Question 1: Understanding Exchange Rate Concepts (25 marks) GreenTech Sdn Bhd, a Malaysian eco-friendly packaging manufacturer, is planning to import biodegradable raw materials from the United States. The company is concerned about the impact of exchange rate movements on its purchasing costs. Currently, the exchange rate is MYR/USD = 4.65. Management believes the rate might change in the next few months. a) Define the foreign exchange market and explain two major functions it plays in international trade. (5 marks) b) Identify two key participants in the forex market and explain their roles with real examples. (5 marks) c) Suppose the exchange rate changes from MYR/USD = 4.65 to 4.80 in two months. i. Which currency has appreciated or depreciated? Justify. (3 marks) ii. Calculate the percentage change in the exchange rate and explain what this means for GreenTech's imports. (7 marks) iii. Suggest one way GreenTech can manage this currency risk. (5 marks) Question 2: Forward Market Application (25 marks) MyBooks Bhd, a local publishing company, expects to receive USD 80,000 from a distributor in the US within 90 days. The company is exploring ways to mitigate currency risk from a weakening USD. The current spot rate is MYR/USD = 4.70 and the 90-day forward rate is 4.65. a) Explain the purpose and mechanism of a forward contract in foreign exchange. (5 marks) b) Calculate the MYR value MyBooks will receive using the forward rate. (5 marks) c) If the future spot rate turns out to be MYR/USD = 4.60, compare the amount received with and without the hedge. (7 marks) d) Should MyBooks hedge with the forward rate? Justify your answer. (8 marks) 3 Question 3: Comparing Hedging Tools (25 marks) TechNova Sdn Bhd exports electronics to Europe and is expecting EUR 50,000 in 60 days. The company is considering using either a forward contract or a foreign currency option to hedge its euro receipts. The spot rate is MYR/EUR = 5.10. The 60-day forward rate is 5.05. A call option with a strike price of 5.00 and premium of 0.06 is available. a) Explain the differences between forward contracts and foreign currency options. (5 marks) b) Calculate the MYR value TechNova will receive under the forward contract. (5 marks) c) Calculate the MYR value under the call option if the future spot rate is 5.15. (7 marks) d) Which instrument offers better flexibility and why? (8 marks) Question 4: Managing Transaction Exposure (25 marks) AgroMart Bhd, a Malaysian food exporter, frequently deals in multiple currencies. The company is worried about exchange rate volatility affecting payments and receivables. AgroMart is evaluating strategies to manage transaction exposure. a) Define transaction exposure and explain why it is important for exporters like AgroMart to manage it. (5 marks) b) Describe two strategies that can be used to manage transaction exposure. (5 marks) c) Provide a real-world example of a company that suffered from not managing its transaction exposure. (7 marks) d) Recommend a currency risk policy for AgroMart. Support your suggestion with justification. (8 marks)