QUESTION It is 1 June, and DML Ltd. is anticipating payment of GBP100,000 to a British supplier in two months’ time. The spot GBPGHS exchange rate is currently GHS5.2110 – GHS5.2260 = GBP1. Pundits are suggesting that the cedi might weaken against the pound sterling in the coming months. The directors of the company are considering hedging against potential currency risk using either forward market transaction or money market transactions. Below are information relating to instruments in the two markets. Forward market (contract specifications): 2-month forward bid rate on 1 June: GHS5.2340 = GBP1 2-month forward ask rate on 1 June: GHS5.2490 = GBP1 Money market (annualized interest rates on 1 June): Investing rate Borrowing rate Ghana 24.0% 28.0% United Kingdom 2.4% 3.6% Required: What kind of currency risk exposure is the company facing? Explain Should DML Ltd hedge its currency exposure using forward market hedge or money market hedge? Support your answer with relevant computation
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
QUESTION
- It is 1 June, and DML Ltd. is anticipating payment of GBP100,000 to a British supplier in two months’ time. The spot GBPGHS exchange rate is currently GHS5.2110 – GHS5.2260 = GBP1. Pundits are suggesting that the cedi might weaken against the pound sterling in the coming months. The directors of the company are considering hedging against potential currency risk using either forward market transaction or
money market transactions. Below are information relating to instruments in the two markets.
Forward market (contract specifications):
2-month forward bid rate on 1 June: GHS5.2340 = GBP1
2-month forward ask rate on 1 June: GHS5.2490 = GBP1
Money market (annualized interest rates on 1 June):
Investing rate Borrowing rate
Ghana 24.0% 28.0%
United Kingdom 2.4% 3.6%
Required:
- What kind of currency risk exposure is the company facing? Explain
- Should DML Ltd hedge its currency exposure using forward market hedge or money market hedge? Support your answer with relevant computations.
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