Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the tables below, see Note 4 to the unaudited condensed consolidated financial statements for a discussion of market risk.
We have short-term borrowings which attract interest at rates that fluctuate based on changes in the South African prime interest rate. The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of December 31, 2021, as a result of changes in the South African prime interest rate, assuming hypothetical short-term borrowings of ZAR 1.0 billion as of December 31, 2021. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the South African prime interest rate as of December 31, 2021, are shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Table 18
As of December 31, 2021
Annual expected interest charge
($ ’000)
Hypothetical change in interest rates
Estimated annual expected interest charge after hypothetical change in interest rates
($ ’000)
Interest on South Africa overdraft (South African prime interest rate)
4,394
1%
5,022
We hold a significant amount of U.S. dollars and intend to use a portion of these funds to settle part of the purchase consideration related to the Connect Group acquisition. The purchase consideration will be settled in ZAR. Accordingly, we entered into foreign exchange option contracts in an aggregate amount of USD 120.0 million with RMB in November 2021 in order to manage the risk of currency volatility and to fix the USD amount required to be converted to generate ZAR 1.9 billion, which will be utilized for part of the purchase consideration settlement. We purchased foreign currency put options and sold foreign currency call options at the same strike price. The strike price of the synthetic forwards on the date of entering into the contracts was equal to the exchange rate of a traditional forward exchange contract with the same value date.
We expect to record a realized currency gain if the USD/ ZAR spot price on the maturity date is below the strike price because, as the holder of the put options, we would exercise the put option and receive a higher rate of exchange compared to the spot price. The call options sold would be out-of-the-money on the maturity date and would expire unexercised. On the other hand, we expect to incur a realized currency loss if the USD/ ZAR spot price on the maturity date is above the strike price because the put options would be out-of-the-money and would expire unexercised, but RMB would exercise its call options and we would be required to deliver USD at a lower ZAR rate than the spot price.
As noted above, we are committed to utilize $120.0 million of our existing cash reserves to purchase ZAR 1.9 billion in February 2022, at an average rate of $1: ZAR 15.72. The following table illustrates the impact of a hypothetical changes (a 1% increase to $: ZAR 15.88 and a 1% decrease to $1: ZAR 15.56) in the exchange rate between the $ and the ZAR. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Table 19
As of December 31, 2021
Contracted ZAR to be received
(ZAR ’000)
Hypothetical change in exchange rates
Expected ZAR received after hypothetical change in exchange rate
(ZAR '000)
Impact of difference between rate in currency options and hypothetical rate
(ZAR '000)
ZAR received from currency options
1,886,336
1%
1,905,199
(18,863)
(1%)
1,867,473
18,863
55
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