Assume the following information: 90-day Ghana interest rate = 4% 90-day South African interest rate = 3% 90-day forward rate of South African rand = GHS 0.3500 Spot rate of South African rand = GHS 0.3550 Assume that the Osei Bonsu Co. in Ghana will need 300,000 rand in 90 days to pay for imports from South Africa. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge.

Q: Please use information to answer the question below: A US firm's expected Accounts Payable in UK due…

A: Under Money Market Hedge If we will required the amount to paid in other country then in such case…

Q: AMD needs $50 million for 1 year to finance its working capital. The company has two borrowing…

A: If the amount is borrowed in Eurodollars, interest amount is computed as follows:…

Q: If the U.S. economy experiences growth in the future, the property will be worth $50,000,000 and the…

A: Data given:: i)   Growth: Property will be worth $50,000,000 and the exchange course of 1 dollar…

Q: Cal Bank believes the US Dollar will appreciate over the next five days from GHS 4.48 to GHS 4.50.…

A: Given Information Forecast of Bank: US Dollar appreciates over next five days from  GHS 4.48 to GHS…

Q: Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of…

A: In this we have to calculate no arbitrage price according to interest rate parity principles.

Q: Lee Junho who is a currency trader in Japan observers the following market conditions: • Annual…

A: Covered interest arbitrage is an arbitrage strategy where an investor hedges against exchange rate…

Q: Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.56 180-day…

A: Interest Arbitrage is an opportunity for investors and traders to make profit by interest rate…

Q: 7.ABC Company, a British company, expects to receive $10,000,000 in 30 days. It wants to hedge its…

A: Forward contract is an agreement which is done between two parties to hedge foreign currency risk.…

Q: Assume that the international Fisher effect (IFE) holds. The initial Singapore dollar spot rate is…

A: International fisher effect is a sub theory of interest rate parity which says that the spot and…

Q: In the spot market, 1 Philippine peso can be exchanged for 2.51 Japanese yen. In the 1-year forward…

A: This is the question of interest rate parity, hereby "the forward rate premium is equal to the…

Q: An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next…

A: The answer is option (d) [ i.e Forward market]  Refer step 2 for explanation

Q: The interest on a risk free US treasury is 2.75%, while the interest on a risk free Lebanese…

A: Foreign Exchange Rate is the exchange rate at which the currency of one country exchanges with…

Q: Assume the following information regarding U.S. and European annualized interest rates: Currency…

A: Borrow euro € 20,000,000. Then conversion of € 20,000,000 to $ value is

Q: In June 2006, a Korean investor is considering investing 100 Wons in bank deposits in Korea (in Won)…

A: Interest Rate Parity forward exchange rate concept is used in the above question. This simply states…

Q: pose the annual interest rates in the U.S. (home nation) and the U.K (foreign nation) are 8% and 6%,…

A: There are benefits due to change in the exchange rate change over period of time.

Q: Suppose that the annual interest rates on 6-months borrowing in Romania and the United States are…

A: Interest rate parity - It states that interest rates across the globe should be the same i.e.…

Q: i) Assuming you do not have any initial investment funds, suggest a way you might profit from the…

A: Forward contract is a contract which allow an investor to purchase a currency at a predetermined…

Q: Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million…

A: DEAR  is the estimated loss of a portfolio with the change in market conditions such as change in…

Q: Is it profitable for a US bank to issue $200 million of one-year bonds in the US at 6.5% to invest…

A: Arbitrage is a process under which  one can sell a security and buy another security simultaneously…

Q: Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican…

A: Money market hedge is using money market to hedge the risk from foreign currency fluctuations

Q: If the interest rate in Oman is 10% and in China is 15%. Current spot exchange rate is CNY16.59/OMR…

A: in covered interest arbitrage, you borrow in the currency which has lower interest rate and invest…

Q: American Pharoah management is planning to make a $ 2.0 million loan to a French firm. Currently,…

A: Loan rate to be charged = LIBOR+ Default risk premium + Foreign exchange rate risk premium + Country…

Q: Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate…

A: Investment Amount is $1,000,000 1-year deposit rate offered by U.S. banks = 10% 1-year…

Q: ABC’s payoff on the forward contract is closest to:

A: Forward Contract: It is an over-the-counter contract between two parties agreeing to purchase or…

Q: Suppose you have a 1,200,000 US dollar payable coming due in June and that the spot today is .98…

A: A portfolio is a collection of different kinds of stock. A well diversified portfolio should be…

Q: A financial institution has just sold 1,000,000 6-month European call options on the Japanese yen.…

A: Spot Rate 0.8 Time period 6 months Strike Rate 0.81 Volatility 10% Rfe-USA 2.5% Rfe-Yen…

Q: Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest in Mexico. The…

A: Arbitrage refers to the situation of sell and purchase of securities of the portfolio in a different…

Q: The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying…

A: The spot rate is the rate at which a bond or other financial instrument trades on an immediate…

Q: The spot rate for the Japanese yen currently is A??Y107 per $1. The one-year forward rate is A??Y106…

A: Given:Spot rate for japanese currently yield=107 per $1One year forward rate is 106 per $1Risk free…

Q: Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is…

A: Arbitrage is the process of making a profit through the purchase and sale of currencies in two or…

Q: Assume that Ghanaian inflation rate is expected to average about 9% annually, while the Nigerian…

A: If an investor or other person wants to exchange one currency with the other currency then the rate…

Q: Suppose you are a speculator from France. You observe the following 1-year interest rates, spot…

A: Theoretical forward rate = 0.6563 Actual forward rate =0.6731 Theoretical forward rate < actual…

Q: Suppose the spot rate of the yen today is $0.0100 while the three-month forward rate is $0.0096. How…

A: The spot rate is lower than the forward rate, implying that the currency is trading at a premium.…

Q: Suppose that you are working for ANZ Bank as a foreign exchange trader and are currently exploring…

A: Covered interest arbitrage It is a strategy where the favorable interest rate differentials are used…

Q: Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months.…

A: Exercise rate is the rate at which the currency will be exchanged for other currency in derivatives…

Q: Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot…

A: Money market hedge is using money market to hedge the risk of change in foreign currency…

Q: We have 100 million South African rands that are payable in one year (we have to pay it to a South…

A: Concept. Forward contract , options are various techniques used for hedging.

Q: Data from The Economist BigMac index from January 2022 shows that the local price of a Big Mac in…

A: According to purchase power parity the exchange rate and purchase power should be related and this…

Q: The current spot rate is $0.80/A$ and the six-month forward rate is $0.7775/A$. One-year interest is…

A: Here, Current Spot Rate is  $0.80/A$ Six-month forward rate is $0.7775/A$ One year interest rate in…

Q: Ghana’s inflation is forecasted to be 10.2% over the coming year whilst that of South Africa is…

A: Exchange rate risk exposure is the financial exposure that an individual or business entity faces…

Q: Suppose that interést rates in the US and South Africa are 5% and 10% respectively. If nterest rates…

A: According to interest rate parity the exchange rate should adjust according change in interest…

Q: If the interest rate in Oman is 10% and in China is 15%. Current spot exchange rate is CNY16.59/OMR…

A: Covered interest arbitrage is the method used by the investor that uses the different favourable…

Q: If the current exchange rate is $1.95/£, the 1-year forward exchange rate is $2.05/£, and the…

A: Current exchange rate=1.95Forward exchange rate=2.05Interest rate on british government bills=7%

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.