Suppose TechNO Ltd. is a South African company that imports computers and other IT-related products from the US. On 1 April 2024, TechNO Ltd. Placed an order for 1500 laptops with a supplier in Los Angeles at a purchase price of USD650 per laptop. The computers will arrive in Johannesburg on 1 June 2024 and full payment of the purchase amount will then be made. TechNO Ltd. decides to hedge its currency exposure by using currency futures contracts for the USD. USD futures contracts are available at the JSE derivatives market in a contract size of USD1000.

The following three USD futures contracts (priced as USD/ZAR) are available for trading at the JSE on 1 April 2024:

USD futures contract (expiry date on 15 June 2024): USD/ZAR: 18.9525

USD futures contract (expiry date on 15 September 2024): USD/ZAR: 19.1225

USD futures contract (expiry date on 15 December 2024): USD/ZAR: 19.8525

Notes: - For USD futures contracts, the initial margin deposit is R450 per contract. - The futures prices listed above are quoted as a single price and not a bid-offer spread.

1.1 TechNO Ltd. must decide if the hedge position for the USD will be long or short. Explain which position (long or short) must be taken and why.

1.2 Which futures contract will be best to use, and why?

1.3 Given your answer above, explain what purchase amount (in ZAR) TechNO Ltd. would be able to budget for in terms of this import transaction.

1.4 How many futures contracts should be bought/sold by TechNO Ltd? Explain.

1.5 Based on your answer above explain what the initial margin deposit (in ZAR) will be that TechNO Ltd. must make with its derivatives market broker.

1.6 Illustrate (i.e., draw a futures payoff graph) to explain the futures position of TechNO Ltd. as initiated on 1 April 2024.

2. Suppose it is 1 June 2024, the laptops arrived in Johannesburg and payment is made. Suppose that the USD futures contracts at the JSE trade at the following exchange rates on 1 June 2024:

USD futures contract (expiry date on 15 June 2024): USD/ZAR: 19.5525

USD futures contract (expiry date on 15 September 2024): USD/ZAR: 19.9225

USD futures contract (expiry date on 15 December 2024): USD/ZAR: 20.2525

Calculate the cumulative profit/loss in the margin account of TechNO Ltd. on 1 June 2024, given the futures contract position it initiated on 1 April 2024. Explain in detail.