5. Assume the following scenario. You run a company based in London, UK. You buy products from Italy. You recently made a large purchase of luxury products from a company based in Milan. You are obligated to pay 50 million Euros 6 months from now. Spot exchange rate is 1 pound = 1.25 Euro. Prevailing interest rates 3% in UK and 4% in Italy. Your company can borrow at 4% in UK and at 5.2% in Euro. The company earns 2.5% on its deposits in UK and 3% in Italy. Answer questions below:

a. Why type of foreign exchange risk does the company face?

b. What are the different ways the company can manage this risk? Demonstrate with calculations.

c. What course of action would you recommend and why?