Question 6: Managing Foreign Exchange Exposure (10 Marks) Ashton Lid, a client to whom you provide financial advice has come to you for guidance over a foreign exchange transaction. The company, based in New Zealand has sold USD 2,000,000 of machine parts to a USA customer. The payment has been deferred for six months. The following information is relevant: Spot exchange rate = USD 0.85/NZD Six month forward rate = USD 0.88/NZD Company's cost of capital 12.0% p.a. US 6-month deposit rate 6.0% p.a. US 6 month lending rate S 9.0% p.a. New Zealand 6-month lending rate = 7.0% p.a. New Zealand 6 month deposit rate 5.0% p.a. Forecasted inflation in New Zealand 4.0% p.a. Forecasted inflation in the USA 8.0% p.a. Required; a) Calculate the expected spot rate in 6 months assuming that the purchasing power parity between the two countries holds. (2 marks) b) Calculate the expected value of the sales proceeds in NZD using the expected spot rate computed in (a) above. (1 marks) c) Calculate and value of the proceeds from the sale if the company enters into a forward rate agreement. (2 marks)