WaFlo Co is a JAMES-based company which has the following expected transactions.. One month: Expected receipt of Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $240,000 One...

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WaFlo Co is a JAMES-based company which has the followingexpected transactions..
One month: Expected receipt ofÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $240,000
One month: Expected paymentofÂ Â Â Â Â Â Â Â Â $140,000
Three months: Expected receipts ofÂ Â Â Â Â $300,000
As the Corporate Finance Manager for WaFlo CO. you collect thefollowing information:
Spot rate ($ per $):Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1.7820 Â± 0.0002
One month forward rate (($ per $):Â Â Â Â Â Â Â 1.7829 Â± 0.0003
Three months forward rate (($ per $): Â Â 1.7846 Â±0.0004
Money market rates for WaFlo Co:
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â BorrowingÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Deposit
One year dollar interest rate:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 4.9%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 4.6
One year kwacha interest rate:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 5.4%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 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 to forecastexchange rates.
(c) Calculate the expected dollar receipts in one monthand in three months using the forward market.
(d) Calculate the expected dollar 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 contracts couldbe used to hedge the three-month dollar receipt.

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4.4 Ratings (866 Votes)

a Transaction Risk The risk that results from actual foreign currency transactions ie the risk that the foreign currency will move adversely leading in a loss from the transaction Translation Risk The risk that the balance sheet items of the company denominated in foreign currency will change due to translation on the See Answer

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