Exchange rate risk

EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

Question

(a) Identify four (4) sources of deposits for Commercial Banks. [4 marks]

(b) Managing Exchange Rate Risk effectively is essential for banks to preserve profitability and maintain financial stability in a dynamic Global Financial Environment. Mention four (4) ways by which Exchange Rates can influence the profitability of banks. [8 marks]

(c) A bank initially received a deposit of GHC150.00. Using the Money Multiplier Principle, determine the total amount of money that can be created from this initial deposit, assuming a reserve ratio of 5%. [4 marks]

(d) Mention four (4) major functions of Commercial Banks in your economy. [4 marks]

(Total: 20 marks)

Answer

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Tags: Banking Profitability, Exchange rate risk, Financial Stability, Functions of Commercial Banks, Money Multiplier Principle, Reserve Ratio, Sources of Deposits
Level: Level 1

Topic: Banks and other Financial Institutions; Money
Series: APR 2024

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

Question

Akosa Minerals Limited (AML) exports a significant portion of its gold production, making its revenue highly sensitive to global gold prices and exchange rate fluctuations. Recently, gold prices have surged to a six-month high of USD 2,904.4 per troy ounce, creating an opportunity for AML to maximize export earnings. However, the company also faces foreign exchange risk, as the Ghanaian cedi (GHS) may depreciate before AML receives its USD payments.
To mitigate this risk, AML’s finance team is considering two hedging strategies: money market hedge and forward contracts. The company must determine which approach provides the best protection against exchange rate fluctuations while optimising its financial position.
AML expects to receive USD 10 million from gold exports in three months. The company is concerned that the USD/GHS exchange rate may depreciate and is evaluating both a money market hedge and a forward contract. The following information is available:

Current spot exchange rate: 1 USD = 12.50 GHS
Three-month forward rate: 1 USD = 12.20 GHS
Three-month interest rates:
USD borrowing rate: 4% per annum
USD deposit rate: 3% per annum
GHS borrowing rate: 23% per annum
GHS deposit rate: 18% per annum

Required:
a) Explain the concept of both the money market hedge and forward contract hedge, and how AML can use each to mitigate its exchange rate risk.
(6 marks)
b) Calculate the amount AML needs to borrow or invest today in both USD and GHS under the money market hedge to fully hedge the future receipt of USD 10 million.
(4 marks)
c) Calculate the GHS amount AML would receive if it chooses the forward contract hedge instead.
(2 marks)
d) Compare the GHS amounts received under the money market hedge and forward contract hedge. Recommend the better option for AML based on the calculations.
(2 marks)
e) Discuss THREE internal hedging techniques AML can employ to mitigate the depreciation of the Ghana Cedi against the US Dollar.
(6 marks)

Answer

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Tags: AML, Currency Fluctuations, Exchange rate risk, Financial risk management, Forward Contract, Hedging, Internal Hedging, Mining Industry, Money market hedge, Risk Mitigation
Level: Level 3

Topic: Financial management
Series: MAR 2025

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

Question

Alpha Plc. is a Nigerian manufacturer of plastic containers, selling across West African and other African countries. In three months, Alpha Plc. is due to receive 70 million Kudi from a Central African country. At today’s board meeting, the directors will discuss the need to hedge the foreign exchange exposure associated with this transaction and potential methods.

Three alternatives will be considered:

(i) Not to hedge this transaction;
(ii) Use a forward contract, with current exchange rates quoted by Alpha Plc.’s bank as follows:

Spot: 1.1548 – 1.1608 Kudi/N
3 months forward: 1.1438 – 1.1508 Kudi/N
(iii) Use an over-the-counter currency option on Kudi, available through Alpha Plc.’s bank. Current premiums at an exercise price of 1.1650 Kudi/N are N1.10 per 100 Kudi for a call option and N1.25 per 100 Kudi for a put option.

Required:

a. State four reasons why a firm might reasonably choose not to hedge its exposure to exchange rate risk. (4 Marks)

b. Show the effect of each of the three alternatives being considered, assuming that the spot exchange rate in three months’ time is:
i. 1.1850 – 1.1880 Kudi/N
ii. 1.1295 – 1.1320 Kudi/N (7 Marks)

c. State four methods available to firms to reduce their exposure to foreign exchange risks that do not involve the use of financial contracts. (4 Marks)

Answer

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Tags: Currency options, Exchange rate risk, Foreign exchange exposure, Forward Contracts, Hedging Strategies, Non-Financial Hedging Methods
Level: Level 3

Topic: Foreign Exchange Risk Management

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

Question

Identify and explain FOUR (4) techniques that can be used internally to hedge exchange rate risk.

Answer

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Tags: Currency risk management, Exchange rate risk, Hedging, Internal hedging techniques
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2020

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

Question

Ahuodzen Pharmaceutical Ltd (Ahuodzen) imports chemicals to produce medicines in Ghana. It has received a consignment of chemicals from a supplier in India. The invoice value of US$2 million is payable two months from now. The Treasury Manager of Ahuodzen is worried about volatility in the cedi to US dollar exchange rate.

Required:
Explain how local currency invoicing would be used as a strategy for managing currency risk exposures and advise the Treasury Manager on the benefit and risk of handling Ahuodzen’s currency risk exposure using local currency invoicing. (5 marks)

Answer

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Tags: Currency risk management, Exchange rate risk, Local currency invoicing
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: MAR 2023

EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

Question

(a) Identify four (4) sources of deposits for Commercial Banks. [4 marks]

(d) Mention four (4) major functions of Commercial Banks in your economy. [4 marks]

(Total: 20 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Banking Profitability, Exchange rate risk, Financial Stability, Functions of Commercial Banks, Money Multiplier Principle, Reserve Ratio, Sources of Deposits
Level: Level 1

Topic: Banks and other Financial Institutions; Money
Series: APR 2024

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

Question

Current spot exchange rate: 1 USD = 12.50 GHS
Three-month forward rate: 1 USD = 12.20 GHS
Three-month interest rates:
USD borrowing rate: 4% per annum
USD deposit rate: 3% per annum
GHS borrowing rate: 23% per annum
GHS deposit rate: 18% per annum

Answer

Find Related Questions by Tags, levels, etc.

Tags: AML, Currency Fluctuations, Exchange rate risk, Financial risk management, Forward Contract, Hedging, Internal Hedging, Mining Industry, Money market hedge, Risk Mitigation
Level: Level 3

Topic: Financial management
Series: MAR 2025

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

Question

Three alternatives will be considered:

(i) Not to hedge this transaction;
(ii) Use a forward contract, with current exchange rates quoted by Alpha Plc.’s bank as follows:

Spot: 1.1548 – 1.1608 Kudi/N
3 months forward: 1.1438 – 1.1508 Kudi/N
(iii) Use an over-the-counter currency option on Kudi, available through Alpha Plc.’s bank. Current premiums at an exercise price of 1.1650 Kudi/N are N1.10 per 100 Kudi for a call option and N1.25 per 100 Kudi for a put option.

Required:

a. State four reasons why a firm might reasonably choose not to hedge its exposure to exchange rate risk. (4 Marks)

c. State four methods available to firms to reduce their exposure to foreign exchange risks that do not involve the use of financial contracts. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency options, Exchange rate risk, Foreign exchange exposure, Forward Contracts, Hedging Strategies, Non-Financial Hedging Methods
Level: Level 3

Topic: Foreign Exchange Risk Management

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

Question

Identify and explain FOUR (4) techniques that can be used internally to hedge exchange rate risk.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Hedging, Internal hedging techniques
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: NOV 2020

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk management, Exchange rate risk, Local currency invoicing
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: MAR 2023

Question Tag: Exchange rate risk

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EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

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EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

You're reporting an error for "EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks"

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

You're reporting an error for "SCS – Mar2025 – L3 – Q4 – Financial Management"

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

You're reporting an error for "FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management"

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

You're reporting an error for "FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management"

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management"

EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks

This question covers sources of bank deposits, ways exchange rates affect bank profitability, calculation of money creation using the money multiplier, and major functions of commercial banks in the economy.

You're reporting an error for "EIB – APR 2024 – L1 – Q6 – Sources of Deposits, Exchange Rate Influence, Money Multiplier, Functions of Commercial Banks"

SCS – Mar2025 – L3 – Q4 – Financial Management

AML evaluates money market and forward contract hedges to mitigate USD/GHS exchange rate risk on USD 10M gold export revenue, with calculations and internal hedging strategies.

You're reporting an error for "SCS – Mar2025 – L3 – Q4 – Financial Management"

FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management

Evaluate foreign exchange hedging options for Alpha Plc’s expected receipt of Kudi and discuss non-financial risk reduction methods.

You're reporting an error for "FM – Nov 2018 – L3 – Q6 – Foreign Exchange Risk Management"

FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management

Identify and explain four internal techniques to hedge exchange rate risk.

You're reporting an error for "FM – Nov 2020 – L2 – Q5b – Foreign exchange risk and currency risk management"

FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management

Explain how local currency invoicing can be used to manage currency risk exposure, and discuss the benefits and risks associated with this strategy.

You're reporting an error for "FM – March 2023 – L2 – Q5a – Foreign exchange risk and currency risk management"

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