Level 2 – Page 22

FM – L2 – Q91 – Foreign Exchange Risk Management

Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

Question

A UK company, BrightHorizon Ltd, expects to pay $750,000 to a supplier in three months’ time. The following exchange rates are available for the dollar against sterling (GBP/USD):

| Spot | 1.8570 | 1.8580 |
| 3 months forward | 1.8535 | 1.8543 |

The company is concerned about a possible increase in the value of the dollar during the next three months and would like to hedge its FX risk.

Required:
(A) Explain how the exposure to currency risk might be hedged, and the amount that BrightHorizon Ltd will have to pay in sterling in three months’ time to settle its liability.

(B) Calculate EuroTech GmbH’s income in euros from settlement of the forward contract in two months’ time.

Answer

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Tags: Currency Risk, Foreign Exchange, Forward Contract, Hedging, Transaction risk, USD/GBP
Level: Level 2

Topic: Foreign exchange risk and currency risk management

FM – L2 – Q90 – Foreign exchange risk and currency risk management

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

Question

The treasurer of Eurotrade Company wants to hedge an exposure to currency risk. Eurotrade is a company whose domestic currency is the euro, and the company must make a payment of US $500,000 to a US supplier in six months’ time.
The following market rates are available:

Six month interest rates

	Borrowing	Deposits
Euro	4.8%	4.4%
US dollar	2.5%	2.0%

(These interest rates are expressed as an annual rate of interest.)

Required
Compare the cost of hedging the currency risk exposure with:
(a) a forward exchange contract (3 marks)
(b) a money market hedge. (5 marks)
Recommend which method of hedging would be preferable in this situation.

Answer

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Tags: Currency hedging, Euro, Foreign Exchange Risk, Forward Contract, Money Market Hedge, Transaction exposure, US Dollar
Level: Level 2

Topic: Foreign exchange risk and currency risk management

FM – L2 – Q89 – Treasury Management

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

Question

A company, NorthStar Enterprises, has an outstanding 10-year variable rate loan of $15 million on which it is paying SOFRA + 2%. It wishes to eliminate its exposure to a rise in variable interest rates. Currently, 10-year US interest rate swaps are quoted at 4.458%.

Required:
Explain how the treasury function could use an interest rate swap to hedge interest rate risk and calculate the effective borrowing rate that would result.

Answer

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Tags: Hedging, Interest Rate Risk, Interest Rate Swap, SOFRA, Treasury management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q88 – Money Market Hedge

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

Question

BritCo Ltd expects to receive $600,000 in six months’ time from a customer. It intends to convert these dollars into sterling.
The current spot rate for the dollar against sterling (GBP/USD) is 1.8800. The six-month interest rates are 5% per year for sterling and 3.5% per year for the US dollar.

Required
(a) Show how BritCo Ltd can create a money market hedge for its exposure to a fall in the value of the dollar.
(b) Estimate what the exchange rate should be for a six-month forward contract, GBP/USD.

Answer

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Tags: Currency Risk Management, Foreign Exchange Risk, Forward Contract, Hedging, Interest rates, Money Market Hedge, Sterling, US Dollar
Level: Level 2

Topic: Treasury Management

PSA – L2 – Q11.2 – Preparation and Presentation of Financial Statements for Central Government

Prepare 2024 cash flow statement for Central Government of Salima with notes.

Question

Prepare the Central Government of Salima: Cash flows statement for the year ended 31st December 2024.

Answer

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Topic: Preparation and Presentation of Financial Statements for Central Government

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

Question

AB Enterprises, a company whose domestic currency is the cedi, has imported a consignment of tomato paste from Spain at a cost of EUR540,000, which is payable in three months’ time. Ama Kofi, the company’s finance director, is concerned about the company’s exposure to currency risk, and she is considering the use of forward contracts or currency futures to hedge the risk.

Required:
(i) Explain to Ama Kofi FOUR differences between a forward contract and a futures contract.
(ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AB Enterprises facing in relation to the EUR540,000 tomato paste consignment?
(iii) Explain to Ama Kofi, THREE disadvantages of hedging the euro exposure with futures hedge.

Answer

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Tags: Basis risk, Currency Risk, Financial instruments, Forward contracts, Futures contracts, Futures hedging, Hedging, Transaction risk
Level: Level 2

Topic: Futures and hedging with futures

PSAF – L2 – Q11.1- Preparation and Presentation of Financial Statements for Central Government

Prepare 2023 financial performance statement for Republic of Zamara Consolidated Fund.

Question

(a) Prepare the Republic of Zamara Consolidated Fund Account: Statement of financial performance for the year ended 31st December 2023.

