Question 1

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$2,000 in America, 1,500 British pounds in the United Kingdom, and 1,000 euros in France. The current spot exchange rates between the Namibian dollar and the US dollar, the British pound, and euro are 15.9; 20.6; and 17.6 respectively. The current spot exchange rate between the pound and the euro is 1.25 euros per pound and the US$ is 1.5 per pound. The exchange rate outlook is very blurred as it is believed that the exchange rates could move either way. Suppose the ABC Holdings can buy currency call and put options at a premium of N$2 per unit of foreign currency. The US$ call and put options have a strike price of N$16.500; the British pound call and put options have a strike price of N$21.400, and the euro call and put options have a strike price of N$19.500. The 6-month forward rates for British pound is N$19.85, for the euro is N$19, and for the US dollar is N$17.

Question 2

A firm ABC CC wants to undertake an investment project which costs N$500,000, which it wants to finance through a bank loan. The project has a 90 percent chance of success. If the project succeeds the firm will make a cash flow of N$1,200,000 after a year. If it fails the firm will get a cash flow of N$300,000 and will be required to pay back only half of the borrowed amount. The bank has a required rate return of 15%.