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Evaluate a money market hedge

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Reference no: EM132600419

B Limited recently imported machinery from a company in the United States of Americs (USA). Payment of $100 000 must be made in 6 months' time. The financial manager is concerned that the cost of these supplies may rise in Rand terms due to political uncertainty and slow economic growth in South Africa. He has decided to hedge the currency risk of this creditor.

The following information has been provided by the company's bank:

                                                            Buy                                  Sell

Spot rate (Rand per Dollar)          14.1479                         14.5307

Forward rate 6 month                 14.7215                          14.9381

                                                    Borrowing                     Deposit

Annual Rand interest rate           10.50%                        7.75%

Annual Dollar interest rate              3.75%                     2.50%

B Limited does not have any cash reserves at present.

REQUIRED:

Question 1: Evaluate whether a money market hedge, a forward market hedge or a lead payment should be used to hedge the foreign creditor.

Reference no: EM132600419

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