Kind Berhad is a Malaysian manufacturer of plastic containers, which it sells in many West African and other African countries. In three months" time, Kind Berhad is due to receive 70 million Kudi from a country in Central Africa whose curency is Kudi. At a board meeting slated for today, the directors will be discussing whether or not there is a need to hedge the foreign exchange exposure associated with this transaction and if so, how best this might be achieved. At the board meeting, three possible altematives will be considered: (1) Not to hedge this transaction; (ii) Use a forward contract. Exchange rates quoted by Kind Berhad's bank today are: Spot 1.1548 - 1.1608 Kudi/RM; and 3 months forward 1.1438 - 1.1508 Kudi/RM; and (ii) Use an over-the-counter currency option on Kudi which is available through Kind Behard's bank. Current premiums at an exercise price of 1.1650 Kudi/RM are RM1.10 per 100 Kudi for a call option and RM1.25 per 100 Kudi for a put option. Required: State FOUR (4) reasons why a fim might reasonably choose not to hedge its exposure to exchange rate risk. (8 marks) (6) Show the effect of each of the three alternatives being considered, assuming that the spot-exchange rate in three months" time is: 1.1850 - 1.1880 Kudi/RM 1.1295 - 1.1320 Kudi/RM (9 marks) (C) State FOUR (4) methods available to firms to reduce their exposure to foreign exchange risks which do not involve the use of financial contracts. (8 marks) [Total: 25 Marks) Kind Berhad is a Malaysian manufacturer of plastic containers, which it sells in many West African and other African countries. In three months" time, Kind Berhad is due to receive 70 million Kudi from a country in Central Africa whose curency is Kudi. At a board meeting slated for today, the directors will be discussing whether or not there is a need to hedge the foreign exchange exposure associated with this transaction and if so, how best this might be achieved. At the board meeting, three possible altematives will be considered: (1) Not to hedge this transaction; (ii) Use a forward contract. Exchange rates quoted by Kind Berhad's bank today are: Spot 1.1548 - 1.1608 Kudi/RM; and 3 months forward 1.1438 - 1.1508 Kudi/RM; and (ii) Use an over-the-counter currency option on Kudi which is available through Kind Behard's bank. Current premiums at an exercise price of 1.1650 Kudi/RM are RM1.10 per 100 Kudi for a call option and RM1.25 per 100 Kudi for a put option. Required: State FOUR (4) reasons why a fim might reasonably choose not to hedge its exposure to exchange rate risk. (8 marks) (6) Show the effect of each of the three alternatives being considered, assuming that the spot-exchange rate in three months" time is: 1.1850 - 1.1880 Kudi/RM 1.1295 - 1.1320 Kudi/RM (9 marks) (C) State FOUR (4) methods available to firms to reduce their exposure to foreign exchange risks which do not involve the use of financial contracts. (8 marks) [Total: 25 Marks)
