Metro Ltd is a company which distributes and sells decorative trains for display. The company,which is based in Australia, imports the decorative trains from the USA which it packages and sells inNew Zealand and larger countries in the Far East. The company is also considering establishing asubsidiary in South Africa which would buy products from Metro Ltd and sell within Africa.Metro Ltd reports its results in its home currency. The company pays for its purchases fromthe USA in US dollars, but receives payment for the goods which it sells in Australia and theFar East in local currency. All transactions carried out with the subsidiary in South Africawould be in US dollars. The company generally takes $6$ weeks to pay its supplier in the USAand receives payment from debtors within $4$ months.Over the last few years the company has found that sales have been quite predictable and it hasbeen possible to plan sales levels and purchases of goods in advance. However, there isincreasing competition from companies in the Far East, which may make this more difficult inthe future.Required:$($a$)$ The company is currently considering whether the foreign currency exposure could bemanaged more efficiently. Describe the following types of foreign currency exposure, givingexamples of how they could impact Metro Ltd$,$ now and in the future: $(12$ marks$)($i$)$Economic risk

$3($ii$)$ Translation risk$($iii$)$Transaction risk$($b$)$ Describe the following approaches to managing or hedging transaction exposure and thedisadvantages and advantages of each method: $(12$ marks$)($i$)$Leading and lagging$($ii$)$ Matching$($iii$)$Forward exchange contracts$($iv$)$Currency options$($c$)$ Identify the factors which Metro Ltd should consider when deciding which approach to take, andgive recommendations on how Metro Ltd should manage its transaction exposure, giving reasons foryour recommendations. $(6$ marks$)$