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Suppose you are in the business of importing and exporting in India. You want to hedge your transaction exposure. You explore various alternatives and gather the following information:

Interest Rates are as follows:

iINDIA $=7\mathrm{.}63\%$ per year

iCHINA$=11\mathrm{.}25\%$ per year

Foreign Exchange $($spot and forward$)$ rates are as follows

Foreign Exchange $($FX$)$ Rate: $($INR$/$CNY$)$

Today$($Spot$)$

$1-$Month

$2-$Month

$3-$Month

$4-$Month

$6-$Month

$1-$year

$1\mathrm{.}3025$

$1\mathrm{.}2986$

$1\mathrm{.}2948$

$1\mathrm{.}2910$

$1\mathrm{.}2873$

$1\mathrm{.}2801$

$1\mathrm{.}2601$

Option Information

Call Options

Put Options

$4-$month Option

$6-$Month options

$4-$month options

$6-$month options

FX Rate: $($INR$/$CNY$)$

FX Rate: $($INR$/$CNY$)$

FX Rate: $($INR$/$CNY$)$

FX Rate: $($INR$/$CNY$)$

Premium:$0\mathrm{.}0085$

Spot rate: $1\mathrm{.}3025$

Exercise Price: $1\mathrm{.}2910$

St$(1)$:$1\mathrm{.}3150$

St$(2)$: $1\mathrm{.}2850$

Premium: $0\mathrm{.}0065$

Spot rate: $1\mathrm{.}3025$

Strike Price: $1\mathrm{.}2865$

St$(1)$:$1\mathrm{.}3250$

St$(2)$: $1\mathrm{.}2650$

Premium: $0\mathrm{.}0085$

Spot rate: $1\mathrm{.}3025$

Strike Price: $1\mathrm{.}2910$

St$(1)$: $1\mathrm{.}3150$

St$(2)$: $1\mathrm{.}2850$

Premium: $0\mathrm{.}0065$

Spot rate: $1\mathrm{.}3025$

Exercise Price: $1\mathrm{.}2865$

St$(1)$:$\mathrm{.}3250$

St$(2)$: $1\mathrm{.}2650$

Futures Information:

FX Rate: $($INR$/$CNY$)$

Contract Month

Spot Rate

Futures Rate

Today $($April Contract$)$

$1\mathrm{.}3025$

$1\mathrm{.}2825$

$3-$Months Away $($July Contract$)$

$1\mathrm{.}2910$

$1\mathrm{.}2910$

$4-$months away $($August Contract$)$

$1\mathrm{.}2873$

$1\mathrm{.}2873$

$6-$Months away $($October

$1\mathrm{.}2801$

$1\mathrm{.}2801$

Your associated cash flows for export are CNY $1,750,000$ in $4$ months. Conduct a futures hedge for transaction exposure associated with the cash flows gained from export explaining the process and showing your net CF after hedging. Assuming in the future when your receive cash flows, spot rate at that time is $[$St$(1)]$ how do you feel about your hedging decision? Clearly show your steps with formulas where applicable. Explain clearly the process of hedging associated with export along with the cash flows that you are hedging. You will lose points if you do not show process and explain the steps.

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