REVIEW QUESTIONS

QUESTION ONE AUG 2020 Qn 2 (b)

Although a foreign exchange futures contract is conceptually similar to a forward foreign exchange
contract, there are important differences the two instruments.

REQUIRED

i. Compare and contrast foreign exchange futures and foreign exchange forward contracts
ii. Briefly discuss the advantages and disadvantages of currency future

QUESTION TWO MAY 2019 Qn 4

a) Over the past few decades, derivatives and derivatives markets have grown to be an integral
and a significant component of financial markets
i. Briefly explain the different categories of participants in the derivative markets
ii. Discuss any the key functions of derivative instruments and markets
b) Beseni Company is an importer/exporter of heavy machinery for a variety of industries. It is
based in Tanzania but trades extensively with USA. The company does not have separate
treasury function and it is part of your duties to assess and manage currency risk. You are
concerned about the recent fluctuation in the exchange rate between $ and Tsh and you are
considering various methods of hedging the exchange risk involved.
Assume it is now the end of March, 2019. The following transactions are expected on 30 th June
2019.
Sales receipts US$ 450,000
Purchases payable US$ 250,000
The following information is available:
 The spot rate of exchange is Tsh 2,314-Tsh 2,330 per US$
 The thee- month forward rate that will apply for this contract is Tsh 2,310-Tsh 2,320 per
US$
 Annual interest rates for three months' borrowing are: Tanzania 6 per cent; United
States 8 percent
 Annual interest rates for three months’ lending are: Tanzania 4 per cent and United
States 6.5 per cent

REQUIRED

i. Calculate the net Tsh receipt that Beseni Company can expect from its transactions
if the company hedged the exchange risk ( after taking out exposure netting ) using
each of the following
 The forward foreign exchange market (3 marks)
 The money market (4 marks)
ii. Recommend the most financially advantageous alternative for Beseni Company.

QUESTION THREE NOV 2019 Qn 1 (a)

KIPARA Co. is company based in the USA, supplying medical to the USA and Europe. It is 30 th November
2019 KIPARA Co's Treasury Department is currently dealing with a sale to a Swiss customer for CHF 12.3
million will pay for the equipment on 31st may 2020. The treasury Department intends to hedge the
foreign exchange risk on this transaction using traded futures or options as far as possible. Any amount
not hedged by a futures or options contract will be hedged on the forward market.

Exchange rates (quoted as US $/CHF 1)

Spot 1.0292-1.0309

Three months forward 1.0327-1.0347

Six months forward 1.0358-1.0380

Current futures (contract size CHF 125,000, futures price quoted as US $ per CHF 1)

Futures price:

December 1.0318

March 1.0345

June 1.0369

Currency options

Contact size CHF 125,000

Exercise price quotation US$ per CHF1

Premium: US cents per CHF 1

Exercise price: 1.0375

Call December March June

0.45 0.50 0.53

Puts 0.74 0.79 0.86

Futures and options contracts mature at the month end

Non-executive Director's comments

A new Non-executive Director has recently been briefed about the work of the Treasury Department
and has a number of questions about hedging activities. He wants to understand the significance of basis
risk in relation to futures. He also wants to know the significant features of the over the counter forward
contracts and options, why KIPARA Co. Prefers to use exchange traded derivatives for hedging

The Non-executive Director has also heard about the mark-to-market process and he wants to
understand the terminology involved, and how the process works, using the transaction with the Swiss
customer as an example. The treasury Department has supplied relevant information to answer his
query. The contact specification for the CHF futures contract states that an initial margin of US$ 1,450
per contract will be required and a maintenance margin of US $ 1,360 per contract will also be required.
The tick size on the contract I US$ 0.0001 and the tick value is US $ 12.50. You assume on the first day
when KIPARA Co. Holds the future contracts, the loss per contract is $ 0.0011.
REQUIRED

