South African Airways has bought a new Airbus and is supposed to pay 20m in 30 d

Question

South African Airways has bought a new Airbus and is supposed to pay 20m in 30 days. They want to eliminate the risk that their home currency, the South African rand (ZAR), will depreciate relative to the Euro during this 30-day period. The following exhibit shows current exchange rates between the ZAR, EUR, and the U.S. dollar (USD): a. Describe the currency transaction(s) that South African Airways should undertake to eliminate currency risk over the 30-day period. b. Calculate the ZAR/EUR cross-currency rate South African Airways would use in valuing the 20m payable, and the resulting value in ZAR.

Explanation / Answer

a. South african airways should enter a 30 days Forward contract to cover 30-Day period currency risk.

b.

beacause of amount payable, weneed to calculate ask rate of Euro for Zar. 30-Days rate is relevant for us because amount payable is within 30 days ZAR/USD = 5.2641 EUR/USD = 0.9285 Means EUR .9285 = ZAR 5.2641 EUR 1 = ZAR 5.6695 Thus, cross currency rate between ZAR/EUR is ZAR/EUR = 5.6695

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