CURRENCY RISK MANAGEMENT

COMPREHENISIVE QUESTION 01

Mongi Inc., a company based in Tanzania, imports goods from the UK. The company is due to
make a payment of £5,000 to a UK supplier in one month’s time.The current exchange rate as
quoted by Mongi Inc. bankers is £:

TZS.3,100 – 3,170.

REQUIRED:

(i) If the TZS. is expected to appreciate against £ by 2% in the next months, what would be
Mongi Inc’s strategy in terms of leading and lagging and by how much would the company
benefit from this strategy? (2 marks)

(ii) If the TZS. was to depreciate against £ by 2% in the next month and by a further 1% in the
second month, how would Mongi Inc’s strategy probably change and what would the resulting
benefit be? (2 marks)

(iii) Comment on the limitations of leading and lagging payments. (2 marks)

COMPREHENISIVE QUESTION 02

The Adverane Group is a multinational group of companies with its headquarters in

Switzerland.The company has introduced the multilateral netting to reduce the number of
intergroup payments. The balances owed to and owed by members of Adverane Group when
netting is to take place are as follows:

Owed by Owed to Local currency

m
Adverane (Switzerland) Bosha (Eurozone) CHF15·90
Adverane (Switzerland) Diling (Brazil) CHF4·46
Bosha (Eurozone) Cogate (USA) €324·89
Bosha (Eurozone) Diling (Brazil) €18·57
Cogate (USA) Adverane (Switzerland) US$27·08
Cogate (USA) Diling (Brazil) US$5·68
Diling (Brazil) Adverane (Switzerland)
Diling (Brazil) Bosha (Eurozone) BRL51·20

CHF € US$ BRL

1 CHF = 1·0000 0·9347–0·9369 1·1196–1·1222 3·1378–3·1760

The group members will make settlement in Swiss francs. Spot mid-rates will be used in
calculations.

Required: Calculate the inter-group transfers which are forecast to take place.

COMPREHENISIVE QUESTION 03

Professional Medics Company is a Tanzanian company that sells Tanzanian made electronics
products around the world. Management is particularly concerned about a receipt of £ 125,000 that
is due to be received by professional medics in 30 days from a UK customer.
The company’s bankers have advised management to opt for one of the following alternatives:
1. Purchase a 30 day forward contract to sell the £125,000 forward, the 30 day forward quotation
for the £ being: 20 dis – 18 dis
2. Money market interest rates are given below:

Borrowing Lending
Sterling 12% 6%
TZS 24% 12%

The spot exchange rate is currently £: TZS 2,695-2,700 and market commentators in Tanzania are
currently suggesting that sterling is expected to trade in a range from £: TZS 2690-2,695 or the
next month.

COMPREHENISIVE QUESTION 04

MESSIAH is a specialist food manufacturing company based in Dar es salaam, Tanzania it

trades with Uganda companies. The following receipts and payments are due within the next
three months:

Due in 3 months: UGS

Payments to suppliers 450,000,000
Receipts from customers 1,950,000,000

Exchange rates as at today

Spot UGS 1.366 – 1.372/1TZS
3 months forward UGS 1.375 – 1.395/1TZS
 Interest rates (annual)
Borrowing Lending

TZS 4.25 3.75

UGS 5.00 4.50
REQUIRED:
Calculate the net TZS currency receipts or payments that MESSIAH might expect for the three-
month transaction and comment on the best alternative if it;
(i) Hedges the three using the forward market (3 marks)
(ii) Hedges the risk using the money market (3 marks)
(iii) Does not hedge the risk and the UGS/TZS spot exchange rates in three months’ time are
UGS 1.324- 1. 328/1TZS. (2 marks)
COMPREHENISIVE QUESTION 05

CASASOPHIA Co, based in Tanzania that uses the TZS is due to receive the payment of £ 125,000
million in January 2016.
It is now 3rd November 2015 and the spot rate is TZS. 2,430.50/£
Sterling future prices for market traded currency future on 3rdNovember (sterling £ 62,500
contracts)
January 2016 TZS. 2,434
March 2016 TZS.2,434

Calculate TZS receipts if £ future is used to hedge the exposure, Assume a spot rate of TZS.
2,429/£ ON 1ST January 2016 and futures price of TZS. 2,433.
COMPREHENISIVE QUESTION 06

MALIKA Co, based in Tanzania that uses the TZS is due to receive the payment of £ 125,000
million in January 2016.
It is now 3rd November 2015 and the spot rate is TZS. 2,430.50/£

Prices or market traded currency options on 3rd November (sterling £31,250 contracts)

November 2015 January 2016

Exercise price TZS/£ Calls puts calls puts
2,445 69 135 114 157
Premiums are In cent per £.
Calculate TZS receipts if £ option is used to hedge the exposure, Assume a spot rate of TZS.
2,420/£ ON 1ST January 2016
COMPREHENISIVE QUESTION 07

