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Question 2 Suppose that a Tanzanian exporter sells goods to a customer in Malawi for Malawi Kwacha 50,000,000 and expects payment in 3 months' time. The exporter does not have any MK payments to match against the income and so he might consider two possible options: (a) Borrow MK for 3 months and exchange the Kwachas into Tshs at the spot rate. Interest would be payable on the Kwacha loan and so the customer's net receipt will be the Tshs value of MK 50,000,000 at the spot rate, less interest charges; (b) Take out a forward exchange contract to sell MK 50,000,000 to the bank in 3 months' time. In the meantime, borrow the Tshs value of these eventual receipts on overdraft - i.e. pay interest on Tshs borrowed for three months. The customer's net receipts will be the Tshs value of the MK 50,000,000 at the forward rate, less interest charges. Required: Suppose the Tanzanian exporter approaches his bank to arrange one of these options on 30 June. He expects payment from his Malawian customer 3 months later, on 30 September. The Tshs - MK rates on 30 June are: Spot MK 1.4770 - 1.4780 Six months forward 1.48 -1.44 cents pm The cost of borrowing in Tshs is 10% per annum and the cost of borrowing in MK (from the exporter's Tanzanian bank) us 6% per annum. Advise the exporter at to which option is cheaper 1

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