NkhosiLimited is a medium$-$sized company whose ordinary shares are all owned by the members of one family. Nkhosi Limited is a Zambian based company. It has recently begun exporting to South African and expects to receive R$500,000$ in six months' time. The company plans to take action to hedge the exchange rate risk arising from its South African exports. Nkhosi Limited could put cash on deposit in South African country at an annual interest rate of$3\%$ per year, and borrow at $5\%$ per year. The company could put cash on deposit in Zambia at an annual interest rate of $4\%$ per year, and$\_$ borrow at $6\%$ per year. Inflation in the South Africa is $3\%$ per year, while inflation in the home country of Nkhosi Limited is $4\mathrm{.}5\%$ per year. Zambia uses an indirect method of quoting exchange rates.

The following exchange rates are currently available to Nkhosi Limited:

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

F $1$so$($ZMW$/$ZAR$)=1\mathrm{.}990$

F J$6$o$($ZMW$/$ZAR$)=1\mathrm{.}981$

Required:

a$)$ Calculate;

$1.$ The kwacha value of the forward exchange contract? $(2$ marks$)$

$11.$ The one year expected $($future$)$ spot rate predicted by purchasing power parity theory? $(2$ marks$)$

in$,$ The annualized forward premium$/$discount$.(2$ marks$)$

b$)$ Assume Zambia reverts to a direct system of quoting exchange rates and the interest rates and exchange rates available to Nkhosi Co move as follows:

S $($ZAR$/$ZMW$)=15$

F$1$so$($ZAR$/$ZMW$)=15\mathrm{.}30$

Borrowing interest rate

Zambia

$4\%$ per year

South Africa

$8\%$ per year

Deposit interest rate

Inflation Rate

$3\%$ per year

$1\mathrm{.}5\%$

$6\%$ per year

i$.$ Show whether opportunities for covered interest arbitrage exist? $(3$ marks$)$

$11.$ Assuming the forward rate is an unbiased estimator of the future spot rate, what is the real rate of interest in South Africa? $(3$ marks$)$

$111.$ 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$)$

c$)$ Further, the exchange rates between Zambia and South Africa based on the direct quote method change as shown below in the financial press:

S $($ ZAR$/$ZMW$)=4\mathrm{.}7250$

f$9$o$($ZAR$/$ZMW$)=4\mathrm{.}7506$

$(..()$

$\backslash .,$ c$/10$

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$2$

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The money market interest rate for $90-$day deposits in Zambian Kwacha is $7\mathrm{.}5\%$ annualized. What is implied about interest rates in South Africa? Assume a $365-$day year. $(3$ marks$)$

d$)$ Discuss the following;

$($i$)$ Key$-$factors that have led to the growth of International Financial Management as an independent branch of study. $(5$ marks$)$

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$($ii$)$ Difference between relative and absolute Purchasing power parity theory