- 20 Marks
FM – NOV 2016 – L2 – Q4 – Foreign exchange risk and currency risk management
Explains types of foreign exchange risks, calculates equity cost using different models, and distinguishes between repos and reverse repos.
Question
a) You have been appointed as the Finance Manager of Jaja Ltd and the expectation of the board is for you to provide education and working solution to their foreign exchange losses problem which your predecessor had no clue.
How will you explain the following? i) Foreign Exchange Risk (2 marks)
ii) Transaction Risk (2 marks)
iii) Translation Risk (2 marks)
iv) Economic Risk (2 marks)
b) Kaluu Ltd is a listed company on the Ghana Stock Exchange Market and showed the following performance. The following information was made available to you:
- Current market price per share (as at 31/12/15): GH¢ 10
- Dividend per share 2015: GH¢ 1
- Expected growth rate of dividend: 20% per annum
- The average market returns: 27%
- The risk-free government rate: 24%
- The beta factor of Kaluu Ltd: 1.4
Required: i) What is the estimated cost of equity using the dividend growth model? (3 marks)
ii) What is the estimated cost of equity using the Capital Assets Pricing model? (3 marks)
c) i) Distinguish between repurchase agreement (repos) and reverse repos. (3 marks)
ii) A company enters into an agreement with a bank and it sells GH¢10 million government bonds with an obligation to buy back the security in 60 days. If the rate is 8.2%, what is the repurchase price of the bond? Assume 365 days in a year. (3 marks)
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