- 15 Marks
May 2024 – PL – SC – Q6 – Foreign Exchange Risk Management
Explain economic exposure and management; estimate impact on Linko Plc's value from expected USD strengthening vs GBP.
Question
a. With respect to foreign currency risk management, explain economic exposure and discuss generally, how a company can manage economic exposure. (8 Marks)
b. Linko Plc is a Uk-based company. It supplies medical equipment to the USA and Europe. It also buys some basic raw materials from USA.
In a typical financial year Linko has net imