Currency hedging

FM – L2 – Q102 – Treasury management

PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

Question

PrimeCare Inc, a company in the USA, has agreed a contract to supply medical supplies to HealthBridge Ltd, a large hospital group based in Ghana. The price of the contract is $3 million.
There is currently no existing relationship between the two companies and PrimeCare has no other customers in Ghana.

Required:
Explain how PrimeCare Inc can manage the credit risk and currency risk associated with this international transaction.

Answer

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Tags: Credit risk, Currency hedging, Foreign Exchange Risk, Forward Contract, International payments, Letter of credit, Treasury management
Level: Level 2

Topic: Treasury Management

FM – L2 – Q98 – Foreign exchange risk and currency risk management

Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

Question

Accra Food and Beverage Co has recently imported raw materials from Japan with an invoice value of US$264,000 payable in three months’ time. Due to the company’s efficient production capacity, it has finished products and exported finished products to France. Consequent to this, the French customer has been invoiced for US$75,000 payable in three months’ time. Below is the current spot and forward rates for the transactions:

USD/GHS	Spot	3 Months Forward
	0.9850-0.9870	0.9545-0.9570

Current money market rates per annum are as follows:

Currency	Borrowing	Deposits
US$ (USD)	11% – 13.2%	2.7%
GH₵ (GHS)	12.7% – 14.3%	Not provided

Required:
Demonstrate with relevant calculations how Accra Food and Beverage Co can hedge its exposure to foreign exchange risk using:
(a) The forward markets
(b) The money market

Answer

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Tags: Currency hedging, Foreign Exchange Risk, Forward Markets, Forward Rates, Interest rates, Money Markets, Net Exposure, Spot Rates, Transaction risk, USD/GHS
Level: Level 2

Topic: Foreign exchange risk and currency risk management

FM – L2 – Q95 – Currency Risk Management

UK company hedges €2,110,000 net euro payment using forward contract, money market hedge, and currency futures; compare costs.

Question

It is now the end of July. A UK company, Zenith Enterprises, expects the following receipts and payments in euros at the end of the month in three months’ time (at the end of October):

| Receipts | €540,000 |
| Payments | €2,650,000 |

The company is concerned about the exposure to a risk of a movement in the sterling/euro exchange rate, and it has decided to hedge the exposure.
It is considering three methods of hedging the exposure:
(a) with a forward exchange contract
(b) using a money market hedge
(c) using currency futures.

Relevant data is as follows:

FX rates, €/£1
Spot	1.4537	1.4542
3 months forward	1.4443	1.4448

3-month interest rates	Borrow	Invest
Sterling (UK)	6.2%	5.6%
Euro	3.8%	3.4%

Currency futures: €/£1
Contract size is €100,000 per contract
December futures price: 0.6929

Required:
Demonstrate with relevant calculations how Zenith Enterprises can hedge its exposure to foreign exchange risk using:
(a) a forward exchange contract (3 marks)
(b) a money market hedge (4 marks)
(c) currency futures (3 marks)
Recommend which method of hedging would be preferable in this situation.

Answer

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Tags: Currency futures, Currency hedging, Euro, Financial Risk Management, Foreign Exchange Risk, Forward Contract, Hedging Strategies, Money Market Hedge, Sterling
Level: Level 2

Topic: Futures and hedging with futures

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

Tag (SQ): Currency hedging

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FM – L2 – Q102 – Treasury management

PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

FM – L2 – Q98 – Foreign exchange risk and currency risk management

Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

FM – L2 – Q95 – Currency Risk Management

UK company hedges €2,110,000 net euro payment using forward contract, money market hedge, and currency futures; compare costs.

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.

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Tag (SQ): Currency hedging

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FM – L2 – Q102 – Treasury management

PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

You're reporting an error for "FM – L2 – Q102 – Treasury management"

FM – L2 – Q98 – Foreign exchange risk and currency risk management

Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

You're reporting an error for "FM – L2 – Q98 – Foreign exchange risk and currency risk management"

FM – L2 – Q95 – Currency Risk Management

UK company hedges €2,110,000 net euro payment using forward contract, money market hedge, and currency futures; compare costs.

You're reporting an error for "FM – L2 – Q95 – 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.

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

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