a. Discussion points with the customer regarding their investment re-pricing plans:

• Explain the current economic context in Ghana, including high inflation and rising Bank of Ghana prime rates driving Treasury bill yields to 27.35% p.a., compared to lower US dollar rates at 13.98% p.a., highlighting the opportunity for higher returns but with currency risk.
• Discuss the foreign exchange risk, as converting US$ to GHS exposes them to GHS depreciation, which could erode gains if not hedged, referencing historical GHS volatility post-2022 DDEP and banking cleanup.
• Outline the hedging mechanism using a 6-month forward contract to lock in the exchange rate for repurchasing US$ to meet obligations, reducing uncertainty but at the cost of the discount (0.7125 cedis).
• Highlight potential costs, such as penalties for early termination of the US$ fixed deposit under BoG regulations and bank terms, and any transaction fees for FX conversion and forward contracts.
• Advise on liquidity and cash flow implications, ensuring the Treasury bill investment aligns with their US$ obligations timeline, and discuss reinvestment risks at maturity if rates change.
• Review regulatory compliance, including BoG’s foreign exchange guidelines under the Foreign Exchange Act 2006 (Act 723) and reporting requirements for large transactions to avoid money laundering flags per Anti-Money Laundering Act 2020.
• Evaluate the overall risk-return profile, comparing the net effective yield after hedging to keeping the US$ deposit, using practical examples from similar clients during Ghana’s 2023 economic challenges.
• Discuss alternatives like US$ money market funds or diversified portfolios to balance yield and risk, emphasizing sustainable banking principles per BoG directives.
• Address tax implications, such as withholding tax on Treasury bill interest (8% for residents) versus US$ deposit income, and ensure alignment with NPRA guidelines for fund managers.
• Conclude with monitoring and exit strategies, offering ongoing advice on market movements via bank treasury updates, and the need for board approval given their custodian status.

b. Illustration and validity of the strategy:

Using the rates provided, assume the spot rate is 9.8750 GHS per US$ (mid-rate for simplicity, as single quote given), and the 6-month forward rate is 9.8750 – 0.7125 = 9.1625 GHS per US$.

• Disinvest US$950,000 fixed deposit and convert at spot: GHS received = 950,000 x 9.8750 = 9,381,250 GHS.
• Invest in 6-month GH cedis Treasury bill at 27.35% p.a. (13.675% for 6 months): Maturity value = 9,381,250 x (1 + 0.13675) = 9,381,250 + 1,282,684.38 = 10,663,934.38 GHS.
• To hedge US$ obligations (assuming full principal hedge for illustration), enter forward contract to buy US$950,000 at 9.1625 GHS/US$: Cost at maturity = 950,000 x 9.1625 = 8,704,375 GHS.
• Net GHS after repurchasing US$950,000 = 10,663,934.38 – 8,704,375 = 1,959,559.38 GHS surplus, which can be converted back or retained, but the effective US$ position at end is the original plus interest equivalent.

Comparatively, keeping the US$ deposit: Maturity value = 950,000 x (1 + 0.1398/2) = 950,000 x 1.0699 = 1,016,405 US$.

In the strategy, after hedging, they effectively lock in a higher yield because the forward discount does not fully offset the interest differential. The theoretical forward rate per interest rate parity should be 9.8750 x (1 + 0.2735/2) / (1 + 0.1398/2) = 9.8750 x 1.13675 / 1.0699 ≈ 9.8750 x 1.0627 ≈ 10.494 GHS/US$, but the quoted forward is 9.1625 (lower than spot), indicating mispricing favoring the strategy.

The strategy is valid and profitable, yielding an arbitrage-like gain of approximately US$147,300 equivalent (surplus GHS converted at forward), as the market forward does not reflect the full interest differential, allowing higher effective returns post-hedge compared to the US$ deposit. However, in practice, confirm no early breakage fees and BoG approval for large forwards.