1) Evaluate which of the exchange traded derivatives would give KIPARA Co. The higher receipts,
considering scenarios when the options are exercised and not (10 marks)
2) Discuss the benefits and drawbacks for KIPARA Co. In using forward contract compared with
using over-the-counter currency options, and explain why KIPARA may prefer to use exchange-
traded derivatives rather than over-the counter derivatives to hedge foreign currency risk. (5
marks)
3) Explain to Non-executive Director how the mark-to-market process would work for the CHF
futures, including the significance of the data supplied by the treasury Department. Illustrate
your explanation with calculations showing what would happen on the first day, using the data
supplied by Treasury Department. ( 5 marks)

QUESTION FOUR: QN 2 NOVEMBER 2019 (a)

You bank's Dar es Salaam Office has surplus funds to the extent of TSH 500 million for a period of 3
months. The cost of the funds to the bank is 7 % per annum. It proposes to invest the funds in Dar es
Salaam, Nairobi or Durban and obtain the best yield, without any exchange risk. The following rates of
interest rate are available at the three centres of investment of domestic funds for a period of 3 months.

Dar es Salaam 8%

Nairobi 10%

Durban 6%

The market rates in Dar es Salaam for Kenya shilling and South African Rands are as follows;

Dar es Salaam on Nairobi (quoted as KES/TZS)

Spot 2.4950/2.4965

1 month 0.30/0.04 c discount

2 months 0.80/0.90 c discount

3 months 1.50/1.60 c discount

Dar es Salaam on Durban (quoted as ZAR/TZS)

Spot 5.3290/6.2360

1 month 1.80/1.70 pf premium

2 months 2.90/2.80 pf premium

3 months 4.00/3.90 pf premium

REQUIRED

Determine the centre at which the investment will be made and the net gain ( to neatest TZS) to the
bank on the funds. Ignore brokerage and cable expenses (10 marks)
QUESTION FIVE: MAY 2018 QN 2 (b)

Electro Company Ltd is a Tanzanian firm specialised in supplying electronic products to companies
around the world. Its management is considering how best to manage the financial risk of the
transaction entered into on 1st January 2018.

The transaction details are as follows:

It is now 1st January 2018 and the mid- spot rate is TZS 2,430/£. The Zenith Inc a British TV-manufacturer
is new customer and its first payment to Electro Company £ 156,250 is due on 30 th June 2018. Electro's
management is considering using one of the following hedge alternatives to hedge the June receipt from
Zenith Inc.

 A forward Market Cover

 Money Market Hedge or
 Market Traded Currency Options

The following information has been collected:

Foreign Exchange Market

Bid Ask

Spot TZS/£ 2,420 2,440

6 months forward TZS/£ 2,450 2,460

1 Year forward TZS/£ 2,470 2,480

Prices for market traded currency options on 01/01/2018 (Contract size =£31,250)

Exercise Price: TZS 2,445/£

June 2018 Call Puts

69 135

December 2018 114 157

Premiums are cents per £

Money Market Prices (Stated Rates of Interest)

Country Deposit Borrowing

Tanzania 8% 16%
UK 4% 12%

REQUIRED:

1) Assuming a spot rate of TZS 2,429/£ on 30th June 2018, Calculate the net Tanzanian shillings
receipts if to hedge its receipts Electro Company uses
a. A forward Market cover ( 2 marks)
 b. Money market hedge (2 marks)
c. Traded currency options ( 2 marks)
2) With reference to your calculation in part (b) above, advice Electro's management on how it
should proceed (2 marks)

QUESTION SIX: QN 3 (a) may 2018

In recent board meeting of Sabra Company, a hot debate arose about whether profit on import-export
deal was realized or not. During the meeting the management claimed to have made a profit on the
deal amounting TZS 15,000,000 but could hardly convince all members of the board. Some members of
the board believe that forward market cover was necessary. The management did not take such a cover.
The details of the deal are as on 1st January 2018, the company purchased a consignment of textile
products from UK at £ 10,000 payable in the three months ( 1st April 2018). The consignment was
shipped directly to a customer in Uganda The customer was invoiced in Uganda Shillings (UGS) at
invoice price of UGS 210,000,000. The Ugandan customer was given three months Credit to 1 st April
2018. Shipping costs amount to TZS 2,000,000 has been paid.

