avoided.
Moreover, the use of exchange currency by utilising the swap method could mainly
provide relevant loss due to increased risk from operations. The total increased USD value
that will be paid by implementing the swap strategy is $814,956. This hedging strategy will
not able to provide relevant coverage and only reduce the profits generated from currency
exchange. Chinn and Kucko (2015) stated that, the use of swap strategy could only help in
reducing risk and compensating for the loss until it comes under the interest that is provided
by the bank any increment in loss excess of the overall interest paid by the banks will directly
increase risk of the currency exchange. This could mainly been seen on 180 day interest rate
and 360 day interest rate, where the 180 day interest payment directly compensate the
calculation in currency value. However, the 360 day interests were not able to compensate
with the relevant change in currency calculations where relevant loss from operations could
be identified.

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However, the use of option hedging procedure could eventually help in reducing the
relevant risk from current fluctuations. The use of put option could eventually help in
reducing the overall risk of Xinjiang to support its payment in USD. Therefore, relevant
income from the use of options could provide a return of 10,336,294. Hence, it is
recommended that use of option trading could be eventually help in generating higher
revenue from operations.
c.i) Depicting the unrealised gain/loss faced by Xinjiang through the recommendations:
Particulars Value
Total paid amount 50,000,000
Paid in December 2017 25,000,000
Paid in June 2018 25,000,000
Premium 0.05
loss from operations 1,250,000
Spot value 6.8255
Loss from exchange 183,137
Actual cash 25,000,000
Payment on exchange 25,183,137
Premium 0.04
loss from operations 1,000,000
Spot value 6.95
Loss from exchange 143,885
Actual cash 25,000,000

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Payment on exchange 25,143,885
Total payment 50,327,022
Actual intended payment 50,000,000
Extra premium payment (loss in USD) 327,022
c.ii) Depicting the how the overall unrealised gain or loss happed in each period of
settlement:
The relevant unrealised loss was mainly due to the increment in value of USD, which
relevant nullified the overall profit generated from put option. This put option was mainly
conducted due to the relevant payment system that was needed by Xinjiang. The overall
increment in value of USD was mainly the reasons where the company was fully hedged in
its payment. However, the only increment in loss was due to the premium, which was needed
to be paid by Xinjiang. Nevertheless, the unrealised loss was mainly due to the premium
payment that needs to be paid by Xinjiang, as it helps in reducing the overall risk from
investment.
The overall USD payment is mainly conducted for the rail products, which mainly
amount of 50 million. However, the overall payment needs to be hedged, as the payment is
conducted on USD, where the exchange rate could change with time. Moreover, the overall
premium payment is mainly conducted to hedge the currency exposure of Xinjiang. Frieden
(2015) stated that with the use of option pricing companies are mainly able to hedge their
currency exposure, while investing the least amount of money from their operations.

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d.i) Depicting whether managing the overall foreign exchange risk is worth the amount
of effort required:
The relevant statement, whether management of overall exchange risk is worth the
effort is relevantly true, as with the hedging process loss generated by the company could be
reduced. The overall foreign currency hedging mainly allows the organisation to adequately
reduce the loss from transaction, if pricing of the currency fluctuates to undesirable levels.
The relevant hedging of the foreign exchange currency could mainly reduce the overall
excess damage, which might be conducted by the fluctuation on the exchange currency. The
overall foreign exchange risk could mainly be reduced with the help of hedging process, as
companies make decision on specific day, where currency rate is determined. This overall
hedging process mainly reduces the overall estimated of loss, which might be conducted due
the fluctuations in currency deviation from the actual estimated price. The companies while
making relevant decisions on the currency exchange could mainly help in reducing losses
from operations (Frisari and Stadelmann 2015).
The overall transaction that needs to be conducted by the company could mainly be
reduced with the help of hedging strategy, as it might fix the currency exchange value,
whereas fixing the overall cost of the product. Without the hedging procedure the companies
are not able to reduce risk from currency exchange, as the cost of the project might increase,
while invalidating the project. The relevant hedging method could eventually allow the
company to fix the actual cost of expenses conducted for the operations (Giordano, Pericoli
and Tommasino 2013).
d.ii) Depicting whether a company like Xinjiang should choose to remain unhedged:
From the overall valuation of the current position of Xinjiang it could be identified
that the company directly conducts purchases in USD, which might increase currency

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conversion risk. In addition, the overall conversion risk could mainly help in reducing the
overall profitability that might be generated from operations. The company directly purchase
equipment of higher value like 50 million in a particular year. This payments is mainly
conducted in USD, while the company is situated in China. Therefore, the conversion of the
Chinese currency into USD is the main operation, which might increase losses for the
organisation. Hence, the use of hedging process could eventually help in reducing the overall
conversion risk that is haunting operations of the company. The no hedging policy might
directly hamper operational capability of the organisation. In addition, from the overall
evaluation of the case study weakness in USD can be identified, which is hampering the
conversion rate of Xinjian. Therefore, if the company does not hedge its foreign currency
exposure then the company will face higher cost for its products, which could be seen in the
above calculations. However, the change in value of USD was relatively declines in
comparison to the Chinese currency, which directly reflects the use of hedging procedure that
needs to be conducted by Xinjian. Moffett, Stonehill and Eiteman (2017) mentioned that use
of adequate hedging process allows the organisation to reduce loses, which might be
conducted from currency conversion.

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Reference and Bibliography:
Avdjiev, S., McCauley, R.N. and Shin, H.S., 2016. Breaking free of the triple coincidence in
international finance. Economic Policy, 31(87), pp.409-451.
Borio, C., Gambacorta, L. and Hofmann, B., 2017. The influence of monetary policy on bank
profitability. International Finance, 20(1), pp.48-63.
Borst, N. and Lardy, N., 2015. Maintaining Financial Stability in the People’s Republic of
China during Financial Liberalization. Peterson Institute of International Finance. WP 15-4
March 2015.
Chinn, M. and Kucko, K., 2015. The predictive power of the yield curve across countries and
time. International Finance, 18(2), pp.129-156.
Frieden, J., 2015. Banking on the world: the politics of American international finance.
Routledge.
Frieden, J., 2016. The governance of international finance. Annual Review of Political
Science, 19.
Frisari, G. and Stadelmann, M., 2015. De-risking concentrated solar power in emerging
markets: The role of policies and international finance institutions. Energy Policy, 82, pp.12-
22.
Giordano, R., Pericoli, M. and Tommasino, P., 2013. Pure or Wake‐up‐Call Contagion?
Another Look at the EMU Sovereign Debt Crisis. International Finance, 16(2), pp.131-160.
Gomes, S., Jacquinot, P., Mohr, M. and Pisani, M., 2013. Structural reforms and
macroeconomic performance in the Euro Area countries: a model‐based
assessment. International Finance, 16(1), pp.23-44.