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(Q2). A company imports materials from USA at a cost of $1 068 000, which is payable in 6 months' time. The operations director has
(Q2). A company imports materials from USA at a cost of $1 068 000, which is payable in 6 months' time. The operations director has suggested that the company should not hedge the exchange risk as the firm will continue to import in the longer term and that the cost of hedging is very expensive. The following exchange rates and interest rate are given: Buy Sell USA/Maloti Spot (28/05/2022) 6-month forward 15.6520 15.6560 15.7890 15.7940 The 6-month interest rates (annualized) is USA: 5.2% (Deposit rate) 8.5% (Borrowing rate) Lesotho: 10.0% (Deposit rate) 14.1% (Borrowing rate) Required: Determine whether the company should select a forward contract or a money market hedge if it wishes to minimize the cost of hedging the currency exposure. (6marks). 0020/2021 ACC 467
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