Hedging against financial risk: Derivatives

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.

Question

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)

Answer

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Tags: Currency Hedging, Foreign Exchange Risk, Hedging, Risk Management, Risk Mitigation
Level: Level 3

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.

Question

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Foreign Exchange Risk, Forward Market, Hedging, Money market
Level: Level 3

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.

Question

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Hedging, Foreign Exchange Risk, Hedging, Risk Management, Risk Mitigation
Level: Level 3

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.

Question

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%

Answer

Find Related Questions by Tags, levels, etc.

Tags: Foreign Exchange Risk, Forward Market, Hedging, Money market
Level: Level 3

Topic: Hedging against financial risk: Derivatives

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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.

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.

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.

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.

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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.

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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.

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"

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.

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

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.

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"

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