Question Tag: Hedging

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 12 Marks

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

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

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)

 

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

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

  • 8 Marks

FM – Nov 2020 – L3 – Q4c – Interest Rate Risk Management

Calculates the interest payments for a loan based on varying NIBOR rates with a floating rate arrangement.

c. Calculate:
i. The interest payments if NIBOR is 10% (4 Marks)
ii. The interest payments if NIBOR is 7.5% (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2020 – L3 – Q4c – Interest Rate Risk Management"

  • 4 Marks

FM – Nov 2020 – L3 – Q4b -Interest Rate Risk Management

Calculates the six-monthly fixed interest payment for a loan under a swap arrangement to secure a fixed interest rate.

b. A plc wants to borrow N200 million for five years with interest payable at six-monthly intervals. It can borrow from a bank at a floating rate of NIBOR plus 1% but wants to obtain a fixed rate for the full five-year period. A swap bank has indicated that it will be willing to receive a fixed rate of 8.5% in exchange for payments of six-month NIBOR.

Required:
Calculate the fixed interest six-monthly payment with the swap in place. (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2020 – L3 – Q4b -Interest Rate Risk Management"

  • 20 Marks

FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management

Analyze hedging methods for foreign exchange risk involving a future CHF transaction.

About one year ago, you were employed by Tesco, an American company based in New York. You work online from home in Nigeria and are a member of the international treasury of Tesco.

Tesco supplies medical equipment to the USA and Europe and also buys some basic raw materials from Europe. It is currently 30 November 2024. On 31 May 2025, Tesco is due to receive CHF16.3 million from a Swiss customer and also to pay CHF4.0 million to a Swiss supplier.

Exchange rates (quoted as US$/CHF1):

  • Spot: 1.0292 – 1.0309
  • Three months forward: 1.0322 – 1.0341
  • Six months forward: 1.0356 – 1.0378

Annual interest rates available to Tesco:

  • Switzerland: 3.2% (investing), 4.4% (borrowing)
  • USA: 4.6% (investing), 5.8% (borrowing)

Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1):

  • Future price: December – 1.0306, March – 1.0336, June – 1.0369

Currency options (contract size CHF125,000; exercise price quotation US$ per CHF1, premium in US cents per CHF1):

Calls Puts
Dec Mar June Dec Mar June
1.0375 0.47 0.50 0.53 0.74 0.79 0.86

Required:

  • a. Calculate the net receipt if hedged using a forward contract. (4 Marks)
  • b. Calculate the net receipt if hedged using money market hedging. (8 Marks)
  • c. Calculate the net receipt if hedged using futures. (10 Marks)
  • d. Calculate the net receipt if hedged using options. (8 Marks)
    (Total: 30 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management"

Has Case Study
  • 6 Marks

SCS – May 2020 – L3 – Q6 – International Financial Management

Explain a suitable foreign currency risk hedging method for Customer Focused Ltd in relation to the Look and Like Ltd contract.

Customer Focused Ltd has received a proposal from a potential supplier, Look and Like
Ltd, to provide fresh produce (Exhibit 2a) and is considering whether to accept. Kpakpo
Armah has written a note (Exhibit 2b) about Look and Like Ltd.
Required:
Using the information available, including information you feel relevant from your answer
to Section A:

Describe an appropriate foreign currency risk management hedging method for the risk the company might face in the future as described in Exhibit 2b.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "SCS – May 2020 – L3 – Q6 – International Financial Management"

  • 1 Marks

BL – Nov 2023 – L1 – SA – Q6 – Business Ethics and Corporate Governance

This question asks about a company's method to hedge against business risks.

A means by which a company may hedge against business risk is called
A. Limitation of Liability
B. Limitless Liability
C. Moderated Liability
D. Arbitraging
E. Modulating

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "BL – Nov 2023 – L1 – SA – Q6 – Business Ethics and Corporate Governance"

  • 5 Marks

AFM – May 2017 – L3 – Q1a – Hedging against financial risk: Non-derivative techniques

Recommendations to mitigate losses on foreign currency transactions due to the depreciation of the Cedi.

In the last couple of years, the Cedi has depreciated substantially against the US Dollar. This has had an adverse effect on the financial performance of most of the multinational companies in Ghana.

