Financial risk management

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

Question

Nkata Plc. is a large publicly quoted company. The directors are currently debating a number of issues, including the following: (i) The role of non-executive directors in corporate governance. (ii) Conflict of interest between directors and shareholders. (iii) Bond covenants usually imposed by lenders.

Required:

a. Discuss the role of non-executive directors in the corporate governance of a listed public company.
(4 Marks)

b. Identify and discuss three areas where the interests of shareholders and directors may conflict, leading the directors to pursue objectives other than maximizing shareholders’ wealth.
(6 Marks)

c. Identify five examples of covenants that might be attached to bonds and discuss briefly the advantages and disadvantages of each to companies.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bond Covenants, Corporate Governance, Financial risk management, Non-Executive Directors, Shareholder Conflict
Level: Level 3

Topic: Corporate Governance and Financial Strategy
Series: MAY 2018

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

Question

You are the Financial Director of Kudi Limited, a Nigerian company that imports raw materials mainly from Tiko (currency: T$) and exports finished products to Katuga (currency: K$). Kudi is partly financed by a loan raised in the domestic market and usually hedges its foreign currency exposure using forward or money markets. Most customers are allowed a 3-month credit. The company recently sold products to a customer in Katuga for K$20 million.

Available Information:

Exchange Rate	K$ per N	T$ per N
Spot Rate	1.9600	1.4600
1 Month Forward	1.9580	1.4579

Central Bank Base Rate Per Annum	Nigeria	Katuga	Tiko
Rate (%)	5.5%	4.25%	3.75%

Required:

(a) Comment on the Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) methods for estimating exchange rates. (6 Marks)

In answering the following questions, include relevant calculations:

Given that interest rates are higher in Nigeria than in Tiko, should T$ be depreciating against the naira and thus trading at a discount? (3 Marks)
Determine the 3-month K$ forward rate of exchange implied by the given information and calculate the naira receipts expected in 3 months from the customer in Katuga. (3 Marks)
Assess whether buying T$ on the spot market now and placing it on deposit would be a sensible policy for Kudi. (3 Marks)

(b) Discuss the concept and significance of foreign exchange economic exposure for a multinational company. (5 Marks)

(Total 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Hedging, Economic Exposure, Financial risk management, Foreign Exchange, Forward Rate, Interest Rate Parity, Multinational Company, Purchasing Power Parity
Level: Level 3

Topic: Foreign Exchange Risk Management
Series: NOV 2017

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

Question

Explain FOUR (4) differences between a foreign currency swap and an interest rate swap.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Foreign currency swap, Interest Rate Swap, Swap contracts
Level: Level 2

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

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

Question

Asanka Ghana Ltd is a medium-sized business in Ghana that is currently borrowing GH¢1,000,000 from North East Bank at a floating or variable interest rate basis at Ghana Reference Rate (GRR) plus 3% margin which is market determined on a monthly basis. This makes their monthly interest payment volatile depending on where GRR is at the end of the month. They are rather interested in fixed interest payment at the end of the month to manage this volatility.

OTI Bank Ghana Ltd has agreed to do an Interest rate Swap with Asanka where OTI Bank Ghana Ltd pays the variable rate to Asanka but Asanka pays them a fixed rate of 21% per annum paid monthly.

The table below shows the GRR for the last 6 months:

Month	GRR (%)	Fixed Rate (D)
1	16%	21%
2	18%	21%
3	20%	21%
4	19%	21%
5	18%	21%
6	17%	21%

Required:

i) Calculate the variable interest, fixed interest, and net settlement under columns (C), (E), and (F) in the table above.
(8 marks)

ii) Will you describe this strategy as an interest rate hedge? Explain.
(2 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Hedging, Interest rate hedge, Interest rate swaps, Swaps
Level: Level 2

