NUMBER 4

(a) To reduce and possibly eliminate foreign exchange

exposure/risks, the finance manager should do the following:

Enter in forward contracts

Enter into currency futures contracts
Buy a call currency option when importing and a put
current option when exporting.
Use a money market hedge by borrowing and lending
depending on when the firm is expecting receivables or
make payments.
Where possible, use swap agreements (currency swaps)
especially where foreign currency is needed to finance
foreign operations.
Leading (upfront payments/receiving) and lagging
(delaying payment or receipt to future date)
Matching the receipts and payments
Netting off especially where a multi-national firm
has a number of subsidiaries overseas which owe each
other some money.
Holding a currency cocktail i.e a portfolio of currencies
where a loss on one currency is offset by a gain on
another currency.
(b) The profitability of the venture may be preserved by:


Entering into agreement to receive cash flows in terms of
home currency only.
If the local currency is weaker compared to the
home currency, this can be done by negotiating for a 5-
year loan of 20 million currency units.
Repay the loan in 27M local currency units so that
long term assets (new factory) would be matched with
long term liability (loan)
If the firm has 20M currency units, it can be invested in
local or home country where local currency is expected
to appreciate.