Question 4
ICAN
•
2021
•
STRATEGIC FINANCIAL MANAGEMENT
•
mixed
Case Stimulus
Kingston Plc. (KP) is a Nigerian company based in Aba. KP exports finished products to and imports raw materials from a company in Central Africa, with currency of Central Dollar (C$).
\(
\begin{array}{lrr} \text{KP has the following expected transactions:} & & \\ & \text{C\$} & \\ \text{One month: Expected receipt} & 4,800,000 & \\ \text{One month: Expected payment} & 2,800,000 & \\ \text{Three month: Expected receipts} & 6,000,000 & \\ & & \\ \text{You have collected the following information:} & & \\ & \text{C\$ per ₦ 1} & \\ \text{Spot rate} & 1.7818 - 1.7822 & \\ \text{One month forward rate} & 1.7826 - 1.7832 & \\ \text{Three months forward rate} & 1.7842 - 1.7850 & \\ & & \\ \text{Money market rate for KP:} & & \\ & \text{Deposit} & \text{Borrowing} \\ & \text{%} & \text{%} \\ \text{Nigeria} & 9 & 12 \\ \text{Central Africa} & 13 & 15 \end{array}
\)
\(\textbf{Required:}\)
Requirements
(
a
)
Discuss the significance to a multinational company of economic exposure.
(
b
)
Explain how inflation rates can be used to forecast exchange rates.
(
c
)
Calculate the expected naira receipts in one month and in three months using the forward market.
(
d
)
Calculate the expected naira receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money-market hedge should be used.
(
e
)
Discuss FOUR possible problems of using futures contracts to hedge exchange rate risks.
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About This Question
This is
Ican
2021
Strategic Financial Management
Question 4.
It is one of the
mixed
questions from the
2021
Ican
Strategic Financial Management
examination.
The question covers
General
.
Difficulty level:
3
.