Question Tag: Money market

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  • 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)

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  • 1 Marks

BMF – MAY 2015 – L1 – SA – Q18 – Basics of Business Finance and Financial Markets

Identifying which option is not a financial instrument in the money market.

Which of these is NOT a financial instrument traded in the money market?

A. Treasury Bills
B. Call money
C. Development stock
D. Stabilization securities
E. Bill Finance scheme

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  • 1 Marks

BMF – May 2022 – L1 – SA – Q18 – Basics of Business Finance and Financial Markets

Identifying the correct market for treasury bills.

The market for treasury bills is called
A. Money market
B. Discount market
C. Financial system
D. Capital market
E. Intermediation market

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  • 1 Marks

BMF – May 2023 – L1 – SA – Q19 – Basics of Business Finance and Financial Markets

Identify an option that is not an example of money market transactions and instruments.

Which of the following is NOT an example of money market transactions and instruments?

A. The interbank market
B. Treasury bills
C. Certificates of Deposit
D. The repo market
E. Bank deposits

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  • 1 Marks

BMF – Nov 2019 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Identifying the market where Treasury bills are traded

The market for Treasury bills is known as the:
A. Money market
B. Discount market
C. Financial system
D. Financial market
E. Intermediation market

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  • 10 Marks

AFM – Nov 2018 – L3 – Q5b – The role of the treasury function in multinationals

Explain key money market instruments, including securitization, reverse repurchase agreements, banker’s acceptance, and commercial paper.

The money market deals primarily with short-term instruments with short-term maturities and the repayment of funds borrowed is required within a short period of time.

Required:
Explain the following in the money markets:
i) Securitization.
ii) A “Reverse Repurchase Agreement”.
iii) Banker’s Acceptance.
iv) Commercial Paper.
(10 marks)

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  • 10 Marks

AFM – Nov 2018 – L3 – Q5a – The role of the treasury function in multinationals

Determine whether GCB should borrow locally or through a portfolio of foreign currencies based on borrowing rates and expected currency changes.

The Ghana Cocoa Board (GCB) is contemplating borrowing one-year funds in anticipation of the coming cocoa season, which starts in September/October 2017. GCB can borrow from the local financial market in Ghana or borrow a portfolio of funds made up of UK pounds and Euros. The information below is the borrowing rates and the probabilities of expected strengthening of the international currencies vis-à-vis the cedi.

Required:
Determine whether GCB should borrow from the local financial market or borrow a portfolio of funds made up of UK pounds and Euros.

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  • 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)

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  • 8 Marks

FM – MAY 2019 – L2 – Q1b – Financial markets

Explain the different short-term money market instruments such as Bankers’ acceptance, Commercial Paper, Repurchase Agreement, and Term deposit.

Question:
The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. The short-term debts and securities sold on the money markets, known as money market instruments, have maturities ranging from one day to one year and are extremely liquid.

Required: Explain the following short-term market instruments:

  1. Bankers’ acceptance (2 marks)
  2. Commercial Paper (2 marks)
  3. Repurchase Agreement (Repo) (2 marks)
  4. Term deposit (2 marks)

(Total: 8 marks)

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  • 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)

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  • 1 Marks

BMF – MAY 2015 – L1 – SA – Q18 – Basics of Business Finance and Financial Markets

Identifying which option is not a financial instrument in the money market.

Which of these is NOT a financial instrument traded in the money market?

A. Treasury Bills
B. Call money
C. Development stock
D. Stabilization securities
E. Bill Finance scheme

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  • 1 Marks

BMF – May 2022 – L1 – SA – Q18 – Basics of Business Finance and Financial Markets

Identifying the correct market for treasury bills.

The market for treasury bills is called
A. Money market
B. Discount market
C. Financial system
D. Capital market
E. Intermediation market

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  • 1 Marks

BMF – May 2023 – L1 – SA – Q19 – Basics of Business Finance and Financial Markets

Identify an option that is not an example of money market transactions and instruments.

Which of the following is NOT an example of money market transactions and instruments?

A. The interbank market
B. Treasury bills
C. Certificates of Deposit
D. The repo market
E. Bank deposits

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  • 1 Marks

BMF – Nov 2019 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Identifying the market where Treasury bills are traded

The market for Treasury bills is known as the:
A. Money market
B. Discount market
C. Financial system
D. Financial market
E. Intermediation market

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  • 10 Marks

AFM – Nov 2018 – L3 – Q5b – The role of the treasury function in multinationals

Explain key money market instruments, including securitization, reverse repurchase agreements, banker’s acceptance, and commercial paper.

The money market deals primarily with short-term instruments with short-term maturities and the repayment of funds borrowed is required within a short period of time.

Required:
Explain the following in the money markets:
i) Securitization.
ii) A “Reverse Repurchase Agreement”.
iii) Banker’s Acceptance.
iv) Commercial Paper.
(10 marks)

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  • 10 Marks

AFM – Nov 2018 – L3 – Q5a – The role of the treasury function in multinationals

Determine whether GCB should borrow locally or through a portfolio of foreign currencies based on borrowing rates and expected currency changes.

The Ghana Cocoa Board (GCB) is contemplating borrowing one-year funds in anticipation of the coming cocoa season, which starts in September/October 2017. GCB can borrow from the local financial market in Ghana or borrow a portfolio of funds made up of UK pounds and Euros. The information below is the borrowing rates and the probabilities of expected strengthening of the international currencies vis-à-vis the cedi.

Required:
Determine whether GCB should borrow from the local financial market or borrow a portfolio of funds made up of UK pounds and Euros.

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  • 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)

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  • 8 Marks

FM – MAY 2019 – L2 – Q1b – Financial markets

Explain the different short-term money market instruments such as Bankers’ acceptance, Commercial Paper, Repurchase Agreement, and Term deposit.

Question:
The money market is the arena in which financial institutions make available to a broad range of borrowers and investors the opportunity to buy and sell various forms of short-term securities. The short-term debts and securities sold on the money markets, known as money market instruments, have maturities ranging from one day to one year and are extremely liquid.

Required: Explain the following short-term market instruments:

  1. Bankers’ acceptance (2 marks)
  2. Commercial Paper (2 marks)
  3. Repurchase Agreement (Repo) (2 marks)
  4. Term deposit (2 marks)

(Total: 8 marks)

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