Required:
As a Financial Adviser of your organization, a multinational company involved in the export trade, recommend actions to be taken to minimize the loss on foreign currency transactions. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2017 – L3 – Q1a – Hedging against financial risk: Non-derivative techniques"

  • 10 Marks

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

i) Explanation of Exchange Exposure (2 marks):

Exchange exposure refers to the risk that a company’s financial performance or position may be affected by fluctuations in exchange rates between currencies. For an exporter quoting prices in a foreign currency, there is a risk that the value of the foreign currency may change before payment is received, leading to a gain or loss in the value of that payment when converted into the company’s domestic currency.

Exchange exposure is classified into three types:

  • Transaction Exposure: Risk arising from actual transactions involving foreign currency payments or receipts.
  • Translation Exposure: Risk from converting foreign subsidiaries’ financial statements into the parent company’s reporting currency.
  • Economic Exposure: Risk from the overall impact of exchange rate changes on a firm’s future cash flows and market value.

(2 marks)

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

Pre-acceptance exposure arises in the period between the time an exporter quotes a price in a foreign currency and the time the contract is accepted.

Two methods to minimize pre-acceptance exposure:

  1. Time-Limited Quotes:
    • The exporter can limit the validity period of the quote to a short timeframe, ensuring that the exchange rate does not fluctuate significantly before the contract is accepted.
    • Advantage: This method reduces the period during which the exchange rate risk exists, thus minimizing potential exposure to currency fluctuations.
  2. Forward Contracts:
    • The exporter can lock in a forward contract to sell the foreign currency at a predetermined rate when the quote is accepted. This ensures that the company knows exactly what exchange rate will apply, regardless of fluctuations.
    • Advantage: A forward contract provides certainty about the future exchange rate, allowing the exporter to avoid potential losses due to unfavorable exchange rate movements.

(2 marks for each method, 4 marks total)

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

Post-acceptance exposure arises after the contract has been accepted but before the payment has been received. There are several methods for hedging this exposure:

  1. Borrowing in the Foreign Currency:
    • The exporter can borrow the foreign currency equivalent of the receivable immediately and repay the loan once the foreign customer pays. This hedges the risk of adverse currency movements.
    • Advantage: This method is relatively simple and cheap. It also provides immediate cash flow in the foreign currency and eliminates exchange rate risk.
  2. Forward Contracts:
    • The exporter can enter into a forward contract to sell the expected foreign currency receipt at a specified rate on the date payment is due. This locks in the exchange rate and eliminates the uncertainty associated with currency fluctuations.
    • Advantage: Forward contracts offer certainty about the amount of the domestic currency that will be received, providing security and allowing for better financial planning without committing cash resources upfront.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques"

  • 5 Marks

AFM – May 2016 – L3 – Q2b – Hedging against financial risk: Non-derivative techniques, Hedging against financial risk: Derivatives

Describe four approaches that a company can use to hedge against foreign exchange risk.

b) As a trading company, Joewoka exports and imports merchandise in many countries for which it receives and makes payment in foreign currency. This exposes the company to foreign exchange risk.

As a Financial Consultant to the company, suggest FOUR approaches that the company can use to hedge against foreign exchange exposure. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2016 – L3 – Q2b – Hedging against financial risk: Non-derivative techniques, Hedging against financial risk: Derivatives"

  • 10 Marks

AFM – May 2016 – L3 – Q1b – Hedging against financial risk: Non-derivative techniques, Hedging against financial risk: Derivatives, The use of financial derivatives to hedge against interest rate risk

Explain how to hedge a foreign exchange risk exposure using forward and money markets with calculations.

b) A Ghanaian Food and Beverage company has recently imported raw materials from China with an invoice value of US$264,000 payable in three months’ time. Due to the company’s efficient production capacity, it has finished production and exported finished products to Germany. Consequently, the German customer has been invoiced for US$75,900 payable in three months’ time. Below is the current spot and forward rates for the transactions:

  • USD/GHS Spot: 0.9850 – 0.9870
  • 3 Months Forward: 0.9545 – 0.9570

Current Money Market rates per annum are as follows:

