(a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited,...

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(a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited, a company based in Kenya expects to receive 2 million Euros in one year's time. The existing spot rate of the Euro is KES 120/EUR. The 1-year forward rate of the Euro is KES 121/EUR. The company expects the spot rate of the Euro to be KES 122/EUR in one year. There are 1-year put options on Euros available in the market with an exercise price of KES 123 and a premium of KES 4 per unit. The following money market rates are available: Deposit rate Borrowing rate Kenya Eurozone 8% 5% 9% 6% Required: (i) The cash flow to be received in Kenya Shillings (KES) assuming SPL Limited uses money market hedge. (3 marks) (ii) The cash flow to be received in KES assuming SPL Limited decides to use a put option hedge. (2 marks) (iii) Advise the management on the best strategy to adopt. (1 mark) (c) Douglas Kombo specialises in cross-rate arbitrage. He notices the following quotes: SFr 1.5971/$ Swiss Franc/United States dollar Australian Dollar/United States Dollar = A $ 1.8215/$ Australian Dollar/Swiss Franc Required: A $ 1.440/SFr Arbitrage profit, if any, assuming Douglas has $1,000,000 to invest. (5 marks) (d) The following interaffiliate cash flows are uncorrelated with one another: Affiliate Expected Standard transaction deviation (S) ($) United States 100,000 40,000 Canada 150,000 60,000 Zambia 175,000 30,000 Egypt 200,000 70,000 Required: (i) The standard deviation of the portfolio of cash held in the central depository. (2 marks) (ii) Outline three advantages of centralised cash management system to the multinational corporations (MNCs) (a) Explain four reasons why multinational corporations (MNCs) forecast exchange rates. (b) (4 marks) SPL Limited, a company based in Kenya expects to receive 2 million Euros in one year's time. The existing spot rate of the Euro is KES 120/EUR. The 1-year forward rate of the Euro is KES 121/EUR. The company expects the spot rate of the Euro to be KES 122/EUR in one year. There are 1-year put options on Euros available in the market with an exercise price of KES 123 and a premium of KES 4 per unit. The following money market rates are available: Deposit rate Borrowing rate Kenya Eurozone 8% 5% 9% 6% Required: (i) The cash flow to be received in Kenya Shillings (KES) assuming SPL Limited uses money market hedge. (3 marks) (ii) The cash flow to be received in KES assuming SPL Limited decides to use a put option hedge. (2 marks) (iii) Advise the management on the best strategy to adopt. (1 mark) (c) Douglas Kombo specialises in cross-rate arbitrage. He notices the following quotes: SFr 1.5971/$ Swiss Franc/United States dollar Australian Dollar/United States Dollar = A $ 1.8215/$ Australian Dollar/Swiss Franc Required: A $ 1.440/SFr Arbitrage profit, if any, assuming Douglas has $1,000,000 to invest. (5 marks) (d) The following interaffiliate cash flows are uncorrelated with one another: Affiliate Expected Standard transaction deviation (S) ($) United States 100,000 40,000 Canada 150,000 60,000 Zambia 175,000 30,000 Egypt 200,000 70,000 Required: (i) The standard deviation of the portfolio of cash held in the central depository. (2 marks) (ii) Outline three advantages of centralised cash management system to the multinational corporations (MNCs)

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