FINANCIAL MANAGEMENT – Page 5

FM – L2 – Q91 – Foreign Exchange Risk Management

Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

Question

A UK company, BrightHorizon Ltd, expects to pay $750,000 to a supplier in three months’ time. The following exchange rates are available for the dollar against sterling (GBP/USD):

| Spot | 1.8570 | 1.8580 |
| 3 months forward | 1.8535 | 1.8543 |

The company is concerned about a possible increase in the value of the dollar during the next three months and would like to hedge its FX risk.

Required:
(A) Explain how the exposure to currency risk might be hedged, and the amount that BrightHorizon Ltd will have to pay in sterling in three months’ time to settle its liability.

(B) Calculate EuroTech GmbH’s income in euros from settlement of the forward contract in two months’ time.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Risk, Foreign Exchange, Forward Contract, Hedging, Transaction risk, USD/GBP
Level: Level 2

Topic: Foreign exchange risk and currency risk management

FM – L2 – Q90 – Foreign exchange risk and currency risk management

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

Question

The treasurer of Eurotrade Company wants to hedge an exposure to currency risk. Eurotrade is a company whose domestic currency is the euro, and the company must make a payment of US $500,000 to a US supplier in six months’ time.
The following market rates are available:

Six month interest rates

	Borrowing	Deposits
Euro	4.8%	4.4%
US dollar	2.5%	2.0%

(These interest rates are expressed as an annual rate of interest.)

Required
Compare the cost of hedging the currency risk exposure with:
(a) a forward exchange contract (3 marks)
(b) a money market hedge. (5 marks)
Recommend which method of hedging would be preferable in this situation.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency hedging, Euro, Foreign Exchange Risk, Forward Contract, Money Market Hedge, Transaction exposure, US Dollar
Level: Level 2

Topic: Foreign exchange risk and currency risk management

FM – L2 – Q89 – Treasury Management

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

Question

A company, NorthStar Enterprises, has an outstanding 10-year variable rate loan of $15 million on which it is paying SOFRA + 2%. It wishes to eliminate its exposure to a rise in variable interest rates. Currently, 10-year US interest rate swaps are quoted at 4.458%.

Required:
Explain how the treasury function could use an interest rate swap to hedge interest rate risk and calculate the effective borrowing rate that would result.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Hedging, Interest Rate Risk, Interest Rate Swap, SOFRA, Treasury management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q88 – Money Market Hedge

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

Question

BritCo Ltd expects to receive $600,000 in six months’ time from a customer. It intends to convert these dollars into sterling.
The current spot rate for the dollar against sterling (GBP/USD) is 1.8800. The six-month interest rates are 5% per year for sterling and 3.5% per year for the US dollar.

Required
(a) Show how BritCo Ltd can create a money market hedge for its exposure to a fall in the value of the dollar.
(b) Estimate what the exchange rate should be for a six-month forward contract, GBP/USD.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Risk Management, Foreign Exchange Risk, Forward Contract, Hedging, Interest rates, Money Market Hedge, Sterling, US Dollar
Level: Level 2

Topic: Treasury Management

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

Question

AB Enterprises, a company whose domestic currency is the cedi, has imported a consignment of tomato paste from Spain at a cost of EUR540,000, which is payable in three months’ time. Ama Kofi, the company’s finance director, is concerned about the company’s exposure to currency risk, and she is considering the use of forward contracts or currency futures to hedge the risk.

Required:
(i) Explain to Ama Kofi FOUR differences between a forward contract and a futures contract.
(ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AB Enterprises facing in relation to the EUR540,000 tomato paste consignment?
(iii) Explain to Ama Kofi, THREE disadvantages of hedging the euro exposure with futures hedge.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Basis risk, Currency Risk, Financial instruments, Forward contracts, Futures contracts, Futures hedging, Hedging, Transaction risk
Level: Level 2

Topic: Futures and hedging with futures

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

Question

Briefly describe the following financial instrument:

(a) Forwards

(b) Futures

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Risk, Financial instruments, Hedging, Options
Level: Level 2

Topic: Hedging with options

FM – L2 – Q84 – Discounted cash flow

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

Question

A company is considering whether to invest in a new item of equipment costing GH₵45,000 to make a new product. The product would have a four-year life, and the estimated cash profits over the four-year period are as follows.

Year	GH₵
1	17,000
2	25,000
3	16,000
4	4,000

The project would also need an investment in working capital of GH₵8,000, from the beginning of Year 1.
The company uses a discount rate of 11% to evaluate its investments.
Required
Calculate the NPV of the project at the discount rate of 11%.
Using the NPV you have calculated at 11%, and the NPV at a discount rate of 15%, estimate the internal rate of return (IRR) of the project.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discounted cash flow, investment appraisal, IRR, NPV
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q82 – Discounted Cash Flow

Calculate NPV of a project with given cash flows and 10% cost of capital, and state if it should be undertaken.

Question

A company has a cost of capital of 10%. Calculate the NPV of an investment project with the following estimated cash flows:

Years	Cash flow each year
	GH₵
0	(70,000)
1	15,000
2–4	12,000
5–10	8,000

State whether the project should be undertaken.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flows, Cost of Capital, Discounted cash flow, investment appraisal, NPV
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q81 – Sources of finance: debt

Calculate loan repayment schedule for a GH₵300,000 loan and list advantages of term loan over overdraft.

Question

(a) Dinco Supermarket is considering acquiring a loan of GH₵300,000 from Abrempong Bank Ltd. The loan is payable in five equal annual instalments at an interest rate of 25%. Dinco Ltd has consulted you to determine their annual repayment amount and the interest thereon.

