You work for RockCor, a U.S. mining equipment company. RockCor has sold drilling rigs to the South African government for 600M South African Rand (ZARs). Payment from the drilling equipment will be made in ZARs as per the contract. At the current exchange rate of .10 USDs per ZAR, the USD value of the contract is $60M. The ZAR account receivable will be paid by the S. African government in 180 days, at which point all the drilling equipment will have shipped.
RockCor is concerned that the ZAR will depreciate relative to the USD over the next 180 days and will adversely impact the USD value of the ZAR receivable. The company’s CFO asks you to construct a MMH that will lock in a known USD value of the receivable. Checking the available bank borrowing and lending interest rates for 180-day loans and deposits, you find that:
The 180-day interest rate for ZARs 4% and for USDs is 4%. (Annualized rates)
Set up and explain in detail, a MMH hedge using these bank interest rates Be sure to show many USDs you can exchange for 600M ZARs.