FIN4802 Spring Study School Questions

Question 1 The following information exists.  Spot rate = ZAR 1.20 for 1BP  30-day forward rate = ZAR 1.25 for 1BP Interest rates are as follows: Lesotho Botswana 30-day deposit rate 10% 9% 30-day borrowing rate 12% 11%  A call option that expires in 30 days has an exercise price of ZAR1.25 and a premium of ZAR0.04. The size of the contract is BP300 000. You have forecasted the future spot rate in ZAR for BP in 30 days as follows: Possible outcomes Probability 1.30 27% 1.38 39% 1.05 34% Assume you are a foreign exchange analyst at GHL Bank in Lesotho. You have been approached by a customer who intends to pay Botswana Pula (BP300 000) in 30 days’ time. Given the information below, advise the customer on how he can use the hedging techniques (call option, money market hedge and forward contract) so that he can get the BP300 000 at the lowest cost. You are also required to show a comparison between unhedged scenario versus the results of the three hedging techniques.