Required:

(i) Prepare a repayment schedule for Dinco indicating clearly the interest payment and the principal repayment

(ii) State THREE (3) advantages of a term loan over an overdraft facility

(b) On 1st January 20X4, Exchequers Insurance issued a 15% convertible bond quoted at GH₵123. The nominal value for each bond is GH₵100 and the conversion date for the bond is 31st December 20X9 after interest has been paid. The bond is convertible at 20 ordinary shares per GH₵100 bond. The current price per share is GH₵6.

Required:

(i) Determine the conversion rate.

(ii) Determine the conversion premium.

(iii) Comment on the possibility of bond holders converting for shares.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Conversion Premium, Conversion Rate, Convertible bonds, Debt financing, Equity Conversion
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q80 – Simple interest and compound interest

Solve various time value of money problems involving simple and compound interest, annuities, and sinking funds.

Question

(a) Kofi borrowed GH¢120,000 for eight months at 15% simple interest per annum. How much interest would he pay?
Compute the annual rate of interest that, if compounded continuously monthly, would result in the payment of the same amount of interest.

(b) Ama paid GH¢500,000 into a fund which yielded 8% per annum compounded annually.
How much amount will she have in the fund after 10 years?

(c) At the start of each 6 month period for 7 years Kwame paid GH¢25,000 into a fund earning annual interest at 6% compounded semi-annually.
What amount would be in the fund at the end of 7 years?

(d) Yaw deposited an amount into a bank which will be doubled in eight years. Find the rate of interest on the basis that the amount is compounded annually.

(e) How much should Adwoa deposit now to yield GH¢600,000 at the end of five years at 10% per annum simple interest?

(f) How much should Esi deposit now to yield GH¢600,000 at the end of five years at 10% per annum compound interest?

(g) How much should Kwesi deposit now to yield GH¢600,000 at the end of five years at an annual interest of 10% compounded half yearly?

(h) Nii wants to purchase an annuity that will provide GH¢6,000 per annum at the end of each year for 10 years.
How much will he need to invest in a fund with a return of 6% per annum?
How much interest would he earn over the period of 10 years?

(i) Two years ago, Apex Limited borrowed an amount at an annual interest rate of 10%. The amount of the loan today is GH¢100,000 and the final amount will be paid back in four years.
Apex Limited is to set up a sinking fund which yields a return of 8% per annum compounded quarterly (by parts).
How much will Apex Limited need to deposit at the end of each quarter, in the sinking fund, to settle the loan at the end of four years?

(j) Star Limited wants to invest equal annual amounts in a bank for five years starting from January 1, 20X1 in order to have the following amounts available:

GH¢1.0 million for the purchase of land on January 01, 20X6.
Enough cash to buy an annuity of GH¢240,000 per annum for 4 years commencing from January 1, 20X7 at an interest rate of 8%.
How much will Star Limited need to deposit at the end of each year in a fund that generates a return of 10% per annum compounded annually?

Answer

Find Related Questions by Tags, levels, etc.

Tags: Annuities, Compound interest, Future value, Interest rates, Present value, Simple interest, Sinking fund, Time value of money
Level: Level 2

Topic: Simple interest and compound interest

Subject (SQ): FINANCIAL MANAGEMENT

Search

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

FM – L2 – Q91 – Foreign Exchange Risk Management

Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

FM – L2 – Q90 – Foreign exchange risk and currency risk management

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

FM – L2 – Q89 – Treasury Management

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

FM – L2 – Q88 – Money Market Hedge

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

FM – L2 – Q85 – Forwards

Briefly describe a forward contract as a financial instrument.

FM – L2 – Q84 – Discounted cash flow

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

FM – L2 – Q82 – Discounted Cash Flow

Calculate NPV of a project with given cash flows and 10% cost of capital, and state if it should be undertaken.

FM – L2 – Q81 – Sources of finance: debt

Calculate loan repayment schedule for a GH₵300,000 loan and list advantages of term loan over overdraft.

FM – L2 – Q80 – Simple interest and compound interest

Solve various time value of money problems involving simple and compound interest, annuities, and sinking funds.

Our Offerings

Contact Info

My Account

Get In Touch

Subject (SQ): FINANCIAL MANAGEMENT

Search

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

Explain how a UK company can hedge USD payment risk using a forward contract and calculate the sterling cost in 3 months.

You're reporting an error for "FM – L2 – Q91 – Foreign Exchange Risk Management"

Compare costs of hedging Eurotrade's $500,000 payment using forward contract vs. money market hedge.

You're reporting an error for "FM – L2 – Q90 – Foreign exchange risk and currency risk management"

Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.

You're reporting an error for "FM – L2 – Q89 – Treasury Management"

Calculate money market hedge for $600,000 USD receipt in 6 months and estimate 6-month forward exchange rate for BritCo Ltd.

You're reporting an error for "FM – L2 – Q88 – Money Market Hedge"

Explain four differences between forward and futures contracts for AB Enterprises.

You're reporting an error for "FM – L2 – Q87 – Foreign exchange risk and currency risk management"

Briefly describe a forward contract as a financial instrument.

You're reporting an error for "FM – L2 – Q85 – Forwards"

Calculate NPV and estimate IRR for a project with given cash flows and discount rates.

You're reporting an error for "FM – L2 – Q84 – Discounted cash flow"

Calculate NPV of a project with given cash flows and 10% cost of capital, and state if it should be undertaken.

You're reporting an error for "FM – L2 – Q82 – Discounted Cash Flow"

Calculate loan repayment schedule for a GH₵300,000 loan and list advantages of term loan over overdraft.

You're reporting an error for "FM – L2 – Q81 – Sources of finance: debt"

Solve various time value of money problems involving simple and compound interest, annuities, and sinking funds.

You're reporting an error for "FM – L2 – Q80 – Simple interest and compound interest"

admin

Pick a Form