Assume that spot exchange rate equals 100 Japanese Yen() to one US dollar() and the six month forward rate equals 101 Japanese Yen() to one US Dollar().An investor can purchase a Treasury Bill in the United states that matures in six months time and earn an annual rate of 10 %.

Required:

The annual rate of return on a similar investment in Japan (6 marks)

b) Safaricom Ltd a company based in Kenya imports computers from Canada. The supplier extends a three month credit period.

On 1st, September 2022 maxim ltd imported 5,000 phones at USD 40 each.

i. The borrowing rate is 5 % above the bank base rate while the investing rate is 4 % below the bank base rate. These rates apply both Kenya and Canada.

ii. The bank base rate in Kenya and Canada are 12 % and 14 % respectively.

iii. The current exchange rates between ksh (Kenya).and USD (Canada) are as

follows.

Spot exchange rate One month forward Three months forward

Required

Ksh/1 Canada USD 104 -108

110 - 112 112 -115

Using appropriate computations, explain how safaricom ltd might apply the following strategies to hedge against exposure to foreign exchange risk

a) Forward market cover

b) Money market hedge

c) Advise on the best hedging strategy