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Haier-China can borrow fund in China with an interest rate of 11
Haier-China can borrow fund in China with an interest rate of 11.08% to invest 1.69 million Australian dollars (A$) and expected return of A$1.93 million next year. Assume that Haier-China and Biopharma-Australia engages in a parallel loan in which the Biopharma-Australia gives Haier-China A$1.69 million in exchange for a loan in Chinese yuan (CNY) at the current exchange rate CNY3.7494/A$. These loans will be repaid by both parties at the end of one year. Assume that next year, Haier-China will pay Biopharma-Australia 14.24% interest on A$1.69 million and that the Biopharma-Australia will pay Haier-China 7.10% interest on the Chinese yuan loan. Also, Haier-China believes that the A$ will depreciate to CNY3.3823/A$ next year. How much the Haier-China will make a profit or loss in CNY from this parallel loan agreement in one year. (enter the whole number with no sign or symbol)
Expert Solution
Given Information
|
Interest rate for loan in CNY |
11.08% |
|
|
Tenure |
1 |
year |
|
Amount required in A$ |
1,690,000 |
A$ |
|
Current exchange rate |
3.7494 |
CNY/A$ |
|
Exchange rate after 1 year |
3.3823 |
CNY/A$ |
|
Return receive by Haier in A$ in 1 year |
1,930,000 |
A$ |
|
Interest charged to Haier on A$ loan |
14.24% |
|
|
Interest charged to Biopharma on CNY loan |
7.10% |
The loan transaction under parallel agreement taking place today and its settlement after 1 year are as follows -
|
Transaction |
T=0 |
T= 1 Year |
Remark |
|
AUD loan taken by Haier from Biopharma |
CF = +A$ 1,690,000 Haier takes A$ 1.69 loan from Biopharma for 1 year at 14.24% interest |
CF = 1,930,000 – 1,690,000 – 240,656 = -A$ 656 In CNY, Loss = -A$656*3.3823 CNY/A$ = (2,219) CNY (Loss) Haier receives return of A$ 1.93 m, repays the loan to Biopharma with interest. |
Interest in A$ = 1690000*0.1424 = 240,656 Exchange rate at T=1 = 3.3823 CNY/A$ |
|
CNY loan given by Haier to Biopharma |
CF = + 6,336,486 - 6,336,486 = 0 Haier takes CNY 6.34 m loan in china at 11.08% and in turn loans it out to Biopharma at 7.10% |
CF = + (6,336,486 + 449,891) – (6,336,486+ 702,083) = (252,192) CNY (Loss) Hair gets the loan back from Biopharma with interest @ 7.10% and in turn return it to Chinese lender @11.08% |
Exchange rate today = 3.7494 CNY/A$ Loan amount in CNY to Biopharma = 1690000 * 3.7494 = 6,336,486 Interest received by Haier = 6,336,486 * 0.071 = 448,891 Interest paid by Haier = 6,336,486 * 0.1108 = 702083 |
So, Total Loss made by Haier in CNY = -2219 – 252192 = -CNY 254,411
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