We have 100 million South African rands that are 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 to one US dollar. Also, assume that the forward exchange rate is 10 rands equal to one dollar. We expect the future spot rate to be 9.8 rands 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 rands per dollar for both types of options. Expound on how to hedge the aforementioned exposure. Moreover, the market expectation is that the rand will appreciate against the dollar. We want to implement transactions exposure hedging. Ascertain that we use 1) a forward contract or an options approach.
We have 100 million South African rands that are 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 to one US dollar. Also, assume that the forward exchange rate is 10 rands equal to one dollar. We expect the future spot rate to be 9.8 rands 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 rands per dollar for both types of options. Expound on how to hedge the aforementioned exposure. Moreover, the market expectation is that the rand will appreciate against the dollar. We want to implement transactions exposure hedging. Ascertain that we use 1) a forward contract or an options approach.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:We have 100 million South African rands that
are 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 to one US dollar. Also, assume
that the forward exchange rate is 10 rands equal
to one dollar. We expect the future spot rate to
be 9.8 rands 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 rands
per dollar for both types of options. Expound on
how to hedge the aforementioned exposure.
Moreover, the market expectation is that the
rand will appreciate against the dollar. We want
to implement transactions exposure hedging.
Ascertain that we use 1) a forward contract or an
options approach.
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