• Arise Ghana Limited transacts business with firms in USA and Europe. It sold goods valued US$100 million to PPP Limited, a US firm payable in one year time. The spot exchange rate is GHS4.3/$ and the one year forward exchange rate is GHS4.5/$. The interest rate in Ghana is 6.10 percent per annum and the interest rate in US is 9 percent per annum.
• Describe how Arise Ghana Ltd can use a forward contract to hedge its receivables. Indicate the amount that it will receive at the end of the contract.
• Suppose on maturity date, the spot rate turns out to be GHS5.50/$. Will Arise Ghana Ltd be worst off under the forward hedge?
• Given the scenario in question 5(b), will Arise Ghana Limited behave differently if it had used an option market hedge instead of the forward market hedge? Assume the option premium is GHS0.0001 per pound and the exercise price is GHS4.5/$ (1 year maturity).
• Outline by showing the calculation of the steps through which money market can be used Arise Ghana Ltd to hedge its receivable.
• Under what circumstance will a firm use leading or lagging strategy to hedge against exchange rate exposures?