Enoch Chemists Ghana Ltd is a company based in Ghana that imports drugs and other pharmaceutical products from the UK for sale in Ghana. It is May 2018 and Enoch Chemists has just received a shipment of goods worth 1 million from its UK supplier, to be paid in exactly three (6) months time. Payment will be made in UK pounds.

Additional information is as follows:

The current spot exchange rate is GH 6.20/.

Interest rate on the pound is 2% per annum

Interest rate on the cedi is 18% per annum

Available six months forward rate quote from an exchange rate dealer: GH 6.35/ - GH

6.50/.

Enoch Chemists has access to at the money OTC options on UK pounds, expiring six (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 0.05/.

Required:

a. Bearing in mind the information above and the time Enoch Chemists is expected to make payment, provide a qualitative description of Enoch Chemistss exchange rate exposure if it decides not to hedge?

(5 marks)

b. The Director of Finance at Enoch Chemists is considering the following strategies and has come to you for advice.

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 using the forward exchange rate market.

III. Hedging in the options market. Any premiums paid will come from an investment account on which Enoch Chemists receives 10% per annum

Evaluate the outcome of each of these strategies and hence recommend (with justification) the most appropriate course of action that Enoch Chemists should take in connection with the payable.