Case situation A Namibia firm ABC Holdings has a subsidiary company ABC Corporation, which is located in France. ABC Holdings trades with a British company TN Holdings and an American company, TMC Corporation. ABC Corporation trades with an American company DC Gold Corporation. ABC Holdings has imported goods worth US$750,000 from DC Gold Corporation, which will be delivered in six months. ABC Corporation has exported goods worth 1,500,000 euros to TN Holdings to be paid on delivery which will take six months. ABC Holdings has an agreement with its subsidiary, ABC Corporation, that the subsidiary pays 50 percent of the value of all its exports to the Holding company in Windhoek. Mr Mbayo Tjiramba the CEO for ABC Holdings has planned to visit TMC Corporation in Washington DC, TN Holdings in London, and ABC Corporation in Paris within the next six months. He is planning to spend US$2,000 in America, 1,500 British pounds in the United Kingdom, and 1,000 euros in France. The current spot exchange rates between the Namibian dollar and the US dollar, the British pound, and euro are 15.9; 20.6; and 17.6 respectively. The exchange rate outlook is very blurred as it is believed that the exchange rates could move either way. Suppose the 6-month forward exchange rates for British pound is N$19.85, for the euro is N$19, and for the US dollar is N$17. The following probability distributions are available for the value of the exchange rates expected to prevail at the end of the 6-months period:

N$/USD	Probability	N$/GBP	Probability	N$/euro	probability
15.55	0.2	19.5	0.30	18.5	0.15
16.9	0.4	19.7	0.55	19.0	0.55
17.2	0.3	19.9	0.10	20.0	0.20
17.5	0.1	20	0.05	21.5	0.10

Question1

(a) How much will the ABC Holdings receive from ABC Corporation if it hedges with a forward rate contract? (2 marks)

(b) How much will the ABC Holdings pay in domestic currency for its imports if it hedges with a forward rate contract? (2 marks)

(c) What are the most unfavourable US dollar, British pound, and euro exchange rates? (3 mark)

(d) What are the expected exchange rates? (6 marks)

(e) How much does ABC Holdings expect to receive from its subsidiary if it does not hedge? (2 marks)

(f) How much does ABC Holdings expect to pay for its imports if it does not hedge? (2 marks)

(g) Is the Namibian firm better off not hedging for currency risk? Briefly explain. (1 mark)

Question 2

(a) How much will Mr Mbayo Tjiramba require in local currency for his round robin trip if he buys the currencies now? (1 mark) (b) Suppose Mr Tjiramba returns from his trip with US$500, 400 British pounds, and 300 euros. How much will he have in local currency if exchange rates will be at their expected values? (2 marks)

(c) Suppose Mr Tjiramba returns from his trip with US$500, 400 British pounds, and 300 euros. How much will he have in local currency if exchange rates will be at their most likely values? (2 marks)

(d) If Mr Tjiramba departs in 6 months what is the probability that he will require more Namibian dollars for the United Sates dollars than departing now? (1 mark).

(e) What is the probability that the Namibian dollar will appreciate against the British pound in the next 6 months? (1 mark)