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WaFlo Co is a -based company which has the following expected transactions.. One month: Expected receipt of...

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Finance

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

Answer & Explanation Solved by verified expert
3.6 Ratings (614 Votes)
Answer a Transaction Risk the risk associated with adverse effect of foreign exchange rate fluctuations on completed foreign exchange contract prior to its settlement whereas Translation Risk The risk of change in value of assets liabilities and equities due to hanges in foriegn    See Answer
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