Considering the calculations you have done so far, you need toattend to a number of import and export transactions for goods thatcompanies in the United States expressed interest in.

The first transaction is for the import of goodquality wines from Australia, since a retail liquor trading chaincustomer in the United States, for who you have been doing importsover the past five years has a very large order this time. Theproducer in Australia informed you that the current cost of thewine that you want to import is AUD$2,500,000. The producer inAustralia will only ship goods in three months’ time due toseasonal differences but payment will have to be conducted sixmonths from now.

The second transaction is for the export of 3dprinters manufactured in the U.S.A. The country where it will beexported to is Canada. The payment of CAD 2,500,000 for the exportto Canada will be received nine months from now.

You consider different transaction hedges, namely forwards,options and money market hedges.

You are provided with the following quotes from your bank, whichis an international bank with branches in all the countries:

Forward rates:

Currencies	Spot	3 month (90 days)	6 month (180 days)	9 month (270 days)	12 month (360 days)
$/CAD	0.76465	0.76559	0.77475	0.76748	0.76843
$/AUD	0.72390	0.72516	0.72641	0.72766	0.72892

Bank applies 360 day-count convention to all currencies (forthis assignment apply 360 days in all calculations).

Annual borrowing and investment ratesfor your company:

Country	3 month rates		6 months rates		9 month rates		12 month rates
	Borrow	Invest	Borrow	Invest	Borrow	Invest	Borrow	Invest
United States	2.687%	2.554%	2.713%	2.580%	2.740%	2.607%	2.766%	2.633%
Canada	2.177%	2.069%	2.198%	2.090%	2.220%	2.112%	2.241%	2.133%
Australia	1.973%	1.875%	1.992%	1.894%	2.012%	1.914%	2.031%	1.933%

Bank applies 360 day-count convention to all currencies.Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This isthe annual borrowing rate for 3 months. If you only borrow for 3months the interest rate is actually 2.687%/4 = 0.67175% (alwaysround to 5 decimals when you do calculations). Furthermore,note that these are the rates at which your company borrows andinvests. The rates are not borrowing andinvestment rates from a bank perspective.

Option prices:

Currencies	3 month options				6 month options
	Call option		Put option		Call option		Put option
	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $	Strike	Premium in $
$/CAD	$0.76292	$0.00392	$0.76828	$0.00392	$0.77205	$0.00387	$0.77747	$0.00387
$/AUD	$0.72155	$0.00690	$0.72843	$0.00690	$0.72279	$0.00688	$0.72969	$0.00688

Bank applies 360 day-count convention to all currencies.(Students also have to apply 360 days in all calculations). Optionpremium calculations should include time value calculations basedon US $ annual borrowing interest rates for applicable time periodse.g. 3 month $ option premium is subject to 2.687%/4 interestrate.)

a. Calculate the cost of money market hedges for the importsfrom Australia (Complete Table 3 on the separateanswer sheet)

Table 3: Australia import cost with money market hedge:

	PV of foreign currency to be invested	Converted at spot to $ and to be borrowed	$ amount to be repaid after period	Exchange rate locked in with transaction
Show answers in this row:
Show your workings in the columns below the answers