GHANA INSTITUTE OF MANAGEMENT AND PUBLIC ADMINISTRATION
(GIMPA)
GIMPA BUSINESS SCHOOL
MID-SEMESTER EXAMS
GROUP ASSIGNMENT
1
TITLE OF PAPER: INTERNATIONAL FINANCE
& GLOBAL ECONOMY
COURSE CODE: GMAF 704
LEVEL: I YEAR MASTER OF ACCOUNTING & FINANCE
DATE: MONDAY 10TH FEBRUARY, 2025
EXAMINERS: PROF. EBENEZER B. ANARFO
TIME ALLOWED: TWO (2) WEEKS
INSTRUCTION
S
OPENED BOOK EXAM
Answer any FOUR
questions
Use of non-programmable calculator
is allowed
INDEX NUMBER ......................................................
VENUE ....................................................
2
Question 1
Part
A
Makola Forex Bureau quotes bid-ask rates for the Nigerian naira against
the Ghana cedi as
₦74.58/Gh₵ - ₦76.45/Gh₵. Manu is a trader at Okaishie that has negotiated a
deal for the supply of ₦1,000,000 worth of goods from Nigeria for sale in
Ghana. In anticipation of this order of goods from Nigerian, Manu buys
₦1,000,000 with cedis from Makola Forex Bureau. After the purchase of the
naira, Manu is told by the Nigerian supplier that the deal for the supply of
the goods is off. Manu returns to Makola Forex Bureau to sell back the naira
for cedis (assume that the quoted exchange rate had not changed).
i. Determine the cost in cedis of the first transaction where Manu buys
the ₦1,000,000 with cedis.
(3 marks)
[Link] how much Manu would receive in second transaction
where Manu sells the
₦1,000,000 for cedis, and hence how much Manu loses.
(4 marks)
iii. Given the naira per cedi quote above, calculate the percentage bid-ask
spread, and briefly discuss why you would normally expect the
percentage bid–ask spread on the naira to be higher than that of the US
dollar
(10 marks)
Part B
As a foreign exchange trader, you see the following quotes for the US dollar
($), the Nigerian
naira (₦) and the Ghana cedi (Gh₵):
₦315/$ Gh₵4.15/$ ₦73.50/Gh₵
Is there an arbitrage opportunity, and if so, how much profit can you make if
you have Gh₵1
million?
(8
marks)
3
Total: 25
marks
4
Question 2
It is January 2025 and Fan Milk Ghana has just signed a contract for the
purchase of equipment from a supplier in Germany. The cost of the
equipment is €1 million and payment is due in 6 months’ time.
Additional information is as
follows:
The current spot exchange rate is
GH₵ 4.50/€.
Interest rate on the euro is 2%
per annum
Interest rate on the cedi is 20%
per annum
Fan Milk Ghana has access to at the money OTC options on euros,
expiring 6 months from now. The premiums for the options are as follows:
o Call – a premium of GH₵
0.10/€.
o Put – a premium of GH₵
0.06/€.
Require
d:
a) Provide a qualitative description of Fan Milk’s exchange rate exposure if
it decides not to hedge?
(4 marks)
b) Calculate Fan Milks’s total cost of the equipment to arise from each of the
following strategies.
The cost should be calculated as it would be at the time of delivery of the
equipment in cedis:
I. Not hedging the transaction because it is known that future spot
exchange rates can accurately be predicted based on Interest Rate
Parity (IRP).
II. Hedging in the options market. Any premiums paid will come
from an overdraft account on which Fan Milk pays 20% per annum
(13 marks)
c) Discuss briefly any three factors that might influence call (8 marks)
option premiums.
Total: 25
marks
5
Question 3
PART A
Below is an extract from ALUWORKS’ 2014 Annual Report. Note 14 gives
details of the company’s medium term loans. The company had loans
denominated in US dollars on which it paid interest at 3.56%. In October
2014, management agreed with SG Bank to convert the outstanding balance
of $1,322,778 on the dollar-denominated loan to a cedi-denominated loan on
which ALUWORKS would pay interest at 27.5% per annum. The exchange
rate in October 2014 was GHc 3.35/$.
i. Considering the debt structure of ALUWORKS shown above, discuss the
risks associated with the foreign currency borrowing and assess additional
factors that might influence a company’s decision to source debt
denominated in a foreign currency.
