A Namibia firm has an obligation to pay 1,000,000 in 3 months time and has exported goods worth US$500,000, payment of which is also expected in 3 months time. It is the end of the year, when the exchange rate between the Namibian dollar and the US dollar (NamD/USD) is 16.975 and the exchange rate between the Namibian dollar and the British pound (Nam/Pound) is 19.485. The exchange rate outlook is very blurred as it is believed that the exchange rates could move either way. The following probability distributions are available for the value of the exchange rates expected to prevail at the end of the 3-months period:

NamD/USD Probability NamD/GBP Probability

16.575 0.20 19.378 0.10

16.960 0.15 19.475 0.20

17,125 0.35 19.672 0.15

17.595 0.30 19.895 0.40

19.915 0.15

(a) Explain how are the exchange rates are defined in this case. (2 marks)

(b) How much will the Namibian firm receive from its exports if the exchange rates stay the same? (3 marks)

(c) How much will the Namibian firm pay in domestic currency for its imports if the exchange rates stay the same? (3 marks) 2

(d) What is the worst expected Namibian dollar/US dollar exchange rate? (1 mark)

(e) What are the expected spot exchange rates for the United States dollar and the British Pound against the Namibian dollar? (6 marks)

(f) How much does the Namibian firm expect to receive from its exports? (3 marks)

(g) How much does the Namibian firm expect to pay for its imports? (3 marks)

(h) What is the probability that the Namibian dollar will appreciate against the United States dollar? (2 marks)

(i) What is the probability that the Namibian dollar will depreciate against the British Pound? (2 marks)