A UK based holiday company has two large subsidiaries, one operates in South Africa and one in Australia.

The foreign operations have grown rapidly in recent years, and the parent company has had no formal risk management system in place for foreign exchange risk. A new finance director has been appointed and has put a new system in place, which will seek to quantify the risks that the company is taking.

The following tables show the payables and receivables for the two subsidiaries. The figures are in thousands.

Australian $

Time Subsidiary A Subsidiary B

+Receivable -Payable +Receivable -Payable

1 month. 80. 100. 90 85 2 months 90 85 45 80

3 months 70 100 68. 80

South African Rand

Time. SubsidiaryA SubsidiaryB

+Receivable -Payable +Receivable - Payable

1 month. 600 500 300 280

2 months 550 400. 366. 300

3 months 250 180. 150 280

The exchange rates to the sterling are:

Australian dollar A$3/ 1

SouthAfricanRand R12/1

(a) Discuss the nature of the foreign exchange risks facing the parent company.(b) Using the building block approach, calculate the aggregate net exposure in terms

(c) The company now has as a maximum acceptable exposure limit the sum of 50,000. What recommendation would you give the parent company? Explain the

different ways a company can reduce its foreign exchange risk.