The exchange rates were as follows:

Exchange Rates in Dar es Salaam at 01/01/2018

UGS/TZS TZS/£

Bid Ask Bid Ask

Spot 3.0 4.0 2,700 2,800

Three months forward 5.0 6.0 2,900 2,950

Spot exchange rates on the 1st April 2018.

UGS/TZS TZS/£

Bid Ask Bid Ask

6.0 7.0 3,000 3,100

REQUIRED:

Evaluate the deal and inform the Board of Sabra of whether the management was accurate in its
computation of profit on the deal. Advice the board whether a forward cover could have assisted the
company to avoid loss. ( 10 marks).

QUESTION SEVEN QN 5 (b) MAY 2016

Baraza Trading Company manufactures foot wear for the past ten years it has seen a continual
expansion in its level of operations in Tanzania. It has developed a strong relationship with a major foot
wear wholesaler in the USA. Baraza Company's management has concerns that the company should
start to manage its exposure to exchange rates risk. Baraza Trading Company has sold footwear to the
USA customer worth US $ 50,000 payable in six months time. Assume that today is 1st May 2016 and
interest rate and foreign exchange quotes are as listed below:
Interest rates Deposit Borrowing

TZS 5.0% p.a 6.5% p.a

US $ 7.0% p.a 10.5% p.a

Exchange rates

Spot rates TZS/US $ 1,275-1,278

Three months forward 4-5 premium

Six months forward 4.50-5.1 premium

REQUIRED:

Advice Baraza's board whether it should use forward contracts or money market hedge when managing
the above dollar transaction over next six months. (10 marks)

QUESTION EIGHT QN 2 (c) NOV 2018

Uyole Company is a medium size Tanzanian Company with export and import trade links with US
Companies. The following transactions are due within the next six months

Purchase of components, cash payments due in 3 months US $ 10,000.

Sales of finished goods, cash receipts due in 6 months US $ 15,000

Purchase of finished goods for resale cash payments due in 3 months US $ 25,000

Sales of Finished goods, cash receipts due in 6 months US $ 24,000

Exchange rates quoted in the foreign currency market are as follows:

Spot (TZS/US $) 2,410-2,430

3 Months forward 8 00-10.00 premium

6 months forward 10-12 premium

The company decides to cover the above transactions in the forward market and the actual spot rates in
3 months and 6 months turned to be as follows

3 months TZS/US$ 2,370-2,380

6 months TZS/US $ 2,210-2,230

REQUIRED:

1. Determine the net TZS receipts which Uyole Company might expect to receive for both its three
and six months transactions if transaction remained uncovered (4 marks)
2. Determine the net TZS receipts which Uyole Company would receive for both its three and six
months transactions if they were covered in the forward market ( 4 marks)

QUESTION NINE QN 6 (a) NOV 2018

On 30th October, 2018 Ibra Trading Company exported goods to a customer in Utopia. The Utopia
customer was invoiced for UD 100,000 (UD=Utopian Dollar) payable on 30th January 2019. In the foreign
exchange market, the following quotes were available:

Spot TZS/UD 846-852

30th December, 2018 forward 836-842

30th January, 2019 forward 833-839

The management of Ibra Trading company wishes to hedge the foreign exchange exposure with traded
currency options. January 2019 exchange traded options have the following characteristics:

UD Exchange Traded Options

UD Calls UD Puts
Exercise Price TZS 837 TZS 835
Option Cost TZS 4 TZS 3
Maturity 30th January, 2019 30th January, 2019
Option Contract Size UD 10,000 UD 10,000

REQUIRED:

a. Illustrate how Ibra Trading Company can make use of the UD options to guard its foreign
exchange exposure. What will be the of the UD Option? (Hint: Set up a hedge position) (5
marks)
b. Comment on the UD option position on 30th January, 2019 if the TZS/UD spot rate on that date is
TZS/UD 830-833 and illustrate the action to be taken by the company to benefit from the option
position. What would be the net receipts from the transaction and the resulting effective
exchange rate? (5 marks)

QUESTION TEN

A German co exports goods to the USA customer and invoices its customer for US $ 12,614,000 and €
6,000,000 payable in August while at the same time it is due to settle its invoice to the USA supplier to
tune of US $ 5,000,000 payable in August ad well. It is now June and in the foreign exchange market,
the following quotations are made.

