Your company exports coal to a Chinese company. According to the agreement between the two companies, the Chinese company sends a cheque denominated in Yuan (Chinese currency) at the end of every quarter. You expect to receive the next cheque in two months. The macro-economic indicators predict that the rate of inflation in China will rise substantially over the next two months while it remains unchanged in Australia.

(a) Will the Chinese Yuan appreciate or depreciate against Australian dollar during the next two months? Explain your answer. 

(b) How will the change in exchange rate affect the cash flows of your company? 

(c) Explain how you could use forward market to hedge foreign exchange risk, if any?

Answer rating: 100% (QA)

a Based on the information provided if the rate of inflation in China is expected to rise substantially while it remains unchanged in Australia it is ... View the full answer