- 20 Marks
ITF – APR 2023 – L3 – Q2 – Eagle Eyes Limited Investment Strategy
Discuss and illustrate the validity of Eagle Eyes Limited's strategy to disinvest US dollar fixed deposit, convert to GHS for Treasury bills, and hedge with a forward contract.
Question
Eagle Eyes Limited (EEL), took advantage of the business prospects under the National Pensions Regulatory Authority (NPRA) and registered as a Fund Manager/Custodian under the law. They chose the High Street branch of your bank and have since proved to be very wealthy customers. Today, you are in the seat managing affairs of the branch. They called on you to discuss movements in their investment as a new strategy to manage their business under the current economic challenges the country is experiencing.
They intend to disinvest their US dollar fixed deposit of US$950,000 which is earning 13.98 percent per annum, sell to your bank for local currency and take advantage of rising Government Treasury bill rates which has seen a major increase on the back of the prime rate. Being much aware of the financial terrain, EEL is hedging its risk through a six month forward contract as it still holds some US dollar obligations in its books.
Your bank’s borrowing rates are as follow:
| US dollar 6 months fixed | 13.98% p.a. |
|---|---|
| GH cedis 6 months Treasury Bill | 27.35% p.a. |
On the foreign exchange market, your bank is quoting the follow rates for today:
| Spot | 9.8750 |
|---|---|
| 6 months forward | 0.7125 cedis discount |
Required: a. In bullet point form, indicate what you would discuss with your customer regarding their investment re-pricing plans. [10 marks] b. Use the spot and forward margins and interest rates shown above to illustrate your answer. Indicate the validity or otherwise of the strategy of EEL. [10 marks]
[Total Marks 20]
Find Related Questions by Tags, levels, etc.
- Tags: Fixed Deposit, Forward Exchange, Hedging Risks, Strategy Validity, Treasury bills
- Level: Level 3
- Topic: Interest Rate Arbitrage
- Series: APR 2023
