BAF Limited is involved in international business. It has the following receivables and payables: Table A:...

BAF Limited is involved in international business. It has the following receivables and payables:

Table A: Total receivables US$10 million

Market	Exchange rate	Expected amount in GHC
Spot rate	GHC1.5/$	X
1 month Forward rate	GHC1.4/$	Y
3 month forward rate	GHC1.71/$	Z

Table B: Total payables £20 million

Market	Exchange rate	Expected amount in GHC
Spot rate	GHC1.5/£	C
1 month Forward rate	GHC1.4/£	D
3 month forward rate	GHC1.71/£	E

Will BAF Limited hedge its receivables through leading or lagging strategy?
Will BAF Limited hedge its payables through leading or lagging strategy?
Indicate its cash flows for X, Y and Z.
Indicate its cash flows for C, D and E.

Expert Solution

a	It will hedge its receivables through Lagging (3 Months) strategy because with the increase in Exchange rate the Dollar is becoming costly (Hence it is favourable to sell it when it has the highest price the inflow will be more when it is hedged for 3 Months forward rate i.e., 1$= 1.71 GHC
b	It will hedge its payables through Lagging (1 month) strategy because with the increase in Exchange rate ,the Dollar is becoming costly (Hence it is favourable to buy it when it has the least price) the outflow will be less when it hedged for 1 month exchange rate i.e., 1$= 1.4 GHC
c	Cashflow in $	Scenario	Exchange rate	Cash flow in GHC
X	1,00,00,000	1.5	1,50,00,000
Y	1,00,00,000	1.4	1,40,00,000
Z	1,00,00,000	1.71	1,71,00,000
d	Cashflow in £	Scenario	Exchange rate	Cash flow in GHC
X	2,00,00,000	1.5	3,00,00,000
Y	2,00,00,000	1.4	2,80,00,000
Z	2,00,00,000	1.71	3,42,00,000

ekkarill92 answered 2 years ago

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