Question
QUESTION ONE Diva Limited is a South African based manufacturer of the latest electronic automobile devices. The company is currently investigating a project to invest
QUESTION ONE
Diva Limited is a South African based manufacturer of the latest electronic automobile devices. The company is currently investigating a project to invest in for expansion from America. The cost of the investment is $9 300 000. The supplier requires three equal instalments with the first instalment payable immediately and the remaining balance paid every three months thereafter.
The banks quoted direct spot and forward exchange rate are as follows:
Spot rate
| 16.4231 |
3 month forward rate
| 16.6472 |
6 month forward rate
| 16.8782 |
Spot rate
| 16.4231 |
3 month forward rate
| 16.6472 |
6 month forward rate
| 16.8782 |
1.1 Determine the rand equivalents of the payments to be made to the supplier for the investment assuming that Diva Limited undertakes forward cover on all foreign currency obligations. (10 marks)
1.2 Discuss how Diva Limited can hedge against transaction exposure using the following techniques:
1.2.1 Matching cross-frontier currency flows (2 marks)
1.2.2 Change currency of invoice (2 marks)
1.2.3 Money market hedge (2 marks)
1.2.4 Currency options (2 marks)
1.2.5 Swaps (2 marks}
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