March Manufacturing Limited is a UK-based manufacturer that has secured its first order from an overseas customer. The customer is a privately owned Argentinean company.

As the Argentinean currency, the pesos, is not widely available outside of the country, March has agreed to accept payment in US dollars.

Payment of $4,300,000 is due on 1 October 2021.

The company’s financial controller has established the following:

Today’s spot rate $1 buys £0.71

UK interest rate 1.2% per annum

US interest rate 2.1% per annum

Estimated spot rate on 1 October $1 buys £0.69

Assume today’s date is 1 June 2021.

Required:

(a) Critically discuss the new financial risks that arise from the company’s international expansion and set out examples of ‘over the counter’ risk management products that may be available to manage those risks.

(b) What forward rate might you expect March’s bank to quote today?

(c) Calculate the GBP value that could be borrowed today if the customer’s dollars were used to repay the loan on 1 October.

(d) How might the company use exchange traded futures to mitigate this risk? What additional information would you require to evaluate this option?

Answer rating: 100% (QA)

a When a company expands internationally it is exposed to various financial risks including currency risk interest rate risk and political risk In thi... View the full answer