May 2017 Q1 a.
In the last couple of years, the Cedi has depreciated substantially against the US Dollar. This has had an adverse effect on the financial performance of most of the multinational companies in Ghana.
Required:
As a Financial Adviser of your organization, a multinational company which is involved in the export trade, recommend actions to be taken to minimize the loss on foreign currency transactions. (5 marks)
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- The usage of a forward exchange contract. This is a contract, usually between a bank and its customer, for the purchase/sale of a specified amount of a stated foreign currency at an exchange rate fixed at the time the contract is made for performance at a future date agreed upon at the time of the contract.
- To borrow foreign currency. A Ghanaian company that has recognized the need to pay a certain amount in US dollars in two months’ time, can borrow that amount of US dollars now, thereby avoiding and reducing translation/conversion risks.
- To insert protection clauses. The exporter can incorporate a clause in the contract of sale, to adjust the selling price, if the exchange rate moves outside an agreed range. Also additional charges may be made as a result of conversion or translation changes which may be agreed to be borne by the importer.
- Export factoring. Where the exporter raises foreign finance through the usage of an international factor.
- To operate a domiciliary account. The company in this case maintains an account in a Ghanaian bank, but denominated in the desired foreign currency. Proceeds of export sales can then be used through this account to settle future commitments.
- Matching and Netting currencies. The idea here is to match receipts and payments in the foreign currency. In this case related amounts are offset in foreign currency if they fall due within the same time period.
- Incorporating a clause in the export contract which will specifically allow or disallow fluctuations in exchange rates. This is slightly different from protection clauses, since the adjustment is done on the exchange rate for payment especially in local currency.
- Foreign Currency Options.
- Foreign Currency Swaps.
- Foreign Currency Futures
- Discounting export bills or invoices with foreign finance houses.
- Negotiation of bills of exchange payable or discountable abroad. (Any 5 points)