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.
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 49QA
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