Exchange rate risk – NBC Institute

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

Question

Alpha Plc. is a Nigerian manufacturer of plastic containers, selling across West African and other African countries. In three months, Alpha Plc. is due to receive 70 million Kudi from a Central African country. At today’s board meeting, the directors will discuss the need to hedge the foreign exchange exposure associated with this transaction and potential methods.

Three alternatives will be considered:

(i) Not to hedge this transaction;
(ii) Use a forward contract, with current exchange rates quoted by Alpha Plc.’s bank as follows:

Spot: 1.1548 – 1.1608 Kudi/N
3 months forward: 1.1438 – 1.1508 Kudi/N
(iii) Use an over-the-counter currency option on Kudi, available through Alpha Plc.’s bank. Current premiums at an exercise price of 1.1650 Kudi/N are N1.10 per 100 Kudi for a call option and N1.25 per 100 Kudi for a put option.

Required:

a. State four reasons why a firm might reasonably choose not to hedge its exposure to exchange rate risk. (4 Marks)

b. Show the effect of each of the three alternatives being considered, assuming that the spot exchange rate in three months’ time is:
i. 1.1850 – 1.1880 Kudi/N
ii. 1.1295 – 1.1320 Kudi/N (7 Marks)

c. State four methods available to firms to reduce their exposure to foreign exchange risks that do not involve the use of financial contracts. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency options, Exchange rate risk, Foreign exchange exposure, Forward Contracts, Hedging Strategies, Non-Financial Hedging Methods
Level: Level 3

Topic: Foreign Exchange Risk Management

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

Question

Identify and explain FOUR (4) techniques that can be used internally to hedge exchange rate risk.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Hedging, Internal hedging techniques
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2020

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

Question

Ahuodzen Pharmaceutical Ltd (Ahuodzen) imports chemicals to produce medicines in Ghana. It has received a consignment of chemicals from a supplier in India. The invoice value of US$2 million is payable two months from now. The Treasury Manager of Ahuodzen is worried about volatility in the cedi to US dollar exchange rate.

Required:
Explain how local currency invoicing would be used as a strategy for managing currency risk exposures and advise the Treasury Manager on the benefit and risk of handling Ahuodzen’s currency risk exposure using local currency invoicing. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Local currency invoicing
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: MAR 2023

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

Question

Three alternatives will be considered:

(i) Not to hedge this transaction;
(ii) Use a forward contract, with current exchange rates quoted by Alpha Plc.’s bank as follows:

Spot: 1.1548 – 1.1608 Kudi/N
3 months forward: 1.1438 – 1.1508 Kudi/N
(iii) Use an over-the-counter currency option on Kudi, available through Alpha Plc.’s bank. Current premiums at an exercise price of 1.1650 Kudi/N are N1.10 per 100 Kudi for a call option and N1.25 per 100 Kudi for a put option.

Required:

a. State four reasons why a firm might reasonably choose not to hedge its exposure to exchange rate risk. (4 Marks)

c. State four methods available to firms to reduce their exposure to foreign exchange risks that do not involve the use of financial contracts. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency options, Exchange rate risk, Foreign exchange exposure, Forward Contracts, Hedging Strategies, Non-Financial Hedging Methods
Level: Level 3

Topic: Foreign Exchange Risk Management

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

Question

Identify and explain FOUR (4) techniques that can be used internally to hedge exchange rate risk.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Hedging, Internal hedging techniques
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2020

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Local currency invoicing
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: MAR 2023

Question Tag: Exchange rate risk

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

Our offerings

Contact Info

Customer

Get In Touch

Question Tag: Exchange rate risk

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

You're reporting an error for "FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management"

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

You're reporting an error for "FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management"

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management"

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

You're reporting an error for "FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management"

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

You're reporting an error for "FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management"

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management"

Our offerings

Contact Info

Customer

Get In Touch

admin