You are the financial manager of The Heaven plc: a British company which has just signed a contract for the sale of gas turbine equipment in France for 2,000,000 in a years time. You have collected the following data relevant to this project

Spot exchange rate: 0.8 = 1

One year forward exchange rate 0.9 = 1

European one year interest rate 5%

British one year interest rate 2%

Price of a put option for 2,000,000 at an exercise price of 0.85 per pound: 300,000

Required:

(1) What kind of foreign exchange exposure does The Heaven face with regard to this transaction? How does this differ from other kinds of exposure?

(2) What kind of risk management strategy would you recommend for The Heaven given the data provided? In what ways does the approach you are recommending differ from that which you would recommend to deal with other kinds of exposure?