Multinational Finance – NBC Institute

Deposit %	Borrowing %
Nigeria	13.25
West African Country	6.5

Deposit %

Borrowing %

Nigeria

13.25

West African Country

6.5

Build Nigeria Plc. (BNP) is a giant construction company with head office in Kano, Nigeria. It is involved in construction of roads, dams, airfields, etc., in many parts of the country. Recently, the company won construction contracts across a number of African countries. One of the contracts is for the construction of a dam for a country in Central Africa whose currency is Central African Dollar (C$). The dam has now been completed, and the retention money of C$210,000,000 is due for settlement in one year’s time.
The current spot exchange rate is C$40 = N1. Risk-free rate is 5% in Nigeria and 25% in the foreign country.
The Chief Finance Officer (CFO) of BNP is worried about the above financial statistics and concluded that BNP will lose as much as N840,000 due to exchange rate movements between now and the end of the year when the retention money is received.

Required:
Explain, showing all relevant calculations, how the CFO arrived at the potential loss of N840,000. (4 Marks)

b. In another contract in a country in the ECOWAS sub-region (with currency of W$), BNP expects the following payment and receipt in six months’ time:
You are provided with the following financial data:

Spot exchange rate:
N per W$1 = 1.4735 – 1.4755
Money Market Rates:

Deposit % Borrowing %

Nigeria 13.25

West African Country 6.5

Deposit %	Borrowing %
Nigeria	13.25
West African Country	6.5

Required:
Show how BNP can make use of money market hedge to mitigate the foreign exchange risk inherent in the above payment and receipt. Show all workings and the necessary steps.

(7 Marks)

c. Discuss TWO advantages and TWO disadvantages of forward exchange contracts.

(4 Marks)

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

Question

Edi Ltd, based in Accra, Ghana, is a multinational company with two wholly-owned subsidiaries: Gil Plc based in Nigeria and Zep Ltd based in South Africa. Until recently, the Edi group has been doing well, returning a stable level of dividends to its shareholders. The financial performance of the Edi group has dipped in the past two years. In the last quarter of last year, the directors approved the establishment of a central treasury department based at the group’s headquarters in Accra. It is believed that the central treasury function will help boost effectiveness and efficiency in the group’s liquidity management, currency risk management, dividend remittances, and borrowing.

Intragroup Currency Transfers:
There are a lot of intragroup credit transactions that are often settled independently between the parties involved. This year, the treasury department has been tasked to manage the settlement of intragroup indebtedness through netting to reduce the volume of currency transactions. It has been agreed that all settlements will be made in the Ghanaian cedi at the prevailing spot mid-market exchange rate.

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Required:

i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.
(6 marks)

ii) Suppose the treasury department is recommending the use of currency futures to hedge net currency exposures. Discuss the advantages and disadvantages of the Edi group using currency options instead of currency futures in hedging net currency exposures.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Futures, Currency Hedging, Currency Transfers, Intragroup Transactions, Multinational Finance, Netting, Treasury Management
Level: Level 3

Topic: The role of the treasury function in multinationals
Series: MAY 2019

Question Tag: Multinational Finance

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FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

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Question Tag: Multinational Finance

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FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

You're reporting an error for "FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management"

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

You're reporting an error for "AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals"

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

You're reporting an error for "FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management"

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

You're reporting an error for "AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals"

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