[kaiming86]

Black & Co. Exports machine parts to South Africa on 3 months credit. The invoice total is Rand 150 million and the current spot rate is R7.46/US$. Exchange rates have been volatile in recent months and Mr Lim is concerned that the foreign exchange rates might move so as to make the export deal unprofitable. They are considering three foreign exchange hedging strategies:
1. Forward market hedge
2. Money market hedge
3. Currency option hedge
Other information:
• The three-month forward rate R7.50/US$
• 3-months Rand borrowing rate is 2.5%
• 3-months US dollar deposit rate is 3%
• A three-month European-style Rand put, USD call option is available for R150 million with a strike price of R7.50/US$ for a premium payable now of US$400,000 on the over-the-counter (OTC) market.
Show how the hedging strategies might work. Use the following assumed spot rates at the end of three months in order to illustrate the nature of each of the hedges:

(a) When the spot rate in 3 months time = R7.00/US$
3 hours ago - 4 days left to answer.