a)
i) Forward market hedge
As the company needs to have the EUR, it will have to buy it from the forward dealers at their ask rate (i.e., GHS17.6684/EUR1):
Outcome of forward hedge = Currency Exposure × Forward rate
Outcome of forward hedge = EUR22,500,000 × GHS17.66684EUR1=GHS397,503,900EUR1GHS17.66684​=GHS397,503,900

ii) Money market hedge
Today:

1. Borrow the cedi equivalent of the PV of the euro payable (i.e., EUR22,500,000)

PV of euro payable=EUR22,500,000(1+0.03754)=EUR22,291,021.67PV of euro payable=(1+40.0375​)EUR22,500,000​=EUR22,291,021.67

cedis to borrow = EUR22,291,021.67 × GHd17.3684EUR1=GHd387,159,380.80EUR1GHd17.3684​=GHd387,159,380.80

*The spot ask rate is used as euros will be bought immediately with the cedis borrowed.

2. Sell the cedis borrowed to buy the PV of the euro payable at the spot offer rate.
   = EUR22,291,021.67

3. Invest the EUR22,291,021.67 bought at the euro investing rate.

On Maturity:

4. Collect the maturity value of the euro investment.

MV of euro Investment=EUR22,291,021.67×(1+0.03754)=EUR22,500,000MV of euro Investment=EUR22,291,021.67×(1+40.0375​)=EUR22,500,000

5. Settle the euro payable with the proceeds from the euro investment.
   = EUR22,500,000

6. Settle the cedi loan as the guaranteed outcome of the hedge.

MV of cedi loan=GHd387,159,380.80×(1+0.31124)=GHd417,280,380.6MV of cedi loan=GHd387,159,380.80×(1+40.3112​)=GHd417,280,380.6

The outcome of the money market hedge is a net cost of GHd417,280,380.6.

NB: Some candidates may use the relevant money market interest rates to estimate the future exchange rate for buying euros in three months and then multiply that by the euro payable to determine the net outcome of the hedge.

E(Std/f)=S0[1+id1+if]TE(Std/f​)=S0​[1+if1+id​]TE(Std/f)=GH317.3684[1+0.311241+0.03754]=GH418.54579469E(Std/f​)=GH317.3684[1+40.0375​1+40.3112​​]=GH418.54579469

Outcome = EUR22,500,000 x GH418.54579469EUR1EUR1GH418.54579469​ = $GH4417,280,380.6$

iii) Explanation of the use of a letter of credit

A Letter of Credit is a contractual obligation by the importer’s bank to release payment upon the shipment of goods and submission of the necessary documentation to the exporter’s bank as proof.

This international payment method is structured to safeguard the interests of both parties. For exporters, it provides a payment guarantee, while for importers, it provides reasonable payment terms and assurance that the goods ordered will be received.

In the transaction between Fufulso Engineering LTD, a Ghana-based company, and a German exporter, the trade could be settled using a letter of credit through the following steps:

1. After finalising the Sales Agreement, Fufulso Engineering LTD would apply to their bank to issue a Letter of Credit in favour of the German exporter.

2. Fufulso Engineering LTD’s bank, acting as the issuing bank, would draft the Letter of Credit based on the terms and conditions of the Sales Agreement and transmit it to the exporter’s bank, which would act as the advising bank.

3. The exporter’s bank would review and approve the Letter of Credit before forwarding it to the exporter.

4. The exporter would ship the consignment of industrial machines as stipulated in the Letter of Credit and submit the required shipping and commercial documents to their bank. A freight forwarder may assist in this process.

5. The exporter’s bank would check the documents for compliance with the terms and conditions of the Letter of Credit. Upon approval, the exporter’s bank would forward the documents to Fufulso Engineering LTD’s bank and request payment.

6. Fufulso Engineering Ltd.’s bank would verify the documents and, upon confirmation, release the payment to the exporter’s bank. Fufulso Engineering Ltd receives the documents granting legal title to the goods in exchange for payment to their bank.

c) Impacts of unfair use of technology in the financial sector

• Use of data without permission

• Exclusion of individuals from financial activities

• Inappropriate discrimination or bias

• Asymmetry of information