Economic Risk – Knowsia

FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

Question

a) Dadisen PLC manufactures and sells pharmaceutical products in Ghana. It imports a significant portion of its pharmaceutical inputs from the USA. However, it only sells its products in Ghana. The company is considering establishing its foothold in The Gambia, Liberia, and Sierra Leone markets.

i) Dadisen PLC reports its results in its home currency. It pays for its purchases from the USA in US dollars but receives payments for its sales in Ghana cedis. All sales from Gambia, Liberia, and Sierra Leone are expected to be transferred into US dollar accounts each week. On average, the company generally takes 90 days to pay its suppliers and receives payment from its debtors within 60 days. In paying its suppliers, the company relies on bank overdrafts at an annual rate of 10%.

Over the last few years, the company has found that sales have been quite predictable, and it has been possible to plan sales levels and purchases of goods in advance. However, the company does not have adequate management skills for its foreign currency exposure. As a result, the company has reported exchange rate losses since 2020. The company is currently considering whether the forex exposure could be better managed.

Required:

Describe the following types of foreign currency exposure, giving examples of how they could impact the financial statements of Dadisen PLC:

Transaction risk
Translation risk
Economic risk

ii) The company estimates that it will need to borrow $1 million in three months’ time for a period of six months but is concerned about expected fluctuations in the exchange rate. The company is considering hedging this exposure using a currency forward contract. The company’s banker, GCB, has agreed to sell the US dollar forward for 9 months at GH¢17 to the dollar.

Required:
Compute the effect of the currency forward transaction on profitability if the spot exchange rate in 9 months is:

GH¢22
GH¢15

Answer

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Tags: Currency Forward Contracts, Economic Risk, Foreign Exchange Risk, Hedging, Transaction Risk, Translation Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: Nov 2024

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)

Answer

Find Related Questions by Tags, levels, etc.

Topic: Foreign exchange risk and currency risk management
Series: NOV 2016

FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

Question

Required:

Describe the following types of foreign currency exposure, giving examples of how they could impact the financial statements of Dadisen PLC:

Transaction risk
Translation risk
Economic risk

Required:
Compute the effect of the currency forward transaction on profitability if the spot exchange rate in 9 months is:

GH¢22
GH¢15

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Forward Contracts, Economic Risk, Foreign Exchange Risk, Hedging, Transaction Risk, Translation Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: Nov 2024

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

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)

Answer

Find Related Questions by Tags, levels, etc.

Topic: Foreign exchange risk and currency risk management
Series: NOV 2016

Question Tag: Economic Risk

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FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

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.

FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

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.

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FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

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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.

You're reporting an error for "FM – NOV 2016 – L2 – Q4 – Foreign exchange risk and currency risk management"

FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management

Explaining foreign exchange risk types and calculating the impact of forward contract hedging.

You're reporting an error for "FM -NOV 2024 – L2 – Q3a – Foreign Exchange Risk Management"

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.

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