Question 1 Assume you are a foreign exchange analyst at GHL Bank in Namibia. You have...

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Question 1 Assume you are a foreign exchange analyst at GHL Bank in Namibia. You have been approached by a customer who intends to pay Botswana Pula (BP300 000) in 30 days' time. The following information exists. • Spot rate • 30-day forward rate Interest rates are as follows: 30-day deposit rate 30-day borrowing rate = NAM$ 1.20 for IBP =NAMS 125 for 1BP Namibia 10% 12% 1.30 1.38 1.05 Botswana 9% 11% • A call option that expires in 30 days has an exercise price of NAM$1.25 and a premium of NAMS0.04. The size of the contract is BP300 000. You have forecasted the future spot rate in NAM$ for BP in 30 days as follows: Possible outcomes Probability 27% 39% 34% Required: (a) Given the information above, advise the customer on how he can use the two hedging techniques (call option and forward contract) in order to buy BP300 000 at the lowest cost. (15) b) Calculate the expected value (in Rands) used by the customer to buy BP300 000 in 30 days' time if he chose to remain unhedged against foreign exchange rate risk. (6) Question 1 Assume you are a foreign exchange analyst at GHL Bank in Namibia. You have been approached by a customer who intends to pay Botswana Pula (BP300 000) in 30 days' time. The following information exists. • Spot rate • 30-day forward rate Interest rates are as follows: 30-day deposit rate 30-day borrowing rate = NAM$ 1.20 for IBP =NAMS 125 for 1BP Namibia 10% 12% 1.30 1.38 1.05 Botswana 9% 11% • A call option that expires in 30 days has an exercise price of NAM$1.25 and a premium of NAMS0.04. The size of the contract is BP300 000. You have forecasted the future spot rate in NAM$ for BP in 30 days as follows: Possible outcomes Probability 27% 39% 34% Required: (a) Given the information above, advise the customer on how he can use the two hedging techniques (call option and forward contract) in order to buy BP300 000 at the lowest cost. (15) b) Calculate the expected value (in Rands) used by the customer to buy BP300 000 in 30 days' time if he chose to remain unhedged against foreign exchange rate risk. (6)

Answer rating: 100% (QA)

aCall option Possible spot rate in 30 days ZAR 130 138 105 Premi... View the full answer