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UKFF4024 MULTINATIONAL FINANCE All questions are COMPULSORY [Total: 100 marks] Q1. Sator Plc, a company based in United Kingdom manufactures wool clothing and trades with companies situated in the European and Asian region. The finance director of Sator has recently reviewed the company's cash flows in the first quarter and are concerned about the exchange risk of the company. These are the following 2 and 3 months cash flow transactions in Singapore dollar (SGD) and Swedish krona (SEK) that Sator were reviewing: Payment Singapore (2 months) Receipts (SGD) (SGD) SGD 513, 265 SGD 120,000 Sweden (3 months) Payment Receipts (SEK) (SEK) Krona 1.3m Krona 9.9 m Foreign exchange rates Spot Two months forward Three months forward SEK/GBP 10.68 - 10.71 10.74 - 10.77 10.78 - 10.78 SGD/GBP 1.44 - 1.47 1.42 - 1.46 1.43 -1.46 Interest rates for 2 or 3 months Borrowing % p.a Singapore 5.75 UK 7.50 Sweden 8.00 Lending % p.a 3.50 5.50 6.00 Sator has a 2-month call option on Singapore dollar at an exercise price of 1.30 SGD/GBP with 2% premium and a 3-month put option on Swedish krona at an exercise price of 10.50 SEK/GBP with a 2% premium. Required: (a) Discuss with supporting calculations, how Sator is going to hedge its foreign exchange risk using forward contract, money market and currency option during the next 2 and 3 months period. Evaluate which is the best hedging techniques for Sator. (Note: Not necessary to compound premium), (32 marks) (b) Explain the various factors that Sator should consider before the company should consider to use the hedging techniques shown above in part (a) to reduce foreign exchange transaction exposure. (8 marks) [Total: 40 marks) This final assessment paper consists of 2 questions on 5 printed pages