You have entered into a CNY denominated contract for the sale of goods with a business partner in China, where it is agreed that you shall receive a payment of CNY500,000 after six months. Since the purchase cost of your goods will be settled in US dollars, you would like to lock the CNY exchange rate to ensure that the sales proceeds will not be affected by exchange rates. You may hedge against any risk of depreciation of CNY during the 6-month period by entering into a 6-month CNY NDF with the Bank to purchase USD62,774.64 at a CNY forward rate of 7.9650 (see below).
On the valuation date, the cash settlement can be one of the following scenarios:
Settlement currency amount (USD)
Scenario 1: CNY depreciation
+1,046.24 (Amount payable to the Bank by you on the settlement date
Settlement currency amount > 0: As you are buying USD under your CNY NDF, you will make a profit from your CNY NDF, which can compensate for your loss for having to sell CNY at a lower spot rate.
Scenario 2: CNY unchanged
There is no loss or gain under your CNY NDF. You may buy CNY at the spot rate.
Scenario 3: CNY appreciation
-919.63 (Amount payable by you to the Bank on the settlement date)
Settlement currency amount <0: As you are buying USD under your CNY NDF, you will suffer a loss from your CNY NDF. However, you may sell CNY at a higher spot rate.
The above information and hypothetical examples are for reference only and are not a complete analysis of all the possible gain or loss scenarios in an actual investment. You must not make any investment decision based upon the above information.
Remark: All forward rates, settlement rates and exchange rates used in the above examples are expressed as the number of units of the CNY required to purchase one unit of USD.
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