Managing transaction risk
Assume the following:
The current exchange rate for the Chinese yuan is 6.3159.
The 120-day US interest rate is 2.125%.
The 120-day Chinese interest rate is 4.35%.
The 120-day forward rate for Chinese yuan is 6.3464.
A US firm is required to make a payment of ¥1,000,000 to a supplier in 120 days.
Describe how the firm can hedge the transaction risk associated with the payment using a currency option.
How could the firm hedge the transaction risk associated with this payment by exposure netting or funds adjustment?
How can the firm use leading or lagging to its advantage in connection with this payment?
How would the answers to the previous questions change in the firm expected to receive a payment of ¥1,000,000 in 120 days rather than making a payment?