Arna Amelicans Groups PLC holds a subsidiary company called DontTell Limited. DontTell Limited, is based in Zambia and has commenced production of a local brew called Chibwantu. Recently, DontTell begun exporting Chibwantu to South Africa and expects to receive R$500,000$ in six months' time. DontTell Limited plans to take action to hedge against the exchange rate risk arising from its South African exports. DontTell could put cash on deposit in South Africa at an annual interest rate of $3\%$ per year. It could also borrow from South Africa at $5\%$ per year. The company could also put cash on deposit in its Zambian Bank Account at an annual interest rate of

$4\%$ per year, and borrow from its financiers at $6\%$ per year. Inflation in South Africa runs at $3\%$ per year, while inflation in Zambia is currently running at $4\mathrm{.}5\%$ per year. In addition the foreign exchange board shows the following:

Spot Rate $($ZAR$/$ZMW$)=2\mathrm{.}000$

Six$-$month forward exchange rate $($ZAR$/$ZMW$)=1\mathrm{.}990$

One$-$year forward exchange rate $($ZAR$/$ZMW$)=1\mathrm{.}981$

Required:

a$)$ Calculate;

i$.$ The six$-$month forward rate.

ii$.$ The annualized forward premium$/$discount$.$

$(4$ marks$)$

$(2$ marks$)$

b$)$ DontTell Limited management seeks your advice on a number of terminologies in

international finance. Briefly explain to them the meaning of the following:

i$.$ Advantages and disadvantages of the Gold standard. ii$.$ Full $-$ bodied Coins

iii. Difference between bid and ask price

$8$

$(4$ marks$)(2$ marks$)(2$ marks$)$

c$)$ Further, DontTell Limited would like to know

i$.$ The benefits and disadvantages of entering into a jomt venture instead of setting up an independent subsidiary in South Africa.

$(4$ marks$)$

$11.$ What is the cross rate for Zambian Kwacha and Loti $($currency of the Kingdom of Lesotho$)$ if the exchange rate between the Zambian Kwacha and South African Rand is S$($ZAR$/$ZMW$)=4\mathrm{.}25-4\mathrm{.}28$ for bid and ask while that between the South African Rand and Loti of Lesotho is S$($ZAR$/$LSL$)=65\mathrm{.}20-65\mathrm{.}30$ for bid and ask.

$(3$ marks$)$

d$)$ And finally the parent company, Arna Amelicans Group PLC seeks your advice on the difference between a number of phrases commonly used in international finance. To this end they request your advice on the difference between the following modes of

quoting exchange rates:

i$.$

II$.$

Direct and Indirect quote of exchange rate

Outright forward quote and swap quote