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Question: you expect to receive zar1 000 00000 in 3 months...

Question details

you expect to receive ZAR1 000 000.00 in 3 months time but you are worried about adverse movements (a strengthening dollar) in exchange rates and want to hedge against this; you gather the following information from the money and foreign exchange markets

spot exchange rate $1.7640/ZAR

Three month forward rate $1.7540/ZAR

Forecast spot exchange rate 3 months from now $1.7400/ZAR

Zimbabwe 3month borrowing interest 8%

Zimbabwe's 3 month deposit interest rate 6%

South Africa's 3 month borrowing interest rate 10%

South Africa's 3 month deposit interest rate 8%.

Show how you can hedge against the currency risk using money market hedge.

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