LIBRO has agreed to pay the €50,000 due on this order in three months times

Current spot rate (TZS/€) 1,252-1,258

3 month currency (put) option on €50,000-exercise price (TZS/€) 1,271
3 month currency (call) option on €50,000-exercise price (TZS/€) 1,265
Euro call option premium (TZS/€) TZS 5
Euro put option premium (TZS/€) TZS 5

Using the information above calculate LIBRO’s payment in TZS for the buses if the actual sport
exchange in three months turn out to be TZS/€1,282-1,298
COMPREHENISIVE QUESTION 08

Fidden is a medium sized UK company with export and import trade with USA. The following
transaction is due within the next six months. Transaction are in the currency specified
Purchases of components, cash payment due in three months £116,000
Sale of finished goods, cash receipts due in three months. £97,000
Purchase of finished goods for resale, cash payment in due in six months £447,000
Sale of finished goods, cash receipts due in six months £154,000

Exchange crates London market

$:£
Spot 1.7106-1.7140
Three months forward 0.82-077cents premium
Six months forward 1.39-1.34 cents premium

Interest rate

Borrowing Lending
Sterling 12.5% 9.5%
Dollars 9% 6%

Foreign currency option prices (New York Market): prices are cents per £, contract size 12,500

Exercise March June September March June September

price(£)
1.60 - 15.20 - - - 2.75
1.70 5.65 7.75 - - 3.45 6.40
1.80 1.70 3.60 7.90 - 9.32 15.35
Assume that is now December with three months to expiry of the March contact and that the option
price is not payable until the end of the option period, or when the option is exercised

YOU ARE REQUIRED:

i. To calculate the net sterling receipts/payment that fidden might expect for both its three
and six month transactions if the company hedge foreign exchange risk on:
 The forward foreign exchange markets
 The money market. (7marks )
ii. If the actual spot rate in six months time was hindsight exactly the present six months
forward rate, calculate whether fidden would have better to hedge through foreign
currency options rather than the forward market or money market (7 marks

COMPREHENISIVE QUESTION 09

Polar Plc, a lotion manufacturer based in the United Kingdom (UK), has imported some chemicals
worth of USD 364,897 from a US supplier. The amount is payable in six months’ time. The
relevant spot and forward rates are:

Spot rate USD 1.5617 – 1.5673

6 months’ forward rate USD 1.5455 – 1.5609

The borrowing rates in U.K. and U.S. are 7% and 6% respectively and the deposit rates are 5.5%
and 4.5% respectively.

Currency options are available under which one option contract is for GBP 12,500.

The option premium for GBP at a strike price of USD 1.70/GBP is USD 0.037 (call option) and
USD 0.096 (put option) for 6 months period.

REQUIRED:

(i) Calculate the amount payable under each of the following methods: forward cover, money
market cover and currency option hedge. (8 marks)

(ii) Point out the alternative that the company will opt for and identify one of its possible
shortfalls. (2 marks)

COMPREHENISIVE QUESTION 10

It is 1st August 2022. Seba Company, a Tanzanian based company buys goods worth €745,000 from
a German company payable on 1st November, 2022. The Tanzanian company wants to hedge
against the Euro (€) strengthening against the Tanzania shilling (TZS). Current spot is TZS/€ 1920 –
1940 and the November futures rate is

TZS.1,935/€. The standard size of a 3-month € futures contract is €125,000. On 1st November the
spot is TZS/€ 1945 – 1955 and the futures price stands at TZS.1,955/€.

REQUIRED:

(i) How might the company use currency futures to establish a hedge for the currency exposure? Is
the hedge in this instance perfect? Why? (3 marks)

(ii) Suppose the company establishes the hedge, how would the position be unwound and what
would be the effective exchange rate for the payment in Euros? (3 marks)

COMPREHENISIVE QUESTION 11

Exactly two years ago, JBL Plc took a 5-year US$ 4 Billion loan at a fixed interest of 12% from
an investment bank to finance a plant expansion project. At the time the loan was taken,
JBL was
exporting a significant proportion of its output to a foreign market. Thus, it was sure that it
would be able to earn U.S. dollars to make dollar payments on the loan.
For about a year now, JBL has not been able to export its output to its foreign market due to trade
restrictions. It sells only to buyers in Tanzania for the TZS. The company now prefers to have its
interest obligation in TZS rather than U.S. dollar.
On the advice of the Treasury Manager, JBL has entered a currency swap arrangement with a
bank to manage the underlying risk exposure. Per the terms of the swap, JBL will continue to
honour its obligations under the actual loan. Under the swap, JBL and the bank will exchange
interests and principals in the appropriate currencies. With a pre-arranged exchange rate of TZS
2000/USD1, the notional principals under the swap arrangement are agreed at US$2 million and
TZS 4 Billion. The 12% interest rate on the existing dollar loan will continue to apply to both the
original dollar loan and the dollar interest payments under the swap arrangement. The interest
rate that will apply to the TZS notional principal is set to 15%.
Required:
Evaluate how JBL Plc can use the currency swap to manage the underlying risk exposure