You operate a business in Australia that frequently trades with partners in China. As a...
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You operate a business in Australia that frequently trades with partners in China. As a result, you often receive payments denominated in Renminbi (RMB), and occasionally you pay bills in RMB. This exposes you to foreign exchange risk, therefore you make use of forward contracts to manage this risk. The spot exchange rate between AUD and RMB is RMB1.0000 = AUD0.1989. The riskfree rates of interest in Australia and China are 2% and 4% respectively (continuously compounded).
1. The 6-month forward rate for the delivery of RMB six months from today is RMB1.0000=AUD__________. Round your answer to four decimal places or you will be incorrect.
2. Suppose that the forward exchange rate you observe is RMB1 = AUD0.1900. Then to make arbitrage profit you should
a. Borrow RMB and convert to AUD at the forward rate to make a profit
b. Borrow RMB, convert it to AUD at the spot rate, invest the accumulated AUD in Australia for 6 months, and enter a six-month forward contract to sell the accumulated AUD
c. Borrow AUD and convert it to RMB at the forward rate to make a profit
d. Borrow AUD, convert it to RMB at the spot rate, invest the resulting RMB in China for 6 months, and enter a six-month forward contract to sell the accumulated RMB
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