Spot US $/Euro 1.4070-1.4090

August forward: 1.4030-1.4150

September Euro future contracts are priced at US $1.4100. (One Euro future contract represents Euro
540,000

Required:

Set up the hedge position and calculate the hedge efficiency of in August the US $/Euro spot rate is US $
1.4150-1.4170 and September Euro future prices at $ 1.4150

QUESTION ELEVEN
On Tuesday morning, an investor takes a long position in a swiss Franc future contract that matures on
Thursday afternoon. The agreed upon prices is US $0.75 for SFr 125,000. At the close of trading on
Tuesday, The futures price has risen to US $ 0.755 at Wednesday close, the price has declined to US $
0752. At Thursday close the price drops to US $ 0.74 and the contract mature.

Required

Details the daily settlements process. What will be the investor's profit or loss.

QUESTION TWELVE

On Monday morning, an investor takes a short position in Euro futures contract that matures on
Wednesday afternoon. The agreed upon price is US $ 0.6370 for Euro 125,000. At the close of trading
on Monday, the futures prices had fallen to US $ 0.6315. At Tuesday close, the price falls further to US $
0.6291. At Wednesday close, the prices rises to US $ 0.6420 and contract matures.

Required

Detail the daily settlement process. What will be the investor's profit or loss.

QUESTION THIRTEEN

DART Buses Ltd is a prominent Tanzanian bus operator. The firm is refurbishing its fleet of buses and
has recently place a very large order for new buses with its main Italian supplier, JITU Technical Ltd.
DART has agreed to pay the € 50,000 due on this order in three month's time. The company has not
previously had many dealings in foreign exchange and its management is now considering whether
DART should manage its exposure to exchange rate risks. You work for DART and have been asked to
advise management on this matter. You have collected the following information.

Current spot rate (TZS/€) 2,950-3,000

3 Months forward 15-18 discount

Euro interest rate (borrowing) 6% p.a

Euro interest rate (deposit) 2% p.a

Tanzanian Shilling interest rate (deposit) 6% p.a

Tanzanian shilling interest rate (borrowing) 10% p.a

3 month currency put options on € 50,000- exercise price (TZS/€) 2,970

3 month currency call option on € 50,000- exercise price (TZS/€) 2,964

Euro call option premium (TZS/€) TZS 5

Euro Put option premium (TZS/€) TZS 5

A recent article in the financial pages of a daily newspaper in Tanzania predicted that the Euro “ could
strength against the TZS by as much as 3% over the next three months “

REQUIRED
  Using the information above calculate DART's payment in TZS for the buses if it uses:
1. A forward contract
2. Money market hedge
3. Currency Option Hedge
 Advise, with supporting calculations, DART's management on the best hedging alternative
should the actual spot exchange in three month turn out to be: TZS 2,980-3,040

QUESTION FOURTEEN

Mickey Ltd wishes to lend US$600,000 to its Japanese subsidiary. At the same time, Hibakki Heavy
Industries is interested in making a medium-term loan of approximately the same amount to its US
subsidiary. The two parties are brought together by an investment bank for the purpose of making
parallel loans. Mickey will lend $600,000 to the US subsidiary of Hibakki for 4 years at 15%.

The principal and interest amounts are payable only at the end of the fourth year along with interest
compounding annually. Hibakki will lend the equivalent in Yen at the current exchange rate to the
Japanese subsidiary of Mickey (i.e. ¥60 million for 4 years at 12%). Again the principal and interest
(annual compounding) are payable at the end of the fourth year, assuming a fixed exchange rate equal
to the current rate. The current exchange rate is ¥100 to the dollar.

