Problem1. You have been hired as the treasurer of Manchester International, the electronic firm with many subsidiaries abroad. The management of the Manchester International is relatively non-finance people and as one of your task, you are anticipated to advise management of potential currency exposure the firm may face and on the management of currency risk.
Question1. Describe management the dissimilar types of exchange rate risk, using suitable numerical examples.
Question2. One of the directors has heard that transaction exposure can equally be handled externally by a forward hedge or internally by the money market hedge. He is extremely confused about these. Explain to him how these two hedging strategies vary and make an evaluation of both techniques for him.
Question3. He also desires to know more about the pricing of a forward contract. Derive and describe how a forward is price for both currency and share.
Question4. Describe the use of forward-forward and forward spot swaps in the managing risks.