Currency Swap – NBC Institute

FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

Question

Exactly two years ago, JBL Plc took a 5-year US$ 20 million loan at a fixed interest of 12% from an investment bank to finance a plant expansion project. At the time the loan was taken, JBL was exporting a significant proportion of its output to a foreign market. Thus, it was sure that it would be able to earn U.S. dollars to make dollar payments on the loan. For about a year now, JBL has not been able to export its output to its foreign market due to trade restrictions. It sells only to buyers in Ghana for the Ghana cedi. The company now prefers to have its interest obligation in Ghana cedi rather than U.S. dollar.

On the advice of the Treasury Manager, JBL has entered a currency swap arrangement with a bank to manage the underlying risk exposure. Per the terms of the swap, JBL will continue to honour its obligations under the actual loan. Under the swap, JBL and the bank will exchange interests and principals in the appropriate currencies. With a pre-arranged exchange rate of GH¢6.5000/USD1, the notional principals under the swap arrangement are agreed at US$20 million and GH¢130 million. The 12% interest rate on the existing dollar loan will continue to apply to both the original dollar loan and the dollar interest payments under the swap arrangement. The interest rate that will apply to the cedi notional principal is set to 15%.

Required:
Evaluate how JBL Plc can use the currency swap to manage the underlying risk exposure. (5 marks)

Answer

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Tags: Currency risk management, Currency Swap, Foreign exchange exposure, Interest Rate Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: APR 2022

FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

Question

a) You are the assistant to the Finance Manager of Kunta Medical Centre. Your boss is negotiating a deal with an investment company investing GH¢500,000 over 3 years. The main terms of the proposed investment deal are that if the amount is deposited now and invested continuously for 3 years, it would attract an 18% annual interest rate with quarterly compounding. However, if the initial deposit of GH¢500,000 is maintained and additional deposits of GH¢50,000 each are made at the beginning of year 2 and year 3, the deposits would attract 18.0% annual interest in year 1, 18.5% in year 2, and 19% in year 3, all with quarterly compounding.

Your boss has asked you to do some computations to inform her about the growth of the deposits based on the terms of the proposed deal.

Required:
i) Suppose GH¢500,000 is deposited now, and there are no top-up deposits in the future; Compute the future value of the deposit at the end of the third year. (3 marks)

ii) Suppose the initial deposit of GH¢500,000 is made now, and the top-up deposits of GH¢50,000 each are made in the future per the terms of the proposed investment deal;

Compute the future value of the initial deposit at the end of the third year. (3 marks)
Compute the aggregate future value of the top-up deposits at the end of the third year. (3 marks)
Compute the aggregate future value of all the deposits at the end of the third year. (1 mark)

b) Sesamu Dried Fruits Ltd is a fruits processing company in Ghana. The company has exported raw mangoes to a distributor in Japan. The invoice value of JP¥20 million is to be collected in three months. The exchange rate between the Ghanaian cedi (GH¢) and the Japanese yen (JP¥) is currently GH¢0.0584/JP¥1. It is expected that the Ghana cedi may appreciate against the JP¥ in the coming months.

Required:
Using the leading and lagging strategy for hedging currency risk exposure, is it advisable for the company to lag the collection of the JP¥ invoice value? (5 marks)

c) COVID-19 has led to volatility in the international money market. Although international business has seen some improvement, progress has been very slow. As a result, the risk of losing part of an investment due to exchange rate and currency value fluctuations are very high.

Required:
Explain how Interest Rate Swap and Currency Swap can be used to mitigate the effects of market volatility. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Compound Interest, Currency Swap, Foreign Exchange Risk, Interest Rate Swap, Investment, Leading and Lagging Strategy
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2021

FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

Question

Required:
Evaluate how JBL Plc can use the currency swap to manage the underlying risk exposure. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Currency Swap, Foreign exchange exposure, Interest Rate Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: APR 2022

FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

Question

Your boss has asked you to do some computations to inform her about the growth of the deposits based on the terms of the proposed deal.

Required:
i) Suppose GH¢500,000 is deposited now, and there are no top-up deposits in the future; Compute the future value of the deposit at the end of the third year. (3 marks)

ii) Suppose the initial deposit of GH¢500,000 is made now, and the top-up deposits of GH¢50,000 each are made in the future per the terms of the proposed investment deal;

Compute the future value of the initial deposit at the end of the third year. (3 marks)
Compute the aggregate future value of the top-up deposits at the end of the third year. (3 marks)
Compute the aggregate future value of all the deposits at the end of the third year. (1 mark)

Required:
Using the leading and lagging strategy for hedging currency risk exposure, is it advisable for the company to lag the collection of the JP¥ invoice value? (5 marks)

Required:
Explain how Interest Rate Swap and Currency Swap can be used to mitigate the effects of market volatility. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Compound Interest, Currency Swap, Foreign Exchange Risk, Interest Rate Swap, Investment, Leading and Lagging Strategy
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2021

Question Tag: Currency Swap

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FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

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FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

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FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

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FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management

Evaluate how JBL Plc can use a currency swap to manage its underlying currency risk exposure.

You're reporting an error for "FM – April 2022 – L2 – Q5b – Foreign exchange risk and currency risk management"

FM – NOV 2021 – L2 – Q3 – Foreign exchange risk and currency risk management

Computation of future value of deposits under different scenarios, currency risk hedging strategy, and explanation of swap contracts.

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