Trendsetter plc is a UK company which produces specialist footwear and imports leather from a company in India, Amulta Limited. The company exports the footwear worldwide, but the majority of the sales are made in the US. 1. Trendsetter has just purchased a consignment of skins from Amulta Limited for 100 million Indian Rupees and the payment is due in 6 months time. The currency risk of this purchase is of particular concern to Trendsetter plc.. The following data has been compiled: Spot exchange rate Rupees 90/£ Forward rate (6 months) Rupees 95/£ UK borrowing rate 5.00% p.a UK investment rate 4.00% p.a. Indian borrowing rate 7.5% p.a Indian investment rate 6.5% p.a Call option exercise price Rupees 92/£ Option Premium 1 million Rupees

Required: 

a) Identify and calculate the costs of the alternative strategies available for hedging this risk and advise which strategy would have produced the best outcome for Trendsetter plc, assuming the actual spot rate in 6 months’ time is Rupees 89.00/£. 

b) Explain why economic (operating) exposure might be of concern to Trendsetter plc even though they do not, at the moment, have any foreign direct investment (FDI). 

c) Describe the additional operating exposures Trendsetter plc would be exposed to if they were to engage in FDI and describe the strategies the company might undertake to reduce its level of economic exposure. 

d) Explain why translation exposure might be of concern to multinational organisations and briefly describe how a multinational organisation might reduce its exposure to translation risk.

Answer rating: 100% (QA)

aThe forward contract would have been the best strategy as it would have resulted in an exchange of 1089000 The forward contract would have been the best strategy as it would have resulted in an excha... View the full answer