Topic: Hedging with options
Series: MAY 2020

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

Question

Required:

a. Discuss the role of non-executive directors in the corporate governance of a listed public company.
(4 Marks)

c. Identify five examples of covenants that might be attached to bonds and discuss briefly the advantages and disadvantages of each to companies.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bond Covenants, Corporate Governance, Financial risk management, Non-Executive Directors, Shareholder Conflict
Level: Level 3

Topic: Corporate Governance and Financial Strategy
Series: MAY 2018

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

Question

Available Information:

Exchange Rate	K$ per N	T$ per N
Spot Rate	1.9600	1.4600
1 Month Forward	1.9580	1.4579

Central Bank Base Rate Per Annum	Nigeria	Katuga	Tiko
Rate (%)	5.5%	4.25%	3.75%

Required:

(a) Comment on the Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) methods for estimating exchange rates. (6 Marks)

In answering the following questions, include relevant calculations:

Given that interest rates are higher in Nigeria than in Tiko, should T$ be depreciating against the naira and thus trading at a discount? (3 Marks)
Determine the 3-month K$ forward rate of exchange implied by the given information and calculate the naira receipts expected in 3 months from the customer in Katuga. (3 Marks)
Assess whether buying T$ on the spot market now and placing it on deposit would be a sensible policy for Kudi. (3 Marks)

(b) Discuss the concept and significance of foreign exchange economic exposure for a multinational company. (5 Marks)

(Total 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Hedging, Economic Exposure, Financial risk management, Foreign Exchange, Forward Rate, Interest Rate Parity, Multinational Company, Purchasing Power Parity
Level: Level 3

Topic: Foreign Exchange Risk Management
Series: NOV 2017

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

Question

Explain FOUR (4) differences between a foreign currency swap and an interest rate swap.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Foreign currency swap, Interest Rate Swap, Swap contracts
Level: Level 2

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

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

Question

OTI Bank Ghana Ltd has agreed to do an Interest rate Swap with Asanka where OTI Bank Ghana Ltd pays the variable rate to Asanka but Asanka pays them a fixed rate of 21% per annum paid monthly.

The table below shows the GRR for the last 6 months:

Month	GRR (%)	Fixed Rate (D)
1	16%	21%
2	18%	21%
3	20%	21%
4	19%	21%
5	18%	21%
6	17%	21%

Required:

i) Calculate the variable interest, fixed interest, and net settlement under columns (C), (E), and (F) in the table above.
(8 marks)

ii) Will you describe this strategy as an interest rate hedge? Explain.
(2 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Hedging, Interest rate hedge, Interest rate swaps, Swaps
Level: Level 2

Topic: Hedging with options
Series: MAY 2020

Question Tag: Financial risk management

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

Our offerings

Contact Info

Customer

Get In Touch

Question Tag: Financial risk management

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

You're reporting an error for "FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy"

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

You're reporting an error for "FM – May 2018 – L3 – SC – Q5 – Financial Risk Management"

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

You're reporting an error for "FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management"

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

You're reporting an error for "FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management"

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

You're reporting an error for "FM – May 2020 – L2 – Q3b – Hedging with options"

FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy

Corporate governance issues in relation to non-executive directors, shareholder-director conflicts, and bond covenants.

You're reporting an error for "FM – May 2018 – L3 – SC – Q7 – Corporate Governance and Financial Strategy"

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

You're reporting an error for "FM – May 2018 – L3 – SC – Q5 – Financial Risk Management"

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

You're reporting an error for "FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management"

FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management

Explain the differences between a foreign currency swap and an interest rate swap.

You're reporting an error for "FM – May 2020 – L2 – Q5c – Foreign exchange risk and currency risk management"

FM – May 2020 – L2 – Q3b – Hedging with options

Calculate the variable and fixed interest payments under an interest rate swap agreement and determine if the strategy is an effective hedge.

You're reporting an error for "FM – May 2020 – L2 – Q3b – Hedging with options"

Our offerings

Contact Info

Customer

Get In Touch

admin