REQUIRED:

(a) If these expectations prove to be correct, what will the dollar equivalent of principal and interest
payments to Hibakki, at the end of the 4 years?

(b) Compute the total amount in dollars that Mickey will receive at the end of the 4 years, from the
payment of principal and interest on its loan by the US subsidiary of Hibakki?

c) Which party will gain the most from the parallel loan agreement?

FOREX swaps

A FOREX swap is similar to a currency swap with the only difference being that, in an FOREX swap, there
is no exchange of interest obligations.

However, the principal is exchanged at the start of the swap and re-exchanged at the end of the swap.

QUESTION FIFTEEN

Advance Electronics ( AE), a US based company would like to borrow pounds, and Royal Foods (RF),
which is a UK company desires to borrow dollars. AE can borrow in dollars at 7 percent and pounds at 9
percent, whereas RF can on its own borrow dollars at 8 percent and pounds at 8.5% AE wants to borrow
£10 million for two years and RF wants to borrow $16 million for two years, and the current ($/£)
exchange rate is $1.60.

Required:

(a) What is the swap transaction the two companies can enter into to achieve their plans?

Note: You may assume the counterparties would exchange principal and interest payments without any
rate adjustments.
(b) Calculate the savings that AE and RF can achieve.

(c) Suppose AE can borrow dollars at 7 percent and pounds at 9 percent, whereas RF can borrow dollars
at 8.75 percent and pounds at 9.5 percent. What range of interest rates would make this swap
attractive to both parties?

(d) Based on the scenario in part (c), suppose AE borrows dollars at 7 percent and RF borrows pounds at
9.5 percent. If the parties swap their current proceeds, with AE paying 8.75 percent to RF for pounds
and RF paying 7.75 percent to AE for dollars, what are the cost savings to each party?

QUESTION SIXTEEN: QN 6(b) NOV 2020

KYT Inc is a company located in United States (US) that has a contract to purchase goods from Japan in
two months time on 1st Jan6. The payment is to be made in Japanese Yen and will amount to 140 million
Yen. KYT Inc managing director wishes to protect the contract against adverse movements in foreign
exchange rates and is considering the use of currency futures. The spot exchange rate is US $ 128.15 Yen
while currently Future contracts in the regional exchanges quoted in US $ per yen are priced at 0.007985
and 0.008250 for January and February respectively. Contract size is 12,500,000 yen.

Assume that futures contracts mature at the end of the month and margin requirements and taxation
may be ignored.

REQUIRED:

1. Illustrate how KYT Inc might hedge its foreign exchange risk using currency futures (2 marks)
2. Explain the meaning of basis risk and show what basis risk is involved in the proposed hedge (4
marks)
3. Assuming the spot exchange rate is 120 yen/US $ on 1st January and that basis risk decreases
steadily in a linear manner, calculate what the result of the hedge is expected to be. Briefly
discuss why this result might not occur (4 marks)
4. In addition, KYT Inc is concerned about its exposure to variable interest rate borrowing. Discuss
the relevant considerations when deciding between futures and options to hedge a company's
interest rate risk. (4 marks)

QUESTION SEVENTEEN: QN 6 MAY 2018

Moonlight Inc, a London based company, recently commenced exports to Kenya. A payment of Kenya
Shillings (KES) 100,000,000 is due from a customer in Kenya in three months time. The Kenyan
government sometimes restrict movement of foreign currencies from the country. However, due to
strong links between Kenya and UK it is unlikely that payments to Moonlight will be affected.

There is neither forward nor derivative markets in Kenya. Moonlight has observed the following foreign
currency quotes:

Exchange Rate KES/£ US $/£

Spot Rate 126.4- 128.2 1.775-1.782

3 month forward rate Not available 1.781-1.789

Moonlight can borrow and invest in any of the three currencies. The respective borrowings and
investing rates are 6% and 4%, 7% and 4.5% and 14% and 10% for pound sterling (£), the US dollar ($)
and the Kenyan shillings respectively. Further, the inflation rates are in the UK, USA and Kenya are
expected to be 3%, 4% and 14% respectively.

