Question ONE 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.

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?

QUESTION TWO

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

-16.4%

Maximum quarterly percentage changes

12.6%

Average quarterly percentage change

0.9%

Standard Deviation of quarterly percentage changes

4.6%

Likelihood of the ZAR appreciating against the cedi

60.2%

Likelihood of the ZAR depreciating against the cedi

38.5%

1. Provide a qualitative description of CPPS's exposure.
2. If CPPC chooses not to hedge this exchange rate risk, what is CPPC's expected revenue in cedis from the consignment just shipped?
3. 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)?
4. 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.
5. Evaluate the validity of the Technical Director's suggestion that CPPC should invoice its exports in cedis.

Question THREE

It is May 2017 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/.
• Required:

1. Provide a qualitative description of Fan Milk's exchange rate exposure if it decides not to hedge?
2. 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:
3. Not hedging the transaction because it is known that future spot exchange rates can accurately be predicted based on Interest Rate Parity (IRP).
4. Hedging in the options market. Any premiums paid will come from an overdraft account on which Fan Milk pays 20% per annum

c. Discuss briefly any three factors that might influence call option premiums.