PZK Co$,$ whose home currency is the dollar, trades regularly with customers in a number of different countries. The company expects to receive $1,200,000$ in six months$$ time from a foreign customer. Current exchange rates in the home country of PZK Co are as follows:

Spot exchange rate: $4178042080$ euros per $

Six$-$month forward exchange rate: $4230242606$ euros per $

Twelve$-$month forward exchange rate: $4282543132$ euros per $

Required:

d$)$ Calculate the loss or gain compared to its current dollar value which PZK Co will incur by taking out a forward exchange contract on the future euro receipt, and explain why taking out a forward exchange contract may be preferred by PZK Co to not hedging the future euro receipt.

e$)$ If the interest rate in the home country of PZK Co is $4\%$ per year, calculate the annual interest rate in the foreign customer$$s country implied by the spot exchange rate and the twelve$-$month forward exchange rate.

f$)$ Discuss whether PZK Co should avoid exchange rate risk by invoicing foreign customers in dollars.

Consider the investments in the two Public Listed Company Stocks.

Required:

a$)$ Compute the risk and return of the above two stocks.

b$)$ Justify using your answers in part A as well as any other empirical computation which of the two stocks you prefer.

c$)$ Given a Risk Free Rate $($RFR$)$ of $15\%,$ draw the Security Market Line $($SML$)$ clearly plotting the two stocks.

d$)$ Compute the Covariance and Correlation Co$-$efficient of the above two stocks and interpret your computation.

e$)$ If you decide to invest in both stocks, and you decide to put $50\%$ in stock A and the Remainder in B$,$ what will be your Portfolio Expected Return and the volatility of the portfolio?

f$)$ Explain the importance of Diversification in investment and Management