Question 2

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:

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