A Namibia firm ABC Holdings has a subsidiary company ABC Corporation, which is located in France. ABC Holdings trades with a British company TN Holdings and an American company, TMC Corporation. ABC Corporation trades with an American company DC Gold Corporation. ABC Holdings has imported goods worth US$750,000 from DC Gold Corporation, which will be delivered in six months. 

ABC Corporation has exported goods worth 1,500,000 euros to TN Holdings to be paid on delivery which will take six months. ABC Holdings has an agreement with its subsidiary, ABC Corporation, that the subsidiary pays 50 percent of the value of all its exports to the Holding company in Windhoek. Mr Mbayo Tjiramba the CEO for ABC Holdings has planned to visit TMC Corporation in Washington DC, TN Holdings in London, and ABC Corporation in Paris within the next six months. He is planning to spend US$2,000 in America, 1,500 British pounds in the United Kingdom, and 1,000 euros in France. The current spot exchange rates between the Namibian dollar and the US dollar, the British pound, and euro are 15.9; 20.6; and 17.6 respectively. The current spot exchange rate between the pound and the euro is 1.25 euros per pound and the US$ is 1.5 per pound. The exchange rate outlook is very blurred as it is believed that the exchange rates could move either way. 

Suppose the ABC Holdings can buy currency call and put options at a premium of N$2 per unit of foreign currency. The US$ call and put options have a strike price of N$16.500; the British pound call and put options have a strike price of N$21.400, and the euro call and put options have a strike price of N$19.500. The 6-month forward rates for British pound is N$19.85, for the euro is N$19, and for the US dollar is N$17.

 

1. How much will ABC Holdings receives from its exports if it hedges with a forward contract.
2. How much will ABC Corporation pay in domestic currency for its imports if it hedges with a forward contract?
3. What are the most favourable Namibian dollar/US dollar and Namibian dollar/pound exchange rates?
4. How much will the ABC Holdings expect to receive from its exports if it does not hedge?
5. How much does ABC Corporations expect to pay in domestic currency if it does not hedge?
6. How much does the ABC Holding expect to receive from its exports if it uses a currency call option?
7. How much does ABC Corporations expect to pay for its imports if it uses currency put options?
8. How much will the CEO spend on his visit in the domestic currency?
9. Is the ABC Holding better off without hedging?
10. How much will the ABC Holding receive from ABC corporations?
11. Which is the optimal hedge for the payables? Explain.
12. Explain the meaning of arbitrage and state the type of arbitrage involved in the scenario?
13. What is the Value of £ in units of US$?
14. What is the Value of US$ in units of £?
15. Assuming the spot rate stay the same, explain whether call option will be exercised in all the three currency. How much will be the profit the option buyer?
16. Assuming the spot rate stay the same explain whether the put options will be exercised among the three currency
17. What is the probability that the currency call option hedge will be more favourable than a no hedge situation?