Question

In: Finance

Arise Ghana Limited transacts business with firms in USA and Europe. It sold goods valued US$100...

Arise Ghana Limited transacts business with firms in USA and Europe. It sold goods valued US$100 million to PPP Limited, a US firm payable in one year time. The spot exchange rate is GHS4.3/$ and the one year forward exchange rate is GHS4.5/$. The interest rate in Ghana is 6.10 percent per annum and the interest rate in US is 9 percent per annum.

Describe how Arise Ghana Ltd can use a forward contract to hedge its receivables. Indicate the amount that it will receive at the end of the contract.
Suppose on maturity date, the spot rate turns out to be GHS5.50/$. Will Arise Ghana Ltd be worst off under the forward hedge?
Given the scenario in question 5(b), will Arise Ghana Limited behave differently if it had used an option market hedge instead of the forward market hedge? Assume the option premium is GHS0.0001 per pound and the exercise price is GHS4.5/$ (1 year maturity).
Outline by showing the calculation of the steps through which money market can be used Arise Ghana Ltd to hedge its receivable.
Under what circumstance will a firm use leading or lagging strategy to hedge against exchange rate exposures?

Expert Solution

a. One year forward exchange rate is GHS4.5/$

If Arise Ghana enters into a forward contract to hedge its receivables, it will receive amount based on the above rate of exchange i.e. $100million * GHS4.5/$ = GHS450 million.

b. If after one year the spot rate is GHS5.50/$ then if the company had not taken any forward contract then it would have received = $100 million * GHS5.5/$ = GHS550 million.

But since if the company had taken forward contract it will recieve GHS450 million as shown in part a. Hence it would be worse off in case of forward contract.

This is because the spot rate after one year has turned out to be higher than the forward rate at which forward contract is taken.

c. Option premium is GHS0.0001 per dollar and strike pric eis GHS4.5/$.

Value in USD at the given strike rate is $450 million.

Premium = $450 million * 0.0001 = $45000

Hence total amount receivable under option contract is :

Amount - premium = $450 mn - $45000 = $449955000

Under spot rate amount receivable will be = $550 mn

Hence worse off under option contract.

d.Arise Ghana Ltd. has receivables of $100 million in one year time.

In money market hedge what we do is we enter into an opposite position.

In the given case we have receivables of $100 million so to get an opposite position we have to enter into a contract so as to get $100 million payable in one year time.

For this purpose we will have to borrow an amount in $ TODAY that becomes $100 million in one year time.

The interest in US is 9 percent per annum so let the amount to be borrowed be x. Now this amount will become $100 million in one year, hence :

x * 1.09 = $ 100,000,000

Hence x comes out to be $91,743,119.

So for money market hedge we borrow $91,743,119 today and invest in GHS.

Converting to GHS using current spot rate of GHS4.3/$ we get :

GHS4.3 * 91743119 = GHS 394,495,412

Now we invest it @ 6.1 % p.a.

At the end of year we have = GHS 394,495,412 * 1.061 = GHS 418,559,632

The amount that we receive from PPP Limited will be used to pay off the $100 mn loan and the final ammount received would be GHS 418,559,632.

jeff jeffy answered 1 year ago

Sigma Limited has sales of $100 million, cost of goods sold of $60 million, assets of...

Sigma Limited has sales of $100 million, cost of goods sold of $60 million, assets of $120 million, accounts receivables of $20 million and inventory of $30 million. Calculate days' sales in receivables ratio.

Boateng Wholesale Ltd. is based in Accra, Ghana. Its sales, cost of goods sold, and inventory...

Boateng Wholesale Ltd. is based in Accra, Ghana. Its sales, cost of goods sold, and inventory amounts for 2018 and 2019 are shown below. (Currency in Ghanaian cedi, GH₵) (20%) 2018 2019 Sales revenue GH₵ 200,000 GH₵ 180,000 Cost of goods sold 100,000 91,000 Beginning inventory 29,000 21,000 Ending inventory 21,000 5,000 Instructions: Determine the inventory turnover and resident period for 2018 and 2019. Give your evaluation on the changes in the...

