1) Agyenim Boateng, owner of the Best Pineapple Company Ltd will be receiving 20,000 British pounds about one month from now as payment for pineapple juice produced and exported by his company. Agyenim is concerned about his exposure because he believes that there are two possible scenarios: (1) the pound will depreciate by 3 percent over the next month or (2) the pound will appreciate by 2 percent over the next month. There is a 70 percent chance that Scenario 1 will occur. There is a 30 percent chance that Scenario 2 will occur.

Agyenim notices that the prevailing spot rate of the pound is GHS 8.1 and the one- month forward rate is GHS 8.6. Agyenim can purchase a put option over the counter from a securities firm that has an exercise (strike) price of GHS 8.6, a premium of GHS0.025, and an expiration date of one month from now. Determine the amount of cedis received by the Best Pineapple Company under each of the two exchange rate scenarios if:

a) The receivables to be received in one month are not hedged.

b) A put option is used to hedge the receivables in one month.

c) A forward hedge is used to hedge the receivables in one month.

Summarize the results of Ghana cedis received based on an unhedged strategy, a put option strategy, and a forward hedge strategy. Select the strategy that you prefer based on the information provided. (20 marks)

2) Ghanas inflation is forecasted to be 10.2% over the coming year whilst that of South Africa is forecasted to be 6.5%. The current exchange rate between Ghana Cedi and the South African Rand is 0.32 ZAR per 1 GHS.

a) How should we quote the exchange rate between Ghana Cedi and the South African Rand (ZAR) in a years time to avoid arbitrage? (5 marks)

b) A Ghanaian company is importing goods worth ZAR 20m in a years time, how much GHS will the company require to import the goods? (5 marks)

c) If the actual rate at the end of the year is 0.35 ZAR per 1GHS, what is the absolute forecast error for the forecast in (a)? (5 marks)

3) Yogobozz Ltd is a fast growing Ghanaian Multinational Company looking for short term working capital loan to support its expansion to other West African Countries. You have just been hired as a Senior Financial Analyst to help the firm secure a cheap source of funding to achieve its objective. The CEO of this company is concerned about the high interest rates in Ghana and has asked you to borrow in Dollars since USD interest rates are cheaper. You have your own reservations about borrowing in USD due to exchange rate risk and looking for figures to explain to him.

You had a chat with the relationship manager of your bank, and they are willing to lend $50 million to you for 1 year at an interest rate of 7.5% which appears to be far better than the current 1-year cedi lending rate of 18.01% on the domestic market. Your intention is to borrow in USD and convert this to Ghana Cedis and use for your

expansion program. The current exchange rate is 5.20 per USD and is forecasted to be 5.75per USD in a years time.

a) Calculate the effective annual Financing Cost of the USD Loan and advise Yogobozz whether it is prudent to borrow USD at this stage. (5 marks)

b) Assume that Interest rate Parity (IRP) holds and that you intend to hedge the exchange rate risk by entering into a 1 year Forward transaction with your Bank. What will be the effective annual interest rate in this case? (5 marks)

4)

a) Briefly explain the following terms:

i. Initial Margin (2 marks)

ii. Maintenance Margin (2 marks)

iii. Variation Margin (2 marks)

iv. ABC Company Ltd purchased 5000 cocoa futures contract at a price of $150

per contract. As part of the contract, ABC was required to deposit $10 per contract initially in their account with the maintenance margin set at $5 per contract. If the price per contract falls to $142 overnight, what action will the exchange require ABC to undertake? (9 Marks)

b) Emmanuella purchased a put option on British pounds for $.06 per unit. The strike price was $1.85, and the spot rate at the time the pound option was exercised was $1.69. Assume there are 31,250 units in a British pound option. What was Emmanuellas net profit on the option? (5 marks)

c) Caleb sold a put option on Canadian dollars for $.05 per unit. The strike price was $.85, and the spot rate at the time the option was exercised was $.92. Assume Caleb immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Calebs net profit on the put option? (5 marks)

d) The value of the US Dollar today is GHS 6.1. Yesterday, the value of the US dollar was GHS 5.91. The Ghana Cedi ____ by ____%. (5 marks)

e) Assuming that existing U.S. one year interest rate is 8% and the Canadian one-year interest rate is 9%. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt covered interest arbitrage, what will be their return? If Canadian investors attempt covered interest arbitrage what will be their return? (5 marks)

5) Cal Bank believes the US dollar will appreciate over the next five days from GHS 4.48 to GHS 4.50. The following annual interest rates apply:

Currency

Dollars Ghana Cedis

Lending Rate

7.10% 6.80%

Borrowing Rate

7.50% 7.25%

Cal Bank has the capacity to borrow either GHS 10 million or $5 million. If Cal Bank's forecast is correct, what will its dollar profit be from speculation over the five-day

period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? (10 marks)

6) 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. (10 marks)