QUESTION FOURQUESTION THREE

$($a$)$ The dollar is selling in Kenya at KES $102.40.$ If the interest for a six months

borrowing in Kenya is $16\%$ per annum and the corresponding rate is $4\%$ in USA.

Required

$($i$)$ Do you expect the dollar to be at a premium or discount in the Kenyan

Foreign Exchange Market? Why?

$($ii$)$ What will be the expected six months forward rate for the US dollar in

Kenya?

$($iii$)$ What will be the rate of forward premium $/$or discount?

$($b$)$ Restate the following one$-,$ three$-,$ and six$-$month outright forward European term

bid$-$ask quotes in forward points.

Spot $1\mathrm{.}3431-1\mathrm{.}3436$

One$-$Month $1\mathrm{.}3432-1\mathrm{.}3442$

Three$-$Month $1\mathrm{.}3448-1\mathrm{.}3463$

Six$-$Month $1\mathrm{.}3488-1\mathrm{.}3508$

Savannah Airways Ltd$.,$ a Kenyan company, entered into an agreement with Airbus

Incorporated for the purchase of the latest version of their aircraft for a total value of $10$

million Euros payable after $6$ months. The current spot exchange rate is KES$110/$EUR$.$

Savannah Airways cannot predict the exchange rate in the future, although a six months

forward contract at KES $114/$ EUR is available.

Required

Explain any three ways in which Savannah could hedge its Foreign Exchange exposure

risk using:

$($a$)$ Forward contract

$($b$)$ Money market operation

$($c$)$ Options