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