Teruliam Cary (TC) is a British based manufacturer of plastic injection systems. After four years of significant growth in selling these systems into Asia from the companys London offices, the companys board has decided to form a joint venture (JV) with a local company in Malaysia, Ramutt Malay (RM), to exploit this growing market. The new JV investment would require a joint capital investment of approximately MYR75m from each partner, the equivalent of about GBP13.7m. The capital investment would be phased over two years with revenues from sales starting to be earned from the start of the second year. TC has already entered a currency option to purchase the MYR required for the capital investment, but TC has not hedged any other part of the JVs currency exposure. TCs share of the JV profits would be repatriated via dividends three months after the JVs year end. These dividends would be paid in MYR. The new company will be staffed by local employees supplied by RM and expatriates from TC in the UK. The local staff will be paid in MYR and the expatriates will be paid in GBP. The staff cost is designed to be equally split between the two JV partners, TC and RM. These costs will then be charged as service costs to the JV.

a) Discuss the three broad types of exchange rate risks that Teruliam Cary (TC) will be exposed to in the new joint venture arrangement. (6) b) Discuss how TC might manage each of these three risks and the ease, or difficulty, associated with dealing with each risk. (9) c) Identify and explain the derivative instruments that can be used to manage the risk identified above. (5)