On December 1^st Mr. Oketch, a Kenyan trader entered into a contract to purchase maize grain from UK. The seller Mr. James gave him an option to pay for the grain after three months at a price of 19,888 or pay immediately with a cash discount of 2,388. If the trader takes the option to pay after three months, he will require him to cover the transaction forward. If he decides to pay immediately, it will be necessary for him to borrow KSH from BBK bank at a rate of 14% p.a. for three months, by which time he will have sold the grain.

Exchange rate (GBP/KSH) on December 1^st

Buying Selling

Spot 145.6285 146.7480

3 months forward premium 0.6900 0.7500

Allowing for exchange commission of 0.1%,

YOU ARE REQUIRED to calculate the KSH payable in each case and to determine the best option for the Kenyan trader accordingly

REQUIRED

Determine the amount that will be debited and credited to his account (20 Marks)