FIN4802 Assignment 1 (COMPLETE ANSWERS) Semester 1 2025 - DUE 23 May
2025; 100% correct solutions and explanations.
Question 1 (8 Marks) Mkhize Ltd would like to assess the country risk of South
Africa. Mkhize Ltd has identified various political and financial risk factors, as
shown below. Political Risk Factor Assigned Rating Assigned Weight Blockage
of fund transfers 7 65% Bureaucracy 3 55% Financial Risk Factor Assigned
Rating Assigned Weight Interest rate 5 30% Inflation 6 20% Exchange rate 5
11% Competition 4 35% Growth 7 30% Mkhize Ltd has assigned an overall
rating of 85 percent to political risk factors and of 35 percent to financial risk
factors. The investment policy for Mkhize Ltd mentions that the company can
only invest in a country if the country's risk is below 8.5. Should Mkhize Ltd
consider South Africa for investment? [8]
🧮 Step 1: Calculate Weighted Political Risk Score Use the formula: Political Risk
Score = (Rating × Weight) for each factor (Weights must be adjusted to total 100%
within political and financial categories)
Political Risk Factors (Total Weight = 65% + 55% = 120%) We'll normalise the
weights:
Blockage of fund transfers: Weight = 65% ÷ 120% = 0.5417 Score = 7 × 0.5417 =
3.7919
Bureaucracy: Weight = 55% ÷ 120% = 0.4583 Score = 3 × 0.4583 = 1.375
✅ Total Political Risk Score = 3.7919 + 1.375 = 5.1669
🧮 Step 2: Calculate Weighted Financial Risk Score Total Weight = 30% + 20% + 11%
+ 35% + 30% = 126% Normalised weights:
, Factor Rating Weight (%) Weight (normalized) Weighted Score Interest rate 5 30
30/126 = 0.2381 5 × 0.2381 = 1.1905 Inflation 6 20 20/126 = 0.1587 6 × 0.1587 =
0.9524 Exchange rate 5 11 11/126 = 0.0873 5 × 0.0873 = 0.4365 Competition 4 35
35/126 = 0.2778 4 × 0.2778 = 1.1112 Growth 7 30 30/126 = 0.2381 7 × 0.2381 =
1.6667
✅ Total Financial Risk Score = 1.1905 + 0.9524 + 0.4365 + 1.1112 + 1.6667 = 5.3573
🧮 Step 3: Combine the Overall Country Risk Score Use Mkhize Ltd’s assigned
importance weights:
Political: 85% = 0.85
Financial: 35% = 0.35
(Since the weights sum to more than 100%, we normalize them):
Total = 0.85 + 0.35 = 1.2
Normalised political weight = 0.85 ÷ 1.2 = 0.7083
Normalised financial weight = 0.35 ÷ 1.2 = 0.2917
Overall Country Risk Score:
= (5.1669 × 0.7083) + (5.3573 × 0.2917) = 3.662 + 1.561 ✅ = 5.223
✅ Final Conclusion: The calculated country risk score is 5.22, which is below the
investment threshold of 8.5.
🔍 Therefore, Mkhize Ltd can consider South Africa for investment.
Question 2 (15 marks) Tshepo Molefe is a foreign exchange dealer with Investec
South Africa. He notices the following quotes: Spot exchange rate ZAR1.3220/BWP
1 year forward exchange rate ZAR1.1492/BWP 1 year BWP interest rate 5.00% per
year 1 year ZAR interest rate 7.50% per year a) the interest rate parity holding? You
may ignore transaction costs. (3) b) With the aid of calculations, show whether or
not an arbitrage opportunity exists. (2) c) In the event that there is an arbitrage
opportunity, you are required to demonstrate all the steps that need to be taken to
make an arbitrage profit. Assume that Tshepo Molefe is authorised to work with
BWP1 000 000 in the Botswana Pula market, or ZAR1 322 000 in the South African
Rand market. Compute the arbitrage profit. (7)
a) Is Interest Rate Parity (IRP) holding? (3 marks) Formula for IRP:
2025; 100% correct solutions and explanations.
