Get premium membership and access questions with answers, video lessons as well as revision papers.

A Kenyan company has agreed to sell goods to an importer in Zedland at an invoiced price of Z 150,000 (Zed (Z) is the currency of...

      

A Kenyan company has agreed to sell goods to an importer in Zedland at an invoiced price of
Z 150,000 (Zed (Z) is the currency of Zedland). Of this amount, Z 60,000 will be payable on
shipment, Z 45,000 one month after shipment and Z 45,000 three months after shipment.
The quoted foreign exchange rates (Z per KSh.) at the date of shipment as as follows:
Spot 1.690 - 1.692
One month 1.687 - 1.690
Three months 1.680 - 1.684
The company decides to enter into appropriate forward exchange contracts through a bank in
order to hedge these transactions.
Required:
i) State the advantages of hedging in this way.
ii) Calculate the amount in Kenya Shillings that the Kenyan Company would receive.
iii) Comment with hindsight on the wisdom of hedging in this instance, assuming that the spot rates at
the dates of receipt of the two instalments of Z 45,000 were as follows:
Fist instalment 1.69 - 1.69
Second instalment 1.700 - 1.704

  

Answers


Kavungya
fig1164926.png
Kavungya answered the question on April 16, 2021 at 18:26


Next: The Lakeside Company Limited is considering investing in a project requiring an initial outlay of Sh.100 million. The project life is two years after which there...
Previous: Large companies with significant borrowings or overseas trade often use interest rate swaps and currency swaps. Required: Explain how interest rate swaps and currency swaps may be...

View More CPA Advanced Financial Management Questions and Answers | Return to Questions Index


Learn High School English on YouTube

Related Questions