FutureFurn Plc is a furniture manufacturer based the UK$,$ using $$ as its functional currency. It is now the end of June.$$US customer$$A US customer has placed an order for $$multi$-$function$$ couches totalling US $ $5$ million, with FutureFurn Plc invoicing the US customer in US $$.$ The payment terms with the US customer are to receive US $ in three months$$ time.$$US supplier$$FutureFurn Plc has placed an order for $$pivot$-$hinges$$ to be used in manufacturing items from a US supplier. The order amounts to US $$200000,$ and payment must be made in US $ in three months$$ time.$$Information gathered in respect of exchange rates and interest rates are detailed below:$$Exchange rates$$US $$/1$Spot$1\mathrm{.}2800-1\mathrm{.}3186$One month forward$1\mathrm{.}3-1\mathrm{.}5$ cent premium$$Three months$$ forward$2\mathrm{.}4-2\mathrm{.}7$ cent premium Three months$$ forward$2\mathrm{.}4-2\mathrm{.}7$ cent premium$$Interest rates $($annual$)$Loan$$Deposit$$UK$8\mathrm{.}00\%7\mathrm{.}00\%$USA$5\mathrm{.}00\%3\mathrm{.}50\%$Currency futures are trading at $1\mathrm{.}2700.$ Each futures contract is for $62,500.$Required:$2\mathrm{.}1$ Calculate the $$ receipt that FutureFurn Plc will expect to receive in $3$ months from the US customer if it:$($a$)$ hedges the risk using the forward market $(2$ marks$)($b$)$ hedges the risk using the money market $(3$ marks$)2\mathrm{.}2$ Calculate the $$ payment that FutureFurn Plc is expected to pay in $3$ months to the US supplier, if it hedges the risk using currency futures, assuming the market price for September futures in September is $1\mathrm{.}2650$ and the spot rate is $1\mathrm{.}2550.$ The number of futures contracts should be rounded up$.(6$ marks$)2\mathrm{.}3$ With reference to financial risk management, hedging can involve the reduction or elimination of financial risk by passing that risk onto someone else. Internal hedging techniques involve reducing risk by creating an offsetting position that tends to cancel any risks.$($a$)$ Discuss the benefits of hedging. $(4$ mark$)($b$)$ Discuss arguments against hedging. $(4$ mark$)2\mathrm{.}4$ With reference to the scenario above, discuss how FutureFurn Plc could make use of $$invoicing in home currency$$ as an internal hedging technique and comment on the potential problems or issues when using this hedging technique. $(5$ marks$)[$Question total: $24$ marks$][$CIMA adapted$]$