Harris Ltd is a US importer/exporter of tiles that has business interests in Europe. The company is part of a wider Group that also has a smaller manufacturing subsidiary within the Eurozone.

 The company is invoicing a German customer for €1,200,000, payable in three months' time. The treasury team of Harris Ltd is considering two methods of hedging the exchange risk. These are:

 Option 1: Borrow Euros now, converting the loan into dollars and repaying the Euro loan from the expected receipts in three months' time. 

Option 2: Enter into a three-month forward exchange contract with the company's bank to sell €1,200,000.

Harris Ltd can borrow in Euros for 3 months at an annual interest rate of 4%. Harris Ltd can invest in US dollars at an annual interest rate of 6%

The current rate of exchange is €0.79 : $1. The three month forward exchange rate is €0.77 : $1.

You are required to: a. Advise the treasury team on: 

(i) Which of the two options is the most financially acceptable to Harris Ltd? Clearly show all steps in the calculations. (24 marks)

 (ii) The issues that the firm should consider when deciding whether to hedge the risk using the foreign currency markets

b. Evaluate other methods that this particular company may use to hedge exchange rate risk

c. Outline your understanding of the Purchasing Power Parity theory. In your answer refer to the impact of the Global Pandemic on foreign exchange rates.