Currently, Moonlight has a £ 800,000 overdraft in the UK. The Kenyan customer has indicated that might
be willing to make a lead payment in return for 1.5% discount on the sale price.

REQUIRED:

1. Discuss the advantages and disadvantages of the alternative currency hedged (including
relevant cross hedges) that are available to Moonlight (4 marks)
2. Calculate the expected outcome of each hedge, and recommend which hedge should be
selected. (8 marks)
3. Evaluate whether or not Moonlight should agree to its Kenyan customer receiving the 1.5%
discount (4 marks)
4. Suggest possible action that Moonlight might take if the Kenyan government decides not to
allow the transfer of money out the country (4 marks)

QUESTION EIGHTEEN: QN 3 (b) NOV 2020

You have been invited by the directors of Tegeta International Company as a financial analyst to resolve
misunderstanding about the need for hedging foreign exchange risk. The company has recently
purchased textile products from China for Yuan 234,000 the payment of which is due in six months.
Some directors are of the view that hedging is important to avoid losses from the appreciation of Yuan.
Others argue that hedging is unnecessarily costly.

REQUIRED:

As a financial analyst, provide a description of the arguments for and against hedging foreign exchange
risk and inform the directors of what multinational companies do in practice with respect to the
management of foreign exchange risk. (9 marks)

QUESTION NINETEEN: QN 4 (c) Nov 2019

A Tanzanian investor enters into an agreement to purchase a property in Kenya for a sum of KES
50,000,000. The full amount has to be paid in three months. He has adequate funds in his bank account
in Dar es Salaam, which fetches him 0.5% interest per month, compounded monthly, to pay for the
property. At present, the spot exchange rate is TZS 21.46/KES and the three month forward exchange
rate is TZS 21.80/KES. In Nairobi, the money market interest rate is 1.8% for a three month investment.
His investment adviser informs him he can decide on two alternative ways of paying for the property.

 Continue to maintain the funds in his dar es salaam bank account and buy KES 50 million
forward
 Purchase KES at spot today and invest the amount in a Nairobi bank for three months so that at
the end of three months the maturity value equals to KES 50 million

REQUIRED:

Evaluate both payment methods and explain which method you would recommend (7 marks)
QUESTION TWENTY: QN 5 (b) November 2016

Omwani Premium Exports Ltd (OPEL), is a seasoned exporter of Arabica and Robusta roasted coffee to
Europe and Asia. After having stayed for long time without a full time finance expert, OPEL has finally
employed you as a finance manager. In a meeting involving the Managing Director (MD), the Marketing
Manager and you, the Managing director expressed his concern about recent trend of the Tanzanian
Shillings strengthening against the pound. He was worried that if the ZTZS keeps on appreciating in
value, OPEL will make a loss on a consignment exported to the United Kingdom, whose payment of £
40,000 will be received in 90 days. The Marketing Manager told the Managing Director that he has no
reason to be anxious since OPEL will use forward contracts, as they have always done, to protect the the
value of the receivables. It was observed that the spot rate was TZS 2,500 per Pound. The 90 days
forward rate for the pound is TZ 2,400.

You have observed that banks are offering options on pound and a put option with strike price of TZS
2,300 and 90 days has premium of TZS 50. You propose that this alternative need to be considered.

REQUIRED:

 Explain to Managing Director and the Marketing manager on how the put option will benefit
OPEL as compared to the forward contract (5 marks)
 Show them under what condition OPEL would exercise the put option and when they would
break even. Assume the spot rate when the £ £40,000 is received range from TZS 2,000 to TZS
2,800 in intervals of TZS 100 (2 marks)
 Compute the realizable answers with put option and compare them with the realization under
forward contract.(4 marks)
 Explain to the managing director any two (2) factors affecting the option value (3 marks)

QUESTION TWENTY ONE: QN 2 MAY 2015

Kakakuona Ltd is a Tanzanian importer of TV sets from France. The company has been contacted to
purchase 300 TV sets at a unit price of 560 Euros. Three months credit is allowed before payment is
due.

