Reference no: EM132621506

MSD Computers (Pty) Ltd, a South African-based computer manufacturer, imports computer motherboards from Taiwan.

The South African rand (R) is the official currency used in South Africa, while the New Taiwan dollar (NT$) is the official currency used in Taiwan. The current spot exchange rate is R0.62/NT$1.

MSD Computers has just placed an order for 30 000 motherboards at a cost of NT$182.50 each. The Taiwanese supplier grants MSD Computers 90 days to pay for any purchases.

Interest rates in South Africa and Taiwan are currently at 8.75% and 2.63% per annum, respectively.

Required:

Question 1: How much, in rand terms, would MSD Computers need, in order to settle its obligation at current spot rates?

Question 2: What should the exchange rate be in 90 days' time?

Question 3: Assuming MSD Computers is able to enter into a forward rate agreement at the rate obtained in Question 3.2 above: how much, in rand terms, would they need to pay, in order to settle their obligation to the Taiwanese supplier?

Question 4: How much more or less, in rand terms, will MSD Computers end up paying, due to the fluctuation in the exchange rate?

Question 5: Briefly explain how MSD Computers can use a money market hedge to mitigate its foreign exchange rate risk.