  • US$ (USD): 11% – 13.2%
  • Gh¢ (GHS): 12.7% – 14.3%

Required:
i) Demonstrate with relevant calculations how the Ghanaian company can hedge its exposure to foreign exchange risk using the Forward Markets. (3 marks)
ii) Demonstrate with relevant calculations how the Ghanaian company can hedge its exposure using the Money Markets. (4 marks)
iii) Determine which of the above markets is the best hedging technique. (3 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2016 – L3 – Q1b – Hedging against financial risk: Non-derivative techniques, Hedging against financial risk: Derivatives, The use of financial derivatives to hedge against interest rate risk"

  • 6 Marks

CR – Nov 2019 – L3 – Q2a – Foreign currency

Analyze foreign currency transactions, their impact on financial statements, and the application of hedging instruments.

a) Nyinahini Ltd (Nyinahini) is a company reporting under IFRS. Nyinahini normally operates only within the country where its buildings are physically located. Recently, it entered into a contract to supply its products to a new client based in South Africa. All the work was completed in the period October to November 2018. The (fixed) contract price of 100 million Rand has been agreed upon as denominated in South African Rand. The full amount was invoiced on 1 December 2018 when the exchange rate was GH¢1 = 10.1889 Rand. The new client paid 50 million Rand in advance on 1 November 2018 when the exchange rate was GH¢1 = 9.9783 Rand. The balance will be paid in two equal instalments on 31 March 2019 and 30 June 2019. The exchange rate at 31 December 2018 was GH¢1 = 10.5037 Rand.

Nyinahini decided to eliminate exchange rate differences on the final two payments and entered into two forward rate agreements on 1 December 2018 to sell the appropriate amount of Rand on 31 March 2019 and 30 June 2019, and set up the relevant documentation to treat them as fair value hedges of the recognized receivables. At 31 December 2018, the two contracts for settlement on 31 March 2019 and 30 June 2019 were valued at GH¢148,000 collectively, as an asset from Nyinahini’s point of view.

Required:
Set out and discuss the accounting treatment of the above items, including relevant calculations, as the information provided permits, in the financial statements of Nyinahini for the year ended 31 December 2018.

(6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "CR – Nov 2019 – L3 – Q2a – Foreign currency"

  • 10 Marks

AT – May 2017 – L3 – Q3b – Business income – Corporate income tax

Compute allowable financial cost on hedged transactions and provide management advice on the tax implications.

b) XYZ Ltd runs a business with a basis period from January to December each year. The following information is relevant to its business operations for 2016 year of assessment:

Item Amount (GH¢)
Chargeable Income from business operations 40,000
Financial cost incurred on hedged transactions 150,000
Financial gain from hedged transactions 60,000

Required:

i) Compute the financial cost to be allowed in 2016 year of assessment. (6 marks)

ii) Advise management on the above results. (4 marks)
(Total: 10 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AT – May 2017 – L3 – Q3b – Business income – Corporate income tax"

  • 5 Marks

FM – May 2021 – L2 – Q4b – Treasury Management

Explain interest rate risk and suggest two ways of managing an entity’s exposure to it.

b) Most large companies maintain a treasury department to handle some specialized functions in finance. One of such functions is the management of financial risk, which includes interest rate risk.

Required:

Explain interest rate risk and suggest two ways of managing an entity’s exposure to interest rate risk. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2021 – L2 – Q4b – Treasury Management"

  • 6 Marks

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

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

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

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

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

  • 7 Marks

FM – Nov 2020 – L2 – Q3b – Futures and hedging with futures | Hedging with options

Explain intrinsic value of an option and calculate the intrinsic value for USD/GH¢ call options over several months.

i) Explain the term intrinsic value of an option. (1 mark)

ii) DUU Ghana Ltd bought USD/GH¢ call options from KASA Ltd. The table below shows the various spot rates and strike prices for the various tenors.

Month Spot Rate USD/GH¢ Exercise Rate/Price USD/GH¢
1 5.1 4.8
2 5.3 5.0
3 5.5 5.4
4 5.8 5.8
5 5.7 6.0
6 6.0 6.4

Required:

Determine the intrinsic value of the option for each trading month and clearly indicate the months in which the option is in-the-money, at-the-money, or out-of-the-money. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2020 – L2 – Q3b – Futures and hedging with futures | Hedging with options"

  • 10 Marks

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.

