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Answer all parts of the question Question I: Coca Coln(KO) and Pepsi have continually been hedging their forcign currency eamings, While they manufacture in Europe,

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Answer all parts of the question Question I: Coca Coln(KO) and Pepsi have continually been hedging their forcign currency eamings, While they manufacture in Europe, significant sales are coming from non-curo currency markets. How they hedge differ, however, dramatically. While Coca Cola (KO) bedged to protect earnings, Pepsi have sometimes generated a significant proportion their earnings from their hedges. As the recent graduate from CUD, the CFO of Coca Cola (KO) assigns you the important task of analyzing the different types of risk faced by the multinational, particularly, for European deals. The following trinsactions are of particular interest to the CFO: - The Coca Cola (KO) parent company in the U.S, has sold inventory in Spain for e15,000,000 payable in 45 days. Current spot rale $0.8375/ 45-day forward rate $0.8325/ Coca Cola (KO)'s parent cost of capital is 24.0% US 45 daty borrowing rate is 7.0% p.a. US 45 day investing rate is 5.0% p.a. US 180 day borrowing rate is 6.0% p.a. US 180 day investing rate is 5.5% p.a. Spain 45 day borrowing rate is 20.0% p.a. Spain 45 day investing rate is 8.0% p.t. Spain 180 day borrowing rate is 9,0% p.u. Spain 180 dny investing rate is 11.5% p.a. Your team of legendary financial analysts expect future spot rate in 45 days to be $0.7850e. (a) Provide 3 possible scenarios which can give rise to transaction exposure? (b) Evaluate the pros and cons of hedging as a risk management tool. Give an example of each. (c) Based on the above information, analyse the impact of - Remaining unhedged - Forward hedging - Money market hedging (d) If you want to hedge the risk by either using a forward or a money hedge, which hedging technique would you recommend to the CFO? Part of your analysis should include the break-even rate. Explain your

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