1. A weak home currency makes a countrys exports to be cheap thus can be used to correct a countrys balance of trade deficit. With clear reasons, Give a critique of this statement ( 4 Marks)

2. XYZ LTD is a Kenyan company based at the EPZ dealing in apparels. They are beneficiaries of the AGOA agreements and thus export clothing materials to the USA. In February 2020, they entered into an agreement to export clothing materials to the USA and expect to receive USD 87,000 one year down the line. They also import machinery from Canada and are planning to buy a cloth dying machine from Canada in February 2021 at C$ 132,000.

Below is additional information:

• Spot rate is Ksh.105/USD at the time of entering into contract
• Spot rate is Ksh. 90/C$ at the time of entering into contract
• One year forward rate (to sell) Ksh.97 /USD
• One year forward rate (to buy) Ksh. 94/C$

One year call option

• Exercise price of Ksh.96/USD
• Exercise price Ksh.88 /C$

One year put option

• Exercise price Ksh.98/USD
• Exercise price Ksh. 94/C$

• February 2021 Spot rate Ksh. 97.25/USD
• February 2021 Spot Rate (ii) Ksh 96/C$

Required:

XYZ Ltd has an option of either using the forward rate contract, options or spot rate. You have been contracted as a consultant on international trade to advice XYZ LTD. Explain how you would go around it (6 Marks)