Calvin Clients Limited reported the inventory and cost of goods sold using the LIFO valuation method...

Calvin Clients Limited reported the inventory and cost of goods sold using the LIFO valuation method (perpetual) . The following table shows the details of purchases and sales for the year 2010. Assume that in each month the purchases happen at the start of the month and sales happened at the end of the month. Month Units purchased Units sold Coat per unit Price per unit January 50 0 100 150 March 100 25 110 150 May 0 60 n/a...

On 10th February 2016, KILPATRICK LIMITED a company based in the united kingdom sold goods worth...

On 10th February 2016, KILPATRICK LIMITED a company based in the united kingdom sold goods worth $2,000,000 to a company in canada and gave three months credit. The canadian company is therefore expected to pay kilpatrick limited by 10th May, 2016. The company expects the british pound to appreciate against the canadian dollar and wants to lock into the current exchange rate of $1.85/£. The management of kilpatrick limited have been advised to set up a money market hedge using...

The following projections relate to two recently merged firms: Revenue = $7,280,000 Cost of Goods Sold...

The following projections relate to two recently merged firms: Revenue = $7,280,000 Cost of Goods Sold (without operating synergy) = 88% of revenue Cost of Goods Sold (with operating synergy) = 85% of revenue Depreciation Expense (not included in the Cost of Goods Sold) = $380,000 Tax Rate = 40% Change in Working Capital = $26,000 Capital Spending = $220,000 Cost of Capital = 12.50% Expected perpetual growth rate = 4.50% After achieving operating synergy, the combined firms can reduce...

1- Retail stores have one cost of goods sold. Manufacturing firms have three types of cost...

1- Retail stores have one cost of goods sold. Manufacturing firms have three types of cost of goods sold. Explain the differences among the three manufacturing types of cost of goods sold. 2-Explain the concept of sunk costs and explain how sunk costs sometimes lead to poor decisions by businesses in regard to products that are well into development but are not successful 3-Describe how the inventory sections of the balance sheet vary for retailers/wholesalers vs. manufacturers 4-Describe at least...

Sara Tea Pty Limited (STPL) is a 100 percent privately owned business. Incorporated in 1972, the...

Sara Tea Pty Limited (STPL) is a 100 percent privately owned business. Incorporated in 1972, the company manufactures and distributes four core products to Australian supermarkets, bakeries, cake shops, restaurants, and delicatessens. The company’s products include decorated maca-sponges (desert style cake that is a combination of a macaroon and a sponge), cheesecakes, celebration cakes, and assorted pastry products. The company’s mission is to ‘bring joy to all our consumers’. The business supplies maca-sponges in three sizes. The large maca-sponge weighs...

A small business has sales of $2 million, cost of goods sold of $12 million, net...

A small business has sales of $2 million, cost of goods sold of $12 million, net profit of $34,500,net fixed assets of $200,000, and total asset turnover of 5.25. What is the value of current assets?

Merchandiser Corp. has been in business for 40 years and values its cost of goods sold...

Merchandiser Corp. has been in business for 40 years and values its cost of goods sold and ending inventory using the LIFO costing method. The current year has been particularly unprofitable and Merchandiser Corp. is under significant investor pressure to finish the year with some good news. Merchandiser Corp's chief financial officer (CFO) has approached the president about a way to substantially increase earnings. She suggest that LIFO stop purchasing inventory the last couple months of the year. Since Merchandiser...

Deb Co. acquired 100% of Land Inc. on January 5, 2016. During 2016, Deb sold goods...

Deb Co. acquired 100% of Land Inc. on January 5, 2016. During 2016, Deb sold goods to Land for $2.4 million that cost Deb $1.8 million. Land still owned 40% of the goods at the end of the year. Cost of goods sold was $10.8 million for Deb and $6.4 million for Land. What was consolidated cost of goods sold?