The chief executive of the company you work for, a small to medium-sized exporter of hot-air hand dryers from the UK, has presented a report on hedging. The company has not engaged in any hedging activity before, but overseas sales have increased as a result of product innovation and improved internet marketing. Additionally, the risk to the sterling value of the sales can no longer be ignored, given the upheavals in the UK around Brexit.

The CEO is the owner/founder of the firm and he has built it up over the last 15 years from a one-shop operation in Newcastle, England into a multi-million pound business generating profits of 4m last year, with revenues growing at 25% per annum. It is only in the last three years that the overseas side of the business has really taken off.

The CEO is interested in hedging the cash flows from the two primary markets: mainland Europe, particularly Germany and France, and the US. The growth in the company is being financed with increased borrowings.

In your report you have to address the following questions:

(a) What is meant by delta-hedging and would it normally apply to a company like

this?b)The company has taken some risks over the years to achieve the strong position it now has. The company operates quite an aggressive working capital policy. What are the cost and cash flow implications of the different forms of currency hedging that this company could set up to manage its foreign receivables, which have an average payment date of 80 days?