QUESTION 1

1. KIKWETU MNC, a Kenyan based Multinational expect spot rate of the US Dollar to be KSH100, KSH103 or KSH104 when the payables are due. This analysis is based on the companys raw research carried out by its quality assurance department, which predicted a decrease in the value of the Kenya shillings (KSH) relative to the USA dollar.

The company has payables of $4,000,000, 120 days from today. There exists a call option with an exercise price of KSH102. The option premium is KSH2 per unit.

REQUIRED

1. Show the effect of each of these scenarios on KIKWETUs cost of payables
2. Explain to the management of the company, when the option is exercisable and when it should be allowed to lapse
   1. Assume in scenario (a) above, KIKWETU MNC had receivables and a put option available accordingly. Other information remains the same.

REQUIRED

1. Show the effect of each of these scenarios on KIKWETUs receivables
2. Explain to the management of the company, when the option is exercisable and when it should be left to lapse