A Namibia firm has an obligation to pay 500,000 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 0.30 19.378 0.15 16.960 0.25 19.475 0.25 17,125 0.25 19.672 0.15 17.595 0.20 19.895 0.40 19.915 0.05

(a) What are the most likely exchange rate values for US dollar and the British pound? (1 mark)

(i) Explain whether the firm is better off by using a forward contract if the future spot exchange rate of the US dollar is at its expected value. (2 marks) (j) Explain the disadvantage of using a forward contract. (2 marks)