Purpose of the Assessment
The purpose of this assignment is …..
Assessment Task
i. Type of Assessment: Discussion and calculation
ii. Requirements and Components of the task: Detailed in briefing
iii. Expected Format: Arial 11 Double Spacing
iv. Word Count: 2,500
Assignment Briefing:
You are working at the Treasury department of DeeMak PLC, a UK import export company which trades with buyers and sellers all over Europe.
1. Critically assess the three types of exchange rate risks (transactional risk, translation risk and economic risk) that such a multinational company like DeeMak may face. (15 marks)
2. What hedging strategies can a company put in place to manage the exposure to each of the three types of exchange rate risks described above? (15 marks)
3. Evaluate the advantages and disadvantages of a multinational corporation trading in a market where the foreign currency is under a fixed exchange rate regime, i.e. a country pegging its exchange rate. (10 marks)
4. Explain under which circumstances the company would decide not to hedge against foreign exchange rate risks. (10 marks)
5. Your boss has asked you to review the company’s foreign currency payables and receivables in order to determine whether forward contract or money market hedging should be used for the following transactions. (50 marks)
Purchase of goods CHF230,000 to pay in 3 months
Purchase of goods CHF300,000 to pay in 6 months
Sales of goods CHF500,000 to receive in 6 months
Purchase of goods EUR560,000 to pay in 3 months
Purchase of goods EUR250,000 to pay in 6 months
Sales of goods EUR470,000 to receive in 6 months
Given the following market data:
Exchange rate quotes from bank:
GBP/CHF GBP/EUR
Bid – Ask Bid – Ask
Spot 1.7725 – 1.7735 Spot 1.1698 – 1.1708
3-m fwd 44/32 discount. 3-m fwd 41/50 premium
6-m fwd 92/80 discount 6-m fwd 98/107 premium
Interest rates Borrowing Deposit
GBP 5% 3.5 %
CHF 3% 2%
EUR 6% 4%
- Calculate the cash flows if the company uses forward contracts to hedge its CHF exposures. (10 marks)
- Calculate the cash flows if the company uses forward contracts to hedge its EUR exposures. (10 marks)
- Calculate the cash flows if the company uses money market hedging technique to hedge its CHF exposures. (10 marks)
- Calculate the cash flows if the company uses money market hedging technique to hedge its EUR exposures. (10 marks)
- Summarise the results of the calculations above make recommendations in a way that helps the company’s executives to make a quick hedging decision for each transaction. (10 marks)
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—– end of assignment —-