Explanation of Local Currency Invoicing:

Local currency invoicing is a strategy for managing currency risk exposures that involves negotiating with foreign suppliers to invoice goods and services in the firm’s local currency (in this case, the Ghana cedi) rather than in a foreign currency like the US dollar. This approach shifts the currency risk to the foreign supplier, as they would be the ones exposed to exchange rate fluctuations between their currency and the Ghana cedi.

Benefits of Local Currency Invoicing:

• Elimination of Currency Risk:
  By having the invoice in the local currency, Ahuodzen Pharmaceutical Ltd would avoid the risk of fluctuations in the cedi to US dollar exchange rate. This would protect the company from potential increases in costs due to adverse exchange rate movements.
• Budget Certainty:
  Local currency invoicing provides more certainty in budgeting and financial planning because the company knows the exact amount it will pay in its local currency without worrying about exchange rate changes.

Risks of Local Currency Invoicing:

• Supplier Resistance:
  The foreign supplier may be unwilling to accept payment in the local currency, especially if the cedi is volatile. They may prefer to receive payment in a stable foreign currency like the US dollar to avoid their own exchange rate risk.
• Higher Costs:
  If the supplier agrees to local currency invoicing, they might charge a premium to cover their own currency risk, leading to higher costs for Ahuodzen Pharmaceutical Ltd. This could reduce the financial benefit of using local currency invoicing as a hedging strategy.

(Marks allocation: Explanation of local currency invoicing = 2 marks; Benefits = 1.5 marks; Risks = 1.5 marks)