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We have 100 million South African rand that is payable in one year (we have to pay it to a South African company from whom
We have 100 million South African rand that is payable in one year (we have to pay it to a South African company from whom we imported.) Assume the spot exchange rate is 10.05 rand equal one US dollar. Also, assume that the forward exchange rate is 10 rand equal one dollar. We expect the future spot rate to be 9.8 rand per $1. Furthermore, calls cost .03( 3%) and puts cost .01(1%). The exercise price of the options is 10 rand per dollar and 11 rand per dollar for both types of options. Expound on how to hedge the exposure. Moreover, the market expectation is that the rand will appreciate against the dollar. We want to implement transactions exposure hedging. We want to hedge via: 1) risk sharing 2) leading and lagging 3) currency swaps. Analyze what the best solution is. Show it: a- Mathematically. b- Explain the answer. Provide reference
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