- 20 Marks
FM – AUG 2022 – L2 – Q5 – Cash management | Foreign exchange risk and currency risk management | Working Capital Management
Analyzes cash management using the Miller-Orr model, explains motives for holding cash, and discusses the advantages of currency forwards over futures.
Question
a) Adjei Departmental Stores’ demand for cash has been quite volatile recently, with the standard deviation in daily cash demand rising to GH¢60,000. The managers of the company are therefore considering using the Miller-Orr model to manage its cash flows. The minimum cash balance would be set to GH¢300,000. The annual interest rate is expected to be 18.25% while the cost of trading investments in securities is GH¢10,000 per transaction.
Required:
i) Compute the cash return point. (4 marks)
ii) Compute the upper cash limit. (2 marks)
iii) Explain how the minimum cash limit, upper cash limit, and cash return point would be used to manage the cash balances of Adjei Departmental Stores. (3 marks)
b) The Founder of a growing technology company has questioned her Chief Finance Officer about the company’s holdings of cash in demand deposit accounts and on hand when the money could be invested in financial securities for returns.
Required:
Explain to the Founder THREE (3) motives for holding cash. (6 marks)
c) Serwaa Home Décor Ltd, a trading company based in Ghana, usually buys foreign currency to settle invoices for imports. The Treasury Manager is considering ways of hedging the company’s foreign currency risk exposures. After considering various options available to her, she has settled on both forwards and futures contracts.
Required:
Explain TWO (2) advantages of currency forwards over currency futures contract. (5 marks)
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