Question $3(10$ marks$)$

Orange Limited has R$10$ million that it keeps in cash in order to replace assets

that are due for replacement in six months from today. This cash will not be

needed until then, and currently earns $4\%$ per annum with the bank. A six$-$month

forward contract can be obtained at the bank for R$12\mathrm{.}15$ per US dollar $($$$).$ Uncle

Sam Bank, in the USA, offers an interest rate of $2\%$ per annum.

Current spot rates are:

$1$ USD $=$ R$11\mathrm{.}85$

$3\mathrm{.}1$ Calculate the arbitrage profit that Orange Limited can make by using the

R$10$ million for six months. $(6)$

$3\mathrm{.}2$ Briefly explain two $(2)$ categories of currency risk that Orange Limited is

exposed to as a result of the company entering into transactions in

foreign currency. $(4)$