QUESTION 3

(a)Under what conditions would a Malaysian MNC's subsidiary consider using a "leading" strategy to reduce currency transaction exposure? Under what conditions would the same subsidiary consider using a "lagging" strategy to reduce currency transaction exposure?

(3 marks)

(b)Does foreign currency exchange hedging both reduce risk and increase expected value against? List and explain THREE arguments in favor of currency risk management and several

(5 marks)

(c)The objective of both operating and transaction exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm's future cash flows. What strategic alternative policies exist to enable management to manage these exposures?

(4.5 marks)

(Total 12.5 marks)

QUESTION 4

(a)Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed proactive policies?

(2.5 marks)

(b)Mauna Loa , a macadamia nut subsidiary of Hershey's with plantations on the slopes of its namesake volcano in Hilo, Hawaii, exports macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of 1,200,000,000. At the present exchange rate of 125/$, this is equivalent to $9,600,000. Sales are relatively equally distributed throughout the year. They show up as a 250,00,000 account receivable on Mauna Loa's balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically 100,000,000.

Mauna Loa would like to hedge its yen receipts, but it has too many customers and transactions to make it practical to sell each receivable forward. It does not want to use options because they are too expensive for this particular purpose. Therefore, they have decided to use a "matching" hedge by borrowing yen.

(i). How much should Mauna Loa borrow in yen?

(ii). What should be the terms of payment on the yen loan?

(6 marks)

(c)The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned to react most appropriately. How can this task best be accomplished?

(4 marks)

(Total 12.5 marks)

noted : i need this answers today before 5pm malaysia