Question 1 (8 Marks) Mkhize Ltd would like to assess the country risk of South
Africa. Mkhize Ltd has identified various political and financial risk factors, as
shown below. Political Risk Factor Assigned Rating Assigned Weight Blockage
of fund transfers 7 65% Bureaucracy 3 55% Financial Risk Factor Assigned
Rating Assigned Weight Interest rate 5 30% Inflation 6 20% Exchange rate 5
11% Competition 4 35% Growth 7 30% Mkhize Ltd has assigned an overall
rating of 85 percent to political risk factors and of 35 percent to financial risk
factors. The investment policy for Mkhize Ltd mentions that the company can
only invest in a country if the country's risk is below 8.5. Should Mkhize Ltd
consider South Africa for investment? [8]
🧮 Step 1: Calculate Weighted Political Risk Score Use the formula: Political Risk
Score = (Rating × Weight) for each factor (Weights must be adjusted to total 100%
within political and financial categories)
Political Risk Factors (Total Weight = 65% + 55% = 120%) We'll normalise the
weights:
Blockage of fund transfers: Weight = 65% ÷ 120% = 0.5417 Score = 7 × 0.5417 =
3.7919
Bureaucracy: Weight = 55% ÷ 120% = 0.4583 Score = 3 × 0.4583 = 1.375
✅ Total Political Risk Score = 3.7919 + 1.375 = 5.1669
🧮 Step 2: Calculate Weighted Financial Risk Score Total Weight = 30% + 20% + 11%
+ 35% + 30% = 126% Normalised weights:
, Factor Rating Weight (%) Weight (normalized) Weighted Score Interest rate 5 30
30/126 = 0.2381 5 × 0.2381 = 1.1905 Inflation 6 20 20/126 = 0.1587 6 × 0.1587 =
0.9524 Exchange rate 5 11 11/126 = 0.0873 5 × 0.0873 = 0.4365 Competition 4 35
35/126 = 0.2778 4 × 0.2778 = 1.1112 Growth 7 30 30/126 = 0.2381 7 × 0.2381 =
1.6667
✅ Total Financial Risk Score = 1.1905 + 0.9524 + 0.4365 + 1.1112 + 1.6667 = 5.3573
🧮 Step 3: Combine the Overall Country Risk Score Use Mkhize Ltd’s assigned
importance weights:
Political: 85% = 0.85
Financial: 35% = 0.35
(Since the weights sum to more than 100%, we normalize them):
Total = 0.85 + 0.35 = 1.2
Normalised political weight = 0.85 ÷ 1.2 = 0.7083
Normalised financial weight = 0.35 ÷ 1.2 = 0.2917
Overall Country Risk Score:
= (5.1669 × 0.7083) + (5.3573 × 0.2917) = 3.662 + 1.561 ✅ = 5.223
✅ Final Conclusion: The calculated country risk score is 5.22, which is below the
investment threshold of 8.5.
🔍 Therefore, Mkhize Ltd can consider South Africa for investment.
Question 2 (15 marks) Tshepo Molefe is a foreign exchange dealer with Investec
South Africa. He notices the following quotes: Spot exchange rate ZAR1.3220/BWP
1 year forward exchange rate ZAR1.1492/BWP 1 year BWP interest rate 5.00% per
year 1 year ZAR interest rate 7.50% per year a) the interest rate parity holding? You
may ignore transaction costs. (3) b) With the aid of calculations, show whether or
not an arbitrage opportunity exists. (2) c) In the event that there is an arbitrage
opportunity, you are required to demonstrate all the steps that need to be taken to
make an arbitrage profit. Assume that Tshepo Molefe is authorised to work with
BWP1 000 000 in the Botswana Pula market, or ZAR1 322 000 in the South African
Rand market. Compute the arbitrage profit. (7)
a) Is Interest Rate Parity (IRP) holding? (3 marks) Formula for IRP:
