- 20 Marks
ITF – OCT 2022 – L3 – Q1 – Financing Export Transaction with Bill of Exchange and FX Risk Protection
Advise on methods to protect from FX risks for an export to South Africa using bill of exchange, outline contractual obligations, calculate proceeds and cedis from forward and currency borrowing, and formula to compare borrowing costs.
Question
Your customer, Adonteng Traders Limited has finished all the registration formalities to take advantage under the new continental trading booming in Africa. Specializing in export of food throughout the continent, Adonteng Traders have negotiated with South African buyers for supply of assorted foodstuff. The arrangement allows them to draw bill of exchange on buyers immediately after shipment for full payment after 90 days. Because of restricted profit margins over the past few months due to the Russian-Ukraine problem, and a shortage of working capital, the customers called to see you on 30 March to seek your advice on how best they can finance this transaction worth USD250, 000 falling due on 30 June. The credibility of the South African buyers is highly undoubted. Adonteng Traders are seeking funding from your bank for three months in either Ghana Cedi equivalent or USD250, 000 and would pay off when final proceeds are due from the buyers. Additional information available on 30 March is as follows:
(i) USD/GHS
Spot 7.7120 7.7160
1 month forward 0.035 0.043 Cedis disc
2 months forward 0.051 0.063 Cedis disc
3 months forward 0.060 0.065 Cedis disc
(ii) Base rate is 19.0%
(iii) US 3 month LIBOR rate is 5.25%
(iv) Adonteng Traders is borrowing dollars from your US correspondent bank at 1.5% over US LIBOR rate.
(v) For interest on USD borrowing, kindly use mid-rate to convert.
(vi) Your customers do not purchase goods for which they have to pay in foreign currency.
REQUIRED:
(a) By what methods can your customers be protected from foreign exchange risks whilst preserving their profit margins? [2 marks]
(b) Outline any contractual obligations in respect of foreign exchange that your customers would have to undertake. [2 marks]
(c) Show by calculation the proceeds of each method proposed in the answer to
(a) above, and the cedis proceeds which each method would produce, stating which of the two options is better for Adonteng Traders. [10 marks]
(d) Set out a formula which your customers would use to compare cedis and foreign
currency borrowing costs, taking into account, where appropriate, the advantages or disadvantages of forward cover. [6 marks]
Notes: (2) Base your calculations on a 30 day month and a 360 day year.
[Total Marks 20]
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