The a2 Milk Company (ATM) wants to hedge against the foreignexchange (FX) risk of its sales revenue in Chinese Yuan Renminbi(CNY) as the majority of its operating expenses are denominated inNew Zealand Dollar (NZD). The company expects to receive 30 millionin CNY in exactly 6 months.

Required:

1. Suppose that ATM has decided to use a “money market hedge”,i.e., to transform its future CNY revenue into NZD by trading inthe spot CNY/NZD market as well as borrowing/lending NZD and CNY.Using the information provided below, determine the equivalent NZDamount of the company’s revenue (of 30 million CNY) that it willreceive in 6 months, after the company employs the money markethedge. Discuss the procedures that the company should take so as toobtain the NZD-equivalence revenue. Express your answer inthousands with 3 dps.

Spot CNY/NZD FX rates		6M NZD interest rates		6M CNY interest rates
Bid	Ask	Deposits	Lending	Deposits	Lending
4.5496	4.5523	3.20% p.a.	5.25% p.a.	1.55% p.a.	4.35% p.a.

Note: the interest is compounded semi-annually.

2. Now suppose that a local bank offers ATM the followingsix-month CNY/NZD FX rates: 4.5313/4.5649 (bid/ask). Should thecompany conduct a “forward hedge”, i.e., enter a forward contractwith the bank, or go for the “money market hedge” as in part (a)?Support your answer with numerical calculations. Ignore alltransaction costs other than the bid/ask spreads of FX and interestrates.