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 (%) Variable Interest (C) Fixed Rate (D) Fixed Interest (E) Net Settlement (F)
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)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

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

  • 20 Marks

FM – MAY 2016 – L2 – Q5 – Foreign exchange risk and currency risk management | Hedging with options

Discuss differences between forward and futures contracts, types of currency risk exposure, disadvantages of hedging with futures, and reasons for differences in interest rates across different maturities.

a) AD Ventures imports tomato paste from Italy for sale in Ghana. AD Ventures typically buys the tomato paste on an open account and pays the euro invoice value two months after receipt of goods. AD Ventures has suffered heavy exchange rate losses of late due to the continuous depreciation of the Ghanaian cedi against the euro. AD Ventures will receive a consignment of tomato paste on 15th May 2016. The value of this consignment is EUR540,000, which must be settled in two months’ time (settlement deadline being 15th July 2016).

The current spot exchange rate for the euro is GH¢4.7110/EUR. Financial pundits forecast that the Ghanaian cedi will depreciate against the euro in the coming months. The owner-manager of AD Venture, Akua Donkor, is worried about the probable foreign exchange loss her business may suffer when the invoice value is settled in two months’ time.

Akua Donkor has heard of the possibility of hedging AD Ventures’ currency exposure with a forward contract or futures contract but does not know what these contracts are. She has asked you to advise her on what to do to hedge against the underlying exposure relating to the EUR540,000 tomato paste consignment.

You would like to recommend a futures market hedge to Akua Donkor. You searched the derivatives market; and you found a futures contract on the euro that matures in August 2016. Other relevant details of the contract follow:

  • Contract size: EUR100,000
  • Futures contract price: GH¢4.8112/EUR

Required:
i) Explain to Akua Donkor FOUR differences between a forward contract and a futures contract. (4 marks)
ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AD Ventures facing in relation to the EUR540,000 tomato paste consignment? Explain why. (4 marks)
iii) Explain to Akua Donkor THREE disadvantages of hedging the euro exposure with a futures hedge. (6 marks)

b) It has been observed that interest rates on debt securities or loans differ for different maturities. For the week ending 28th August 2015, the annual interest rate on the 1-year Government of Ghana note was 22.5% whereas the annual interest rate on the 2-year note was 23%.

Required:
With THREE reasons, explain why interest rates on debt securities and loans are different for different maturity periods. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – MAY 2016 – L2 – Q5 – Foreign exchange risk and currency risk management | Hedging with options"

  • 20 Marks

FM – AUG 2022 – L2 – Q3 – Foreign exchange risk and currency risk management

Calculate interest rates, required sinking fund contributions, and identifies currency risk exposure with recommended hedging strategies.

a) Jeanne Cosmetics Ltd is located in Taifa and is now considered as the leader of organic and natural cosmetic products in the municipality. Per the cash management policy of Jeanne Cosmetics Ltd, any excess cash that is idle for more than three months should be invested. Three months ago, the company invested GH¢100,000 of idle cash in a 3-month fixed deposit account. The investment matures today, and the company will receive a maturity value of GH¢105,000.

Required:
i) Compute the interest rate earned on the account over the investment holding period. (2 marks)
ii) Suppose the interest rate on the account remains the same, and the company rolls over the principal, compute the annual simple interest rate on the investment. (2 marks)
iii) Suppose the interest rate on the account remains the same and the company rolls over both the principal and interests, compute the annual compound interest rate on the investment. (2 marks)

b) Apphia Fabrics Ltd plans to replace its existing manufacturing plant with a newer version in three years’ time. The replacement cost of the existing plant is GH¢10 million currently. However, experts forecast that the cost of the newer version of the plant will be GH¢12 million in three years’ time.

On the advice of the Finance Manager, the company will start saving from now to raise the required amount to buy the plant in three years’ time. Consequently, the company has signed an investment agreement with DT Financial Services Ltd. Per the agreement, the company will deposit equal amounts into an interest-bearing account at the beginning of each of the next three years. The annual nominal interest rate on the account is 16%, but interest will be compounded monthly.

Required:
Compute the equal annual deposit required to raise the required amount in three years’ time. (4 marks)

c) Aduro Pharmaceuticals Plc is a Ghana-based multinational company with a production facility in India and marketing subsidiaries in some West African countries. The Treasury Department of the company is considering strategies for managing its foreign exchange risk exposures. In particular, the Treasury Department is concerned about the following two cases of foreign exchange risk exposures:

Case 1:
The exchange rate between the Ghanaian cedi (GH¢) and the British pound sterling (GBP) is currently GH¢8.1125/GBP1. The company recently borrowed GBP500,000 from an offshore bank to buy active chemicals for the production of paracetamol syrup. The loan is to be paid in six months’ time. Market pundits project that the Ghanaian cedi would depreciate against the pound sterling over the next six months.

