Assuming EAAP enters a credit contract to purchase aluminium steel from a US company to complete its new construction plant at an agreed sum of $1,000,000.00 and a spot rate of 17ZAR/1$ with payment to be made in 90 days.

i. Identify and critically discuss the exchange rate risk that EAAP may be exposed to from this contract? 

Also, offer and critically discuss two methods the company can use to hedge against the exposure? 

ii. Calculate the exposure cost if the South African Rand (ZAR) depreciates against the dollar to 21.8 ZAR/1$ at the end of the 90 days period? 

Will your answer be different if the rand appreciates against the dollar by 11.2ZAR/1$?

Answer rating: 100% (QA)

i EAAP is exposed to exchange rate risk in this credit contract The exchange rate risk refers to the potential losses that EAAP may incur if there are ... View the full answer