Question

1. TY is planning to pay $1 billion US dollar to acquire an important asset at the end of this year. it has two concerns: (1) The market is expecting the appreciation of US dollar, therefore, the exchange rate of US dollar to RMB might appreciate from current 7.0 RMB/USD to 7.5 RMB/USD at the end of this year.(2) risk of getting sufficient money to pay and might need financing. Please design the derivates to TY and provide suggestions for financing.

Answer 1

When Appreciation in foreign currency is expected, It is better for the TY to enter into a dollar forward buying contract and lock the exposure which would decrease the risk of currency appreciation. Another derivative contract that TY can enter into is Options i.e., buy a dollar currency call option or write an RMB put option at a particular strike price thereby limiting the currency exposure risk to a constant level.

The major financing sources that TY could opt for are raising money from the public by issuing shares or debenture, getting loans from public financial institutions, getting investments from venture capitalists, hedge funds, angel investors. TY Can also go for leasing out the asset instead of buying it which can reduce the current exposure.

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