QUESTION FOURQUESTION THREE
a The dollar is selling in Kenya at KES If the interest for a six months
borrowing in Kenya is per annum and the corresponding rate is in USA.
Required
i Do you expect the dollar to be at a premium or discount in the Kenyan
Foreign Exchange Market? Why?
ii What will be the expected six months forward rate for the US dollar in
Kenya?
iii What will be the rate of forward premium or discount?
b Restate the following one three and sixmonth outright forward European term
bidask quotes in forward points.
Spot
OneMonth
ThreeMonth
SixMonth
Savannah Airways Ltd a Kenyan company, entered into an agreement with Airbus
Incorporated for the purchase of the latest version of their aircraft for a total value of
million Euros payable after months. The current spot exchange rate is KESEUR
Savannah Airways cannot predict the exchange rate in the future, although a six months
forward contract at KES EUR is available.
Required
Explain any three ways in which Savannah could hedge its Foreign Exchange exposure
risk using:
a Forward contract
b Money market operation
c Options
