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Question about hedging A Chinese-based exporter of electronic parts will receive $2,000,000(based on the contract)from a...

Question about hedging

A Chinese-based exporter of electronic parts will receive $2,000,000(based on the contract)from a U.S. importer in one year. The spot exchange rate is ¥6.84/$1. The interest rate in China is 5% and in the US it is 3%. How can the Chinese exporter hedge this payable?

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Answer #1

The chinese exporter can hedge his position by using money market hedge

money market hedge is very simple to understand , since the position is receivables , the exporter has to borrow the present value of receivables in $ denomination At the rate prevailing in US.

later convert those $ into yens by using the spot rate and invest the same for one year in his residence country.

so , that he will receive the yens together with interest equals to 10459223 yen

Calculation Aspects :

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