The first transaction is forthe import of good quality wines from Australia, since a retailliquor trading chain customer in the United States, for who youhave been doing imports over the past five years has a very largeorder this time. The producer in Australia informed you that thecurrent cost of the wine that you want to import is AUD$2,500,000.The producer in Australia will only ship goods in three months’time due to seasonal differences but payment will have to beconducted six months from now.

The second transaction is forthe export of 3d printers manufactured in the U.S.A. The countrywhere it will be exported to is Canada. The payment of CAD2,500,000 for the export to Canada will be received nine monthsfrom 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 andinvestment rates for yourcompany:

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 whichyour company borrows and invests. The rates arenot borrowing and investment rates from a bankperspective.

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.)

Canada exchange rate hedgescompared:

	Forward rate	Money market hedge locked in exchangerate
$/CAD

Which hedging technique should be applied?____________________________________

Value of the forwardposition

Show answer in this row: ($ loss or gain for long/short position in forward)
Show your workings in the columns below the answers