Individual assignment for International Finance

Question 1 -

Consider a Mauritius based organization of your choice which has got operations (subsidiary or branch) in one (or various) country (ies) in Africa.

1. Provide a brief context of the organization which includes the African operation(s);

2. Discuss the operating, financial and other exposures that the Mauritian organization and its African operation are faced as a result of its activities in Africa.

3. Recommend and justify the measures and policies that can be put in place in Mauritius and in the international operation to manage the various exposures identified earlier.

Question 2 -

Al-mirah Ltd. is a European firm and maintains all its bank accounts in EUR, which is also its reporting currency. It has recently imported some raw materials from the US and has been invoiced for USD 6 million payable in 1 month time. In addition, it has also exported finished goods to India and South Africa. The Indian customer has been invoiced for USD 8 million, receivable in 3 month time. The South African customer has been invoiced ZAR 50 million receivable in 2 month time.

You are given the following spot and forward FX rates:

USD/EUR

Spot: 1.02980 - 1.09462

1 month forward: premium of 58 pips

2 month forward: premium of 98 pips

3 month forward: premium of 108 pips

ZAR/USD

Spot: 12.6296 - 13.4346

1 month forward: premium of 60 pips

2 month forward: premium of 80 pips

3 month forward: premium of 120 pips

The same spread is maintain for all the forward FX rates and the FX market, which Al-mirah Ltd. has access to, does not trade in ZAR/EUR.

The money market rates applicable to Al-mirah are:

EUR: 4.52% - 4.73% per annum

USD: 5.02% - 5.35% per annum

ZAR: 10.8% - 11.85% per annum

Required:

a) Explain, using with the aid of examples, the different methods used to forecast foreign exchange rates.

b) Show how best Al-mirah Ltd. can externally hedge its foreign exchange exposures.