Question 5 [10 Marks] The logistics division of Healthy Fish Ltd experienced a high number of spoilage incidents over the last year in most cases, the stock of fish was complete spoiled, and the company had to purchase stock from Europe With the current exchange rate, the price of the new stock increased with almost 12% The company made provisions for exchange rate risk by entering into 3-month tranches of a certain type of derivative contract The derivative contract used by the company gives Healthy Fish the right but not the obligation to buy Euros (s) at the negotiated price of R16 30/1 00 The company requires a predetermined date to exercise their choice to buy the Euros at the price of R16 30/1 00 or reject the exchange rate may be more favourable in the next 3-months The company normally pays a premium of RO 15 per Euro for this derivative contract and had contracted to buy 1 000 000 00 should they make use of the derivative contract a Identify the type of derivative contract and use a diagram to illustrate the payoff of this type of derivative contract (7 marks) b The derivative contract is now at expiration date and the current Rand/Euro exchange rate (spot rate) is R15 10/1 00 Would Healthy Fish successfully have hedged the foreign exchange rate risk? Provide the profit or loss as a result of entering into this derivative transaction (3 marks) Question 5 [10 Marks] The logistics division of Healthy Fish Ltd experienced a high number of spoilage incidents over the last year in most cases, the stock of fish was complete spoiled, and the company had to purchase stock from Europe With the current exchange rate, the price of the new stock increased with almost 12% The company made provisions for exchange rate risk by entering into 3-month tranches of a certain type of derivative contract The derivative contract used by the company gives Healthy Fish the right but not the obligation to buy Euros (s) at the negotiated price of R16 30/1 00 The company requires a predetermined date to exercise their choice to buy the Euros at the price of R16 30/1 00 or reject the exchange rate may be more favourable in the next 3-months The company normally pays a premium of RO 15 per Euro for this derivative contract and had contracted to buy 1 000 000 00 should they make use of the derivative contract a Identify the type of derivative contract and use a diagram to illustrate the payoff of this type of derivative contract (7 marks) b The derivative contract is now at expiration date and the current Rand/Euro exchange rate (spot rate) is R15 10/1 00 Would Healthy Fish successfully have hedged the foreign exchange rate risk? Provide the profit or loss as a result of entering into this derivative transaction