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Question 1 You are the sales manager for a United States company that exports mobile phones to the United Kingdom. You have just signed a

Question 1

You are the sales manager for a United States company that exports mobile phones to the United Kingdom. You have just signed a deal to ship phones to a British distributor. The deal is denominated in pounds, and you will receive 700,000 when the phones arrive in London in 6 months. Assume that you can borrow and lend at 7% p.a. in U.S. dollars and at 10% p.a. in British pounds. Both interest rate quotes are annualized rates. The spot exchange rate is $1.4945/, and the 6-month forward exchange rate is $1.4802/.

  1. Describe the nature and extent of foreign exchange risk faced by your company.

(2 marks)

  1. Given the information above, describe two ways of managing the foreign exchange risk. (3marks)
  2. Which of the alternatives in part b is superior? (5 marks)
  3. Discuss the benefits and risks of using a currency option contract relative to a forward contract. (5 marks)

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