Homework answers / question archive / Maple Ltd is a UK manufacturer of sports equipment

Maple Ltd is a UK manufacturer of sports equipment

Finance

Share With

Maple Ltd is a UK manufacturer of sports equipment. It has recently begun exporting to a European country. The company has just delivered a major export order to the European customer at a price of €900,000. Maple Ltd expects to receive the €900,000 in six months' time. The prospect of increased exports to the European country means that Maple Ltd needs to expand its existing business operations in order to be able to meet future orders. The chief financial controller of Maple Ltd is therefore seeking to raise external finance. At the same time, he is concerned about the foreign exchange exposure associated with the export transaction. Therefore, he plans to hedge the exchange rate risk arising from its European exports. The following exchange rates are currently available to Maple Ltd: Current spot exchange rate 1.200 euro per £ Six-month forward exchange rate 1.190 euro per £ One-year forward exchange rate 1.181 euro per £ Maple Ltd could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Maple Ltd does not have any surplus cash to use in hedging the future euro receipt. Required: a) Evaluate whether a forward exchange contract or a money market hedge should be used by Maple Ltd to hedge the euro receipt of €900,000 in six months' time. (15 marks) b) Identify and explain four interational trading risks (other than foreign exchange risk) that Maple Ltd is exposed to and provide an outline of how these risks might be mitigated. (Word limit: maximum 300 words) (10 marks) C) Explain the different types of foreign currency risk faced by a multinational company. (Word limit: maximum 300 words) (10 marks) Total 35 Marks