WaFlo Co is a -based company which has the followingexpected transactions..
One month: Expected receipt of 240,000
One month: Expected payment of 140,000
Three months: Expected receipts of 300,000
As the Corporate Finance Manager for WaFlo CO. youcollect the following information:
Spot rate (K per K): 1.7820 ± 0.0002
One month forward rate (K per K): 1.7829 ± 0.0003
Three months forward rate (K per K): 1.7846 ± 0.0004
Money market rates for WaFlo Co:
Borrowing Deposit
One year Kwacha interest rate: 4.9% 4.6
One year dollar interest rate: 5.4% 5.1
Assume that it is now 1 April.
Required:
(a) Discuss the differences between transaction risk,translation risk and economic risk.
(b) Explain how inflation rates can be used toforecast exchange rates.
(c) Calculate the expected Kwacha receipts in onemonth and in three months using the forward market.
(d) Calculate the expected Kwacha receipts in threemonths using a money-market hedge and recommend whether a forwardmarket hedge or a money market hedge should be used.
(e) Discuss how Kwacha currency futures contractscould be used to hedge the three-month dollar receipt.
Zambian based company
