A Zimbabwean exporter of consumer goods to South Africa expects to receive 2.5 million Rand in 3 months’ time but is worried about adverse movements in exchange and interest rates and wants to hedge...

A Zimbabwean exporter of consumer goods to South Africa expects to receive 2.5 million Rand in 3 months’ time but is worried about adverse movements in exchange and interest rates and wants to hedge against this development. The exporter has gathered the following financial information from the Zimbabwean and South African money markets:

The spot exchange rate isUS$0.18640/ZAR;

The 3 months forward rate is US$0.18540/ZAR;

The forecast spot rateisUS$0.18400/ZAR.

It is also given that:

Zimbabwe’s 3 month borrowing rate of interest is 10% per annum;

Zimbabwe’s 3 month lending rate of interest is 8% per annum;

South Africa’s 3 month borrowing rate of interest is 12% per annum;

South Africa’s 3 month lending rate of interest is 10% per annum.

Show how you can hedge against risk using a money market hedge.

Show how the exporter can hedge against risk using money and forward market hedges.