problem1) Using the information provided below, answer the problems that follow and show all your calculations.
Currency Spot rate 1 month 3 months 6 months
USD/ZAR 8,1658/8,1783 495/585 1475/1595 2875/2985
EUR/USD 1,5436/1,5442 - - 5/2
USD/CHF 1,2635/1,2640 - 27/28 -
GBP/USD 1,9814/1,9817 45/15 145/110 -
AUD/USD 0,9012/0,9014 12/11 - -
1.1 At what rate will a South African importer buy Swiss francs 3 months forward?
1.2 At what rate will a South African exporter sell Australian dollars 1 month forward?
1.3 At what rate will a South African bank sell Euros 6 months forward, fully optional over six (6) months?
1.4 At what rate will a South African bank buy British pounds 3 months forward,optional over the second and third month?
Note 1: Remember that when an exporter sells, the bank buys and that when an importer buys, the bank sells.
Note 2: Satisfactory answers require a thorough understanding of spot buying and selling rates, cross rates and forward rates including the application of discounts and premiums.
On 1 February, your company shipped a consignment of polyester fibres for industrial use, valued at USD 95 000, to a customer in the Far East. Using the exchange rates quoted below
• show all calculations in the form of bank account entries to your bank account for each of the transactions in the situations that follow.
• comment on the cash flows generated.
• comment on the final profitability of the whole deal measured against the original contract.
Date Spot USD/ZAR 1 month 2 months 3 months
1 February 7,9850/8,0018 - 950/1060 -
1 April 7,6782/7,6940 - - 1475/1595
1 July 7,5655/7,5815 - 930/1035 -
1 August 7,9107/7,9270 495/585 - -
15 December 8,3960/8,4110
a) Payment is expected on 1 April and you have asked your bank to cover this amount forward.
b) On due date, your customer lets you know that due to unforeseen circumstancespayment is delayed to 1 July.
c) In June, your customer informs you that part payment of USD 50 000 will be forthcoming on 1 July but with the balance of USD 45 000 rescheduled for 1September.
d) By 1 August, the spot rate has moved so much to your advantage that your decide to benefit from this trend and close out the contract.
e) Finally, your customer settles the outstanding amount of USD 45 000 on 15 December.
Note 1: Your bank account should include all the above transactions. In other words, one bank account for all transactions in order of the value/delivery dates.
Round all values to the nearest rand, that is, 50 cents or more upwards and less than 50 cents downwards. Ignore any interest implication.
Note 2: Regarding fixed date foreign exchange contracts, you are required to show a good grasp of swaps (extensions and early deliveries) and counter contracts.
Before you start calculating the forward rate applicable on 1 July, ask yourself what amount is automatically set-off against the 1st extension and what sum is left needing further attention (point c refers).
problem3) You, a consultant, have been asked by your client to give advice on what options are available on financing an export transaction.
Unfortunately, there are not that many and, in view of your client’s circumstances, the choice is limited to bank overdrafts and the pre-and post-shipment working capital finance facility offered by theIndustrial Development Corporation (IDC).
You assist your client in describeing
• how a bank overdraft facility operates, and
• the finance structure of the IDC’s pre-and post-shipment working capital finance facility.