Gulfa Ltd. is a UAE based company. The company imports goods from Turkey which cost 5,000,000 Lira. The goods are re-sold in the UAE for AED 1,500,000. At the time of the import purchases the exchange rate for Lira against AED is 3.8484 3.8522.

Required:

(a) What is the expected profit on the re-sale?

(b) What would the actual profit be if the spot rate at the time when the currency is received has moved to:

(i) 3.1011 3.1200

(ii) 4.4232 4.6223?

Ignore bank commission charges.

(c) Explain the type of risk faced by Gulfa and how it can hedge against this risk.