(b) Prepare the Republic of Zamara Consolidated Fund Account: Statement of financial position as at 31st December 2023.

(d) Prepare the Kwevadum District Assembly: Statement of financial position as at 31st December 2024.

(e)Prepare the Kwevadum District Assembly: Statement of changes in net assets for the year ended 31st December 2024.

Answer

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Tags: Central Government, Consolidated Fund, Expenses, Financial Statements, IPSAS, Non-Tax Revenue, Public Sector Accounting, Revenue, Statement of Financial Performance, Surplus
Level: Level 2

Topic: Preparation and Presentation of Financial Statements for Central Government

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

Question

Briefly describe the following financial instrument:

(a) Forwards

(b) Futures

Answer

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Tags: Currency Risk, Financial instruments, Hedging, Options
Level: Level 2

Topic: Hedging with options

FM – L2 – Q84 – Discounted cash flow

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

Question

A company is considering whether to invest in a new item of equipment costing GH₵45,000 to make a new product. The product would have a four-year life, and the estimated cash profits over the four-year period are as follows.

Year	GH₵
1	17,000
2	25,000
3	16,000
4	4,000

The project would also need an investment in working capital of GH₵8,000, from the beginning of Year 1.
The company uses a discount rate of 11% to evaluate its investments.
Required
Calculate the NPV of the project at the discount rate of 11%.
Using the NPV you have calculated at 11%, and the NPV at a discount rate of 15%, estimate the internal rate of return (IRR) of the project.

Answer

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Tags: Capital Budgeting, Discounted cash flow, investment appraisal, IRR, NPV
Level: Level 2

Topic: Discounted cash flow

PSAF- L2 – Q10.4 – International Public Sector Accounting Standards

Determine recoverable amount of three intangible assets for Nandom Technical University.

Question

The following information relates to three intangible assets in respect of Nandom Technical University.

	Brands (GHC)	Software (GHC)	Trade Marks (GHC)
Carrying amount	200,000	300,000	240,000
Net realisable value	220,000	250,000	200,000
Value in use	240,000	260,000	180,000

Required:
(a) What is the recoverable amount of each asset?

(b) Calculate the impairment provision for each of the assets.

Answer

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Tags: Accounting Standards, Asset Valuation, Financial Reporting, Impairment, Impairment Loss, Intangible assets, IPSAS, Non-current Assets, Public Sector Accounting, Recoverable Amount
Level: Level 2

Topic: International Public Sector Accounting Standards

Level (SQ): Level 2

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FM – L2 – Q91 – Foreign Exchange Risk Management

Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

FM – L2 – Q90 – Foreign exchange risk and currency risk management

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

FM – L2 – Q89 – Treasury Management

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

FM – L2 – Q88 – Money Market Hedge

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

PSA – L2 – Q11.2 – Preparation and Presentation of Financial Statements for Central Government

Prepare 2024 cash flow statement for Central Government of Salima with notes.

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

PSAF – L2 – Q11.1- Preparation and Presentation of Financial Statements for Central Government

Prepare 2023 financial performance statement for Republic of Zamara Consolidated Fund.

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

FM – L2 – Q84 – Discounted cash flow

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

PSAF- L2 – Q10.4 – International Public Sector Accounting Standards

Determine recoverable amount of three intangible assets for Nandom Technical University.

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Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

You're reporting an error for "FM – L2 – Q91 – Foreign Exchange Risk Management"

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

You're reporting an error for "FM – L2 – Q90 – Foreign exchange risk and currency risk management"

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

You're reporting an error for "FM – L2 – Q89 – Treasury Management"

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

You're reporting an error for "FM – L2 – Q88 – Money Market Hedge"

Prepare 2024 cash flow statement for Central Government of Salima with notes.

You're reporting an error for "PSA – L2 – Q11.2 – Preparation and Presentation of Financial Statements for Central Government"

Explain four differences between forward and futures contracts for AB Enterprises.

You're reporting an error for "FM – L2 – Q87 – Foreign exchange risk and currency risk management"

Prepare 2023 financial performance statement for Republic of Zamara Consolidated Fund.

You're reporting an error for "PSAF – L2 – Q11.1- Preparation and Presentation of Financial Statements for Central Government"

Briefly describe a forward contract as a financial instrument.

You're reporting an error for "FM – L2 – Q85 – Forwards"

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

You're reporting an error for "FM – L2 – Q84 – Discounted cash flow"

Determine recoverable amount of three intangible assets for Nandom Technical University.

You're reporting an error for "PSAF- L2 – Q10.4 – International Public Sector Accounting Standards"

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