You operate a business in Australia that frequently imports goods from partners in China. As a result, you often need to

[answerhappygod]

You operate a business in Australia that frequently imports
goods from partners in China. As a
result, you often need to make payments denominated in Renminbi
(RMB). This exposes you
to foreign exchange risk, therefore you make use of option
contracts to manage this risk. The
spot exchange rate between AUD and MB is RMB1.0000 = AUDO.2200. The
riskfree rates of
interest (continuously compounded) in Australia and China are 2%
and 4% respectively. The
volatility of the MB/AUD exchange rate is 10% pa.
In this particular case you are expecting a shipment of goods from
China in three (3) months'
time and you will need to pay RMB1,000,000 for the goods. You
decide to use an at-the-money
spot (Strike price is RMB1=AUD0.2200) 3-month maturity option to
hedge your exposure.
1. In this particular case your business is exposed to
of the RMB.
2. One strategy you could use to hedge your exposure to currency
risk is to purchase a
option on RMB1.000.000
3. Using the BSM model for currency options (the Garman-Kohlhagen
model), the cost of this
option is AUD
Give your answer as a whole number to the nearest dollar.
4. Suppose in three months time the exchange rate is
RMB1=AUDO.2500. Then the total cost
in AUD (including the cost of the option-ignore the time
differential between payment of the
option premium and payment for the goods) is AUD
Give your answer as a whole number to the nearest
dollar.
DO NOT put dollar signs or commas in any of your numerical
answers.