- 10 Marks
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
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