Akuaba Construction Co entered into an agreement with the government of Ghana in 2018 to build a price processing factory at New Edubiase under the One district one factory program, The Factory will cost $3•2 million. To finance the construction of the factory, Akuaba Construction Co issued Naira-denominated bonds in Nigeria whose currency is the Naira. Interest rates at the time in Nigeria were historically low. The foreign bond issue raised 16 million Naira and the exchange rate at the time was 5•00 Naira/$. Each foreign bond has a par value of 500 Naira and pays interest in Naira at the end of each year of 6•1%. The bonds will be redeemed in five years’ time at par. The current cost of debt of Naira-denominated bonds of similar risk is 7%. In addition to domestic sales, Akuaba Construction Co exports goods to Nigeria and receives payment for export sales in Naira. Approximately 40% of production is exported to Nigeria. The spot exchange rate is 6•00 Naira/$ and the 12-month forward exchange rate is 6•07 Naira/$. Akuaba Construction Co can borrow money on a short-term basis at 4% per year in its home currency and it can deposit money at 5% per year in Nigeria where the foreign bonds were issued. Taxation may be ignored in all calculation parts of this question. Assume that Akuaba Construction Co has no surplus cash at the present time: Discuss and illustrate how a money market hedge could protect Akuaba Construction Co against exchange rate risk in relation to the dollar cost of the interest payment to be made in one year’s time on its foreign bonds.
Akuaba Construction Co entered into an agreement with the government of Ghana in 2018 to build a price processing factory at New Edubiase under the One district one factory program, The
Each foreign bond has a par value of 500 Naira and pays interest in Naira at the end of each year of 6•1%. The bonds will be redeemed in five years’ time at par. The current cost of debt of Naira-denominated bonds of similar risk is 7%.
In addition to domestic sales, Akuaba Construction Co exports goods to Nigeria and receives payment for export sales in Naira. Approximately 40% of production is exported to Nigeria.
The spot exchange rate is 6•00 Naira/$ and the 12-month forward exchange rate is 6•07 Naira/$. Akuaba Construction Co can borrow money on a short-term basis at 4% per year in its home currency and it can deposit money at 5% per year in Nigeria where the foreign bonds were issued.
Assume that Akuaba Construction Co has no surplus cash at the present time:
Discuss and illustrate how a
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