(13 marks)
ii. Assuming the new cedi-denominated loan is payable in one year,
comment on management’s decision to convert the dollar facility into
cedis, if the cedi-dollar rate in October 2015 was GHc 3.95/$. (Hint: Has
ALUWORKS benefited from the decision to convert the dollar-
denominated loan to cedis?). Please show all relevant calculations in
support of your answer.
6
(12
marks)
Total: 25
mark
7
Question 4
Part A
CPPC is a Ghanaian cocoa processing company that exports cocoa butter to
South Africa. CPPC bills its client in South Africa in South African rands
(ZAR), the South African currency. CPPC is due to receive five million rands
in 90 days for a consignment just shipped to South Africa. The spot rate
today is GHS 0.3165/ZAR.
Descriptive statistics of the percentage changes in the quarterly exchange
rates for GHS/ZAR are given below:
Minimum quarterly percentage changes -
Maximum quarterly percentage changes 16.4%
12.6
Average quarterly percentage change %0.9
Standard Deviation of quarterly percentage %
4.6
changes of the ZAR appreciating against
Likelihood %
60.2
the cedi of the ZAR depreciating against
Likelihood %
38.5
the cedi %
i. Provide a qualitative description of CPPS’s
exposure. (7
marks)
ii. If CPPC chooses not to hedge this exchange rate risk, what is CPPC’s
expected revenue in cedis from the consignment just shipped?
(3 marks)
iii. If CPPC does not hedge, what is the range of possible cedi receivable
of the five million rands due, with 95% probability (i.e. within two
standard deviations of the expected cost)? (6 marks)
iv. Recently, the South African rand has been depreciating against the
cedi raising concerns on its impact on CPPC’s cash flows. At a recent
meeting of the Board of Directors, the Technical Director of CPPC
argued that the current system of invoicing exports in the client’s
currency exposes CPPC to high exchange rate risk and suggested that
CPPC should consider invoicing its exports in Ghana cedis.
Evaluate the validity of the Technical Director’s suggestion that CPPC
should invoice its exports in cedis.
(9
marks)
8
Total: 25
marks
9
Question 5
Part A
You are the treasurer of Sarpco Ltd, a Ghanaian company. Sarpco needs to
pay 100,000,000 naira in 6 months from today for goods imported from
Nigeria. Assume the following market information:
Spot exchange rate: ₦76.00/GH₵.
6-month forward rate: ₦71.50/GH₵
Interest rates:
Ghana 20% - 28% per
Nigeria annum
10% - 16% per
annum
Sarpco Ltd is considering hedging its exposure to the naira. Given the
information above:
i. Determine whether a forward hedge or a money market hedge would be
the most appropriate hedge strategy. Show all relevant calculations in
support of your answer.
ii. What additional factors would you consider in making a
recommendation (13
marks)
Part B
Briefly evaluate the factors that may prevent the purchasing power parity
from holding in real economies.
(12
marks)
Total: 25
marks
10
Question 6
Part A
AngloGold Ashanti is a global gold producer headquartered in
Johannesburg, South Africa. AngloGold Ashanti operates in 11 countries,
with significant operations in Ghana.
Identify and discuss the types of exchange rate exposures that AngloGold
Ashanti might face. Use examples to illustrate how AngloGold Ashanti
might face any of the exchange rate exposures you identify.
(13 marks)
Part B
Suppose there is a depreciation of the cedi against the US dollar in recent
times. The Bank of Ghana believes the depreciation is largely due to
speculation and is considering intervening in the foreign market to stop
the depreciation of the cedi.
How can the Bank of Ghana use sterilized intervention to prevent the
further depreciation of the cedi?
(12
marks)
Total: 25
marks
END OF EXAM
PAPER
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