The finance director of Flatpack plc, a rapidly expanding company based in the UK, is considering how to hedge sales revenues of 45m, which are due to be received in 270 days. The company has been quoted the following exchange and interest rates by one of its banks:

Spot rate (/) 1.2655 1.2682

270 day forward rate (/) 1.2821 1.2843

Euro interest rate 2.0 % per annum

Sterling interest rate 1.25 % per annum

A foreign currency dealer at the bank has also privately provided the finance director with her own estimate of the / spot rate in 270 days. Her estimate is 1.2725 1.2732.

Note: Assume there are 360 days in a year.

(i) Calculate the hedged value of the companys euro receivables if Flatpack plc decides to: (a) use a forward market hedge to manage its foreign currency exposure; (b) use a money market hedge to manage its foreign currency exposure. (30 marks)

(ii) Explain to the finance director which hedging strategy is preferable for the company, and, holding all other information unchanged, calculate the forward exchange rate for / under which the forward market hedge would yield an identical sterling value to the money market hedge for the companys euro receivables. (15 marks)

(iii) Given the estimated / spot rate provided by the foreign currency dealer, discuss, with reasons, whether or not the company should hedge the receipt of its euro receivables in this situation. (15 marks)

(iv) Distinguish between transaction risk, translation risk and economic risk and identify and discuss the various operational techniques available to managers that may be of assistance to them in managing exposure to transaction risk. (40 marks)