24. Exchange rate risk management You have recently been appointed as the Financial Controller of Sandbell plc., a privately held company based in the UK, specialising in building and installing passenger shelters at bus stops. It then generates revenue by charging advertisers for their use of the display screens installed as an integral part of the shelter. Sandbell have installed an average of 1,000 shelters each year in the UK and Europe at a cost of 20,000 per shelter. Each shelter has an expected life of 5 years and have had a payback period of 24 months on stable monthly revenue. Sandbell now intend expansion into the US market and they want to borrow either $14m or 10m as a capital repayment + interest loan at the current spot rate of $1.4000:1 to instal 250 shelters in both New York and Chicago. The shelters will be sourced from US manufactures and the cost, including installation, would be invoiced to Sandbell in US dollars (USD). The ongoing revenue and operating costs would also be in USD. If this pilot is successful, they intend using the cash generated from operations to continue expansion into the US. Required: You have been asked by the Chief Financial Officer to produce a report to the board on the implications of using debt finance to fund the initial expansion into the US. Your report should: a) Describe economic, translation and transaction risk 3 marks b) Explain Sandbell's exchange risk exposure 4 marks c) Consider whether Sandbell should borrow in US dollars or British pounds 3 marks d) Discuss whether the loan should be taken out for two years or five years 3 marks e) Explain exchange rate forward contracts and money market foreign exchange hedges 4 marks f) Describe whether and/or how these would be useful in this example. 3 marks