Case 2:
The exchange rate between the Ghanaian cedi (GH¢) and the Indian rupee (INR) is currently GH¢0.0799/INR1. The company’s production subsidiary in India presents its financial statements in the Indian rupee. The net worth of this production subsidiary in India is INR20 million. The company would be preparing its consolidated financial statements in a few months’ time. Market pundits project that the Ghanaian cedi will appreciate against the Indian rupee.

Required:
i) For each case, identify the type of currency risk exposure the company is facing. (2 marks)
ii) In respect of Case 1, recommend TWO (2) internal strategies and TWO (2) external hedging strategies the Treasury Department can use to manage the foreign exchange risk exposure. (8 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – AUG 2022 – L2 – Q3 – Foreign exchange risk and currency risk management"

  • 25 Marks

FM – NOV 2018 – L2 – Q3 – Discounted cash flow | Introduction to Investment Appraisal

Involves calculating the net present value (NPV) of a project and discussing reasons for different interest rates and hedging techniques.

a) Sevista Ltd is evaluating the purchase of a new machine to produce product SEP, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost GH¢1 million. Production and sales of product SEP are forecasted to be as follows:

Year Production and sales (units/year)
1 35,000
2 53,000
3 75,000
4 36,000

The selling price of product SEP (in current price terms) will be GH¢20 per unit, while the variable cost of the product (in current price terms) will be GH¢12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since Sevista Ltd has spare capacity in both space and labour terms. Producing and selling product SEP will call for increased investment in working capital.

Analysis of historical levels of working capital within Sevista Ltd indicates that at the start of each year, investment in working capital for product SEP will need to be 7% of sales revenue for that year. Sevista Ltd pays tax of 25% per year in the year in which the taxable profit occurs. The new machine is expected to have no scrap value at the end of the four-year period. Sevista Ltd uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes.

Required:

i) Determine the net present value of the proposed investment in product SEP.
(13 marks)

ii) Advise whether the project should be undertaken.
(2 marks)

b) Fluctuations in interest rates are a major concern to entrepreneurs and business executives. It has been observed that interest rates on loans vary according to the term of the loan. Besides, interest rates vary over time for varied reasons.

Required:

i) Explain THREE (3) reasons why interest rates on loans may differ for different maturities as explained by the term structure of interest rates.
(6 marks)

ii) Suggest FOUR (4) ways of hedging the company’s exposure to interest rate risk.
(4 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – NOV 2018 – L2 – Q3 – Discounted cash flow | Introduction to Investment Appraisal"

  • 10 Marks

FM – MAY 2019 – L2 – Q3b – Foreign exchange risk and currency risk management | Hedging with options

Calculate profit or loss from option contracts and advise on whether to exercise the options for Universal Plastics Ghana Ltd.

Universal Plastics Ghana Ltd imported raw materials from U.S.A. and Europe for the manufacture of plastic products. The company entered into option contracts with ZAA Bank Ghana Ltd to hedge its six months’ currency risk or exposure. The details of the option contracts are as follows:

Details Transaction Amount Strike Price/ Exchange Rate Spot Rate on Maturity Date Option Premium Paid to the Bank
OPTION A Bought Call option to buy USD against GH¢ US$10m USD/GH¢ 4.7 USD/GH¢ 4.5
OPTION B Bought Call option to buy EURO against GH¢ EUR 8m EUR/GH¢ 5.9 EUR/GH¢ 6.3

Required:

  1. Calculate the profit or loss of OPTION A and advise Universal Plastics Ghana Ltd whether to exercise or not. (4 marks)
  2. Calculate the profit or loss of OPTION B and advise Universal Plastics Ghana Ltd whether to exercise or not. (4 marks)
  3. Calculate the overall profit or loss on the decision to hedge based on (i) and (ii) above. (2 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – MAY 2019 – L2 – Q3b – Foreign exchange risk and currency risk management | Hedging with options"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
error: Content is protected !!
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan