Currency Futures – NBC Institute

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

Question

a. You have worked with a major oil servicing company in Nigeria, with headquarters in the USA, for the past six years. Recently you completed your ICAN examinations, and you have been asked to join the international treasury department in New York City for a two-year attachment. The company is due to pay a UK supplier the sum of ₤5million in three months’ time. Your team is considering alternative methods of hedging the expected payment against adverse movements in exchange rate.

You are required to advise the company which of the following hedging strategies should be adopted for the payment due to be made in three months. Show all workings:
i. Forward contract (2 Marks)
ii. Currency futures (5 Marks)
iii. Currency options (5 Marks)

Answer

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Tags: Currency Futures, Currency options, Forward Contracts, Hedging
Level: Level 3

Topic: Foreign Exchange Risk Management

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

Question

YSL is a company located in the USA that has a contract to purchase goods from Japan in two months’ time on 1st September. The payment is to be made in yen and will total 140 million yen. The managing director of YSL wishes to protect the contract against adverse movements in foreign exchange rates and is considering the use of currency futures. The following data are available:

Spot foreign exchange rate: $1 = 128.15 yen
Yen currency futures contracts on SIMEX (Singapore Monetary Exchange)
- Contract size: 12,500,000 yen
- Contract prices (US$ per yen):
  - September: 0.007985
  - December: 0.008250

Assume that futures contracts mature at the end of the month.

Required:
i) Illustrate how YSL might hedge its foreign exchange risk using currency futures. (5 marks)
ii) Explain the meaning of basis risk and show what basis risk is involved in the proposed hedge. (5 marks)
iii) Assuming the spot exchange rate is 120 yen/$1 on 1 September and that basis risk decreases steadily in a linear manner, calculate what the result of the hedge is expected to be. Briefly discuss why this result might not occur. (5 marks)
(Margin requirements and taxation may be ignored.)

Answer

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Tags: Basis risk, Currency Futures, Currency Hedging, Foreign Exchange Risk, Risk Management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: NOV 2016

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

Question

Edi Ltd, based in Accra, Ghana, is a multinational company with two wholly-owned subsidiaries: Gil Plc based in Nigeria and Zep Ltd based in South Africa. Until recently, the Edi group has been doing well, returning a stable level of dividends to its shareholders. The financial performance of the Edi group has dipped in the past two years. In the last quarter of last year, the directors approved the establishment of a central treasury department based at the group’s headquarters in Accra. It is believed that the central treasury function will help boost effectiveness and efficiency in the group’s liquidity management, currency risk management, dividend remittances, and borrowing.

Intragroup Currency Transfers:
There are a lot of intragroup credit transactions that are often settled independently between the parties involved. This year, the treasury department has been tasked to manage the settlement of intragroup indebtedness through netting to reduce the volume of currency transactions. It has been agreed that all settlements will be made in the Ghanaian cedi at the prevailing spot mid-market exchange rate.

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Required:

i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.
(6 marks)

ii) Suppose the treasury department is recommending the use of currency futures to hedge net currency exposures. Discuss the advantages and disadvantages of the Edi group using currency options instead of currency futures in hedging net currency exposures.

Answer

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Tags: Currency Futures, Currency Hedging, Currency Transfers, Intragroup Transactions, Multinational Finance, Netting, Treasury Management
Level: Level 3

Topic: The role of the treasury function in multinationals
Series: MAY 2019

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

Question

a) The Treasury Department of LCM Ltd is preparing financial plans for the ensuing financial year. Annual credit sales revenue is projected to be GH¢500 million while the cost of sales is expected to be GH¢260 million. Its current assets are composed of inventory and trade receivables, while its current liabilities comprise trade payables and bank overdraft. The following targets have been set:

Receivables turnover days: 90 days
Payables turnover days: 30 days
Operating cycle: 150 days
Current ratio: 1.1 times

The company’s long-term capital consists only of owners’ equity. The composition and size of long-term capital are expected to remain the same for the ensuing year. The opportunity cost of equity capital is 20%, and the interest rate on the bank overdraft is 18%.

Required:
i) Compute the amount of bank overdraft the company will need in the ensuing year. (6 marks)
ii) Compute the net working capital of the company for the ensuing financial year. (2 marks)
iii) Compute the cost of financing working capital (in GH¢). (3 marks)
iv) Identify the working capital financing policy LCM Ltd is employing. (4 marks)

b) Risk can be hedged through a variety of derivative instruments such as futures, options, and swaps. Each derivative instrument presents its advantages and disadvantages.

Required:
In reference to the above statement, justify why a company would choose a currency futures contract over a currency option contract in hedging currency exposure. (5 marks)

Answer

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Tags: Currency Futures, Currency options, Financing policy, Payables turnover, Receivables turnover, Working Capital
Level: Level 2

Topic: Hedging with options, Working Capital Management
Series: JULY 2023

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

Question

Identify five (5) distinguishing features of a currency futures contract and a forward contract. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Foreign Exchange, Forward Contracts
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2015

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Currency options, Forward Contracts, Hedging
Level: Level 3

Topic: Foreign Exchange Risk Management

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

Question

Spot foreign exchange rate: $1 = 128.15 yen
Yen currency futures contracts on SIMEX (Singapore Monetary Exchange)
- Contract size: 12,500,000 yen
- Contract prices (US$ per yen):
  - September: 0.007985
  - December: 0.008250

Assume that futures contracts mature at the end of the month.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Basis risk, Currency Futures, Currency Hedging, Foreign Exchange Risk, Risk Management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: NOV 2016

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

Question

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Required:

i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.
(6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Currency Hedging, Currency Transfers, Intragroup Transactions, Multinational Finance, Netting, Treasury Management
Level: Level 3

Topic: The role of the treasury function in multinationals
Series: MAY 2019

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

Question

Receivables turnover days: 90 days
Payables turnover days: 30 days
Operating cycle: 150 days
Current ratio: 1.1 times

b) Risk can be hedged through a variety of derivative instruments such as futures, options, and swaps. Each derivative instrument presents its advantages and disadvantages.

Required:
In reference to the above statement, justify why a company would choose a currency futures contract over a currency option contract in hedging currency exposure. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Currency options, Financing policy, Payables turnover, Receivables turnover, Working Capital
Level: Level 2

Topic: Hedging with options, Working Capital Management
Series: JULY 2023

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

Question

Identify five (5) distinguishing features of a currency futures contract and a forward contract. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Foreign Exchange, Forward Contracts
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2015

Question Tag: Currency Futures

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FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

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FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

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AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

You're reporting an error for "AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals"

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

You're reporting an error for "FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management"

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

You're reporting an error for "FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management"

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

You're reporting an error for "FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management"

AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Demonstrate how YSL can hedge currency risk using futures contracts and calculate the result of the hedge.

You're reporting an error for "AFM – Nov 2016 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

You're reporting an error for "AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals"

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

You're reporting an error for "FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management"

FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management

Identify distinguishing features of currency futures contracts and forward contracts.

You're reporting an error for "FM – NOV 2015 – L2 – Q5c – Foreign exchange risk and currency risk management"

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