Question

ON 1^st march 2016, kilima limited exports goods to the USA firm RACHEL Inc. The USA FIRM IS DUE TO PAY $2140000 IN SIX months’ time to august 2016.kilima limited is concerned that the US DOLLAR weakens against the Kenyan shillings before us dollar is received.

Exchange rates

Spot rate                                        KES101.50/$1     -     KES103.50/$1

Forward rates

Six months forward                      KES97.20/$1       -       KES 99.50/$1

Nine months forward                 KES 95.40/$1      -         KES 97.50/$1

Interest rates

Kenya shillings six months’ rate          16.5%   -                20.25%

Us dollar six months’ rates                      5.5%     -             6.2%

Required

Evaluate the best method for kilima limited to hedge the currency risk on this transaction using

Money market hedge

Forward contract

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Answer 1