Grader, a UK producer of tyre has maintained its leadership by investing over 1 billion to build the most automated tyre making facilities throughout the European region and is aggressively expanding its chain of wholly owned tyre stores to maintain its position and market share. In the coming months, the company thinks that it will garner contracts for exports to US due to the current trade war between US and China. Currently the company has no cash surplus. Grader, has the following transactions during the last 6 months and the Manager is considering which hedging techniques would benefit the company most. Transactions will be in the currency specified. The following information is given: Sale of finished goods, cash receipt due in 3 months: $197,000 Purchase of finished goods for resale, cash payment due in 6 months: $447,000 Sale of finished goods, cash receipt due in 6 months: $154,000 Exchange rates quoted on London market Spot 3 months forward 6 months forward $/ 1.4106 - 1.4140 1.4024 - 1.4063 1.3967 - 1.4006 Interest rates (annual) 3 months or 6 months GBP () USD ($) Borrowing 7.5% 6.0% Lending 4.5% 3.0% UK Inflation rates (%) Current Expected in the future Required: (a) Using what you consider to be the most appropriate ways to protect Grader against foreign exchange risk, construct FIVE possible methods that Grader might use with respect to foreign exchange exposures of these transactions. Calculations should be included wherever relevant and recommendations on which policy the company should adopt with explanations of any assumptions that you made. (30 marks) (b) Evaluate the effect of the changes in inflation rates is likely to have on the relative value of the two currencies and the impact this will have on the recommendation(s) in (a) above. (10 marks) Grader, a UK producer of tyre has maintained its leadership by investing over 1 billion to build the most automated tyre making facilities throughout the European region and is aggressively expanding its chain of wholly owned tyre stores to maintain its position and market share. In the coming months, the company thinks that it will garner contracts for exports to US due to the current trade war between US and China. Currently the company has no cash surplus. Grader, has the following transactions during the last 6 months and the Manager is considering which hedging techniques would benefit the company most. Transactions will be in the currency specified. The following information is given: Sale of finished goods, cash receipt due in 3 months: $197,000 Purchase of finished goods for resale, cash payment due in 6 months: $447,000 Sale of finished goods, cash receipt due in 6 months: $154,000 Exchange rates quoted on London market Spot 3 months forward 6 months forward $/ 1.4106 - 1.4140 1.4024 - 1.4063 1.3967 - 1.4006 Interest rates (annual) 3 months or 6 months GBP () USD ($) Borrowing 7.5% 6.0% Lending 4.5% 3.0% UK Inflation rates (%) Current Expected in the future Required: (a) Using what you consider to be the most appropriate ways to protect Grader against foreign exchange risk, construct FIVE possible methods that Grader might use with respect to foreign exchange exposures of these transactions. Calculations should be included wherever relevant and recommendations on which policy the company should adopt with explanations of any assumptions that you made. (30 marks) (b) Evaluate the effect of the changes in inflation rates is likely to have on the relative value of the two currencies and the impact this will have on the recommendation(s) in (a) above. (10 marks)