Question

(A). Kofi Agyekum is bidding for a project needed by the USA government. Kofi Agyekum will not know if the bid is accepted until three months from now. Kofi Agyekum will need cedi to cover expenses but will be paid by the USA government in dollars if he hired labour for the project. The contract price is US$ 35,000.00. The current spot rate of the cedi to the dollar is GH¢2.00=US$0. 50, while the forward rate is GH¢2.50 = US$0.99. Required: Calculate in cedi the contract sum if the project is undertaken by the Ghanaian firm, (3Marks) (B). Assume that your bankers are in competition with other banks in the City of Kumasi quotes current exchange price as GH¢ 4.5 - $1. The same bank’s quote a year ago was GH¢ 4.00 -$1 Required: Calculate the percentage change in the value of the cedi as at today. (3Marks) (C). The USA dollar has changed at the rate of $2.50 to £1. in the year 2010. In the year 2014, dollar has traded in the UK financial market as $1.50 to £1.00. i. Compute the percentage change in the value of the dollar. (3Marks) ii. Identify and explain two (2) factors that could have accounted for the change in the value of the dollar in 2014. (6Marks)

Answer 1

A) Amount of contract in US $ terms = 35,000 USD

Applicable forward rate for the contract will be GH¢2.50 = US$0.99

Contract sum in cedi = 35000/0.99 * 2.50 = 88,383.84 GH¢

B) Quote today = GH¢ 4.5 - $1 which implies, 0.22 USD per 1 GH¢

Quote one year ago = GH¢ 4.00 -$1 which implies, 0.25 USD per 1 GH¢

Percentage Change in value of the cedi = (0.22222 - 0.25) / 0.25 *100 = - 11.11%

A fall of 11.11% in one year.

C) i) Rate in 2010,  $2.50 to £1 which implies £ 0.2 per 1 USD

Rate in 2014, $1.50 to £1.00 which implies £ 0.66667 per 1 USD

Percentage Change in value of the USD = (0.66667- 0.20) / 0.20 *100 = 233.33%

An increase of 233.33% over a period of 4 years from 2010 to 2014 which implies a 35.12% annual growth rate.

ii) Two factors for increase in value of dollar are:-

1. deteriorating economic conditions in Great Britain combined with an improving U.S. economy.

2. Interest rates and purchasing power gaps of the two countries commbined with the GDP growth rate.

3. Eurozone crisis also may have had an impact on the above given exchange rates of GBP.

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