BAF Limited is involved in int
January 18th, 2023
BAF Limited is involved in international business. It has thefollowing receivables and payables:
Table A: Total receivables US$10 million
|
Market |
Exchange rate |
Expected amount in GHC |
|
Spot rate |
GHC1.5/$ |
X |
|
1 month Forward rate |
GHC1.4/$ |
Y |
|
3 month forward rate |
GHC1.71/$ |
Z |
Table B: Total payables £20 million
|
Market |
Exchange rate |
Expected amount in GHC |
|
Spot rate |
GHC1.5/£ |
C |
|
1 month Forward rate |
GHC1.4/£ |
D |
|
3 month forward rate |
GHC1.71/£ |
E |
- Will BAF Limited hedge its receivables through leading orlagging strategy?
- Will BAF Limited hedge its payables through leading or laggingstrategy?
- Indicate its cash flows for X, Y and Z.
- Indicate its cash flows for C, D and E.
Answer:
| a | It will hedge its receivables throughLagging (3 Months) strategy because with the increase in Exchangerate the Dollar is becoming costly (Hence it is favourable to sellit when it has the highest pricethe inflow will be more when it is hedged for 3 Months forward ratei.e., 1$= 1.71 GHC | ||||||
| b | It will hedge its payables throughLagging (1 month) strategy because with the increase in Exchangerate ,the Dollar is becoming costly (Hence it is favourable to buyit when it has the least price)the outflow will be less when it hedged for 1 month exchange ratei.e., 1$= 1.4 GHC | ||||||
| c | Cashflow in$ | Scenario | Exchangerate | Cash flow inGHC | |||
| X | 1,00,00,000 | 1.5 | 1,50,00,000 | ||||
| Y | 1,00,00,000 | 1.4 | 1,40,00,000 | ||||
| Z | 1,00,00,000 | 1.71 | 1,71,00,000 | ||||
| d | Cashflow in £ | Scenario | Exchangerate | Cash flow inGHC | |||
| X | 2,00,00,000 | 1.5 | 3,00,00,000 | ||||
| Y | 2,00,00,000 | 1.4 | 2,80,00,000 | ||||
| Z | 2,00,00,000 | 1.71 | 3,42,00,000 |
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