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

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}