c) Explain TWO (2) differences between forward contracts and futures contracts. (5 marks)
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- Forward contract are non-standardized but Futures contracts are standardized as to delivery date, quality and quantity
- Forward contracts are over the counter contracts but Futures contracts are traded on an organized exchange
- Forwards contract have no clearing houses but Futures contracts have clearing houses
- No margin requirement under Forward but margin requirement exist under Futures contract
- Credit risk is higher in Forward contracts but minimal on Futures contracts due to the margin requirements.
d) ValuePack Ghana Ltd is into the manufacturing and sale of drugs in Ghana. The company imports its raw materials from abroad on credit. The suppliers grant them between 3 months and 6 months credit due to their good track record in payment. The company currently has the following invoices due in:
3 months’ time – USD 2 million
6 months’ time – USD 1 million
They are looking to buy USD/GH¢ forward to hedge their exchange rate risk and their Bank offers them the following forward rates:
Tenor Rates
3 months – 5.65
6 months – 5.98
The interest rates applicable to their company for both cedi and US dollar for the same tenors are as follows:
Tenor GH¢ Interest Rate USD interest rate
3 months 15% 2%
6 months 20% 3%
The Spot rate for USD/GH¢ is 5.4 in the market.
Required:
As the newly appointed Finance and Treasury Director of the company, calculate the forward rates for the various tenors based on the information provided above. (5 marks)
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ALTERNATIVE (Assuming the interest rates were understood to be for the specific tenor and not per annum as question was silent)
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