Current Exchange Rates

Spot TZS/Euro 1,970-1,990

1 month forward 25-15 dis

3 months forward 45-35 did

Current Bank Interest Rate

France Deposit 4% Borrowing 8%

Tanzania Deposit 8% Borrowing 12%

REQUIRED:
 1. Calculate the expected TZS cost of the Euro payment in three months using the forward
market hedge and money market hedge and recommend which among the two should
be used (12 marks)
2. If the French supplier is to offer 2.5% discount on the purchase price for payment within
one month evaluate whether you would alter your recommendation in (1) above. (8
marks)

QUESTION TWENTY TWO: QN 4 (a) May 2015

Basic Phones Ltd is an importer and exporter of phones for variety of users. It is based in Tanzania but
trades extensively in the USA and UK. Assume that you are newly 7689appointed Management
Accountant with Basic Phones Ltd. During the month of October 2014 the company made the following
credit transactions:

Month Transaction Units Unit price

October, 2014 Exports 1,000 US $100
Imports 1,000 US $ 80

October, 2014 Exports 1,000 £ 100

Imports 1,000 £ 50
Customers are allowed one month credit while payments to foreign suppliers of phones are made two
months after purchase. In October 2014 the Bankers of Basic Phones Ltd provided the company with the
following rates:

TZS per US $ TZS per £

Spot US $:TZS 1500-1560 £:TZS 2500-2550
One month forward US $:TZS 1530-1570 £:TZS 2560-2580
Two months forward US $:TZS 1540-1580 £:TZS 2565-2595

REQUIRED:

1. Calculate the TZS receipt received by Basic Phones Ltd from its transactions assuming the
company covers the transactions in the forward market (4 marks)
2. Write a brief report discussing the possible causes of the ups and downs in spot exchange rate
(6 marks)

QUESTION TWENTY THREE: Qn 3 May 2017

a. Identify the features of a future contracts and a forward contract. Compare and contrast the
two and identify situations where each is most appropriate as hedging tools (8 marks)
b. An exporter, Global Convenience Ltd, has sold merchandise worth £ 10,000 to a customer in
England. Global Convenience expects to receive the money three months from now. The spot
exchange rate of £ is TZS 3,200. The exporter is expecting depreciation on the £ during the next
three months and expect the price to be at TZS 3,000 then.

The following spot and forward foreign exchange rates are available:

TZS/£
 Spot 3,200
1 month 3,180
2 month 3,150
6 month 3,190

REQUIRED:

What can Global Convenience do to protect itself from expected depreciation of the £? (6 marks)

c. A sugar mill in Kagera is expected to produce 100 metric tons of sugar in the month of July. The
current price in the month of May is TZS 2,200 per kilogram. July Futures is trading at TZS 2,300
per Kilogram. The quantity in each futures contract is 10 Metric ton.

The sugar mill apprehends that a price lesser than TZS 2,300 per Kilogram will prevail in July due to
excessive supply expected at that time.

REQUIRED:

How can the sugar mill hedge its position against the anticipated decline in sugar prices in July? (6
marks)

QUESTION TWENTY FOUR: QN 4 (c) 2020

Suppose a trader opens a short position in two rice futures contracts. Each contract is for 5,000
kilogram. The initial margin is TZS 2,000,000 per contract, and the contract expires in 100 says.
Suppose the future price decreases by TZS 500 per Kilogram per day for the first 10 days, then increases
by TZS 750 per kilogram per day for the next 5 days.

REQUIRED:

Estimate the following:

 The initial margin to be deposited with clearing house

 The total gain/loss due to price decreases
 The total gain/loss due to price increase
 The balance in the trader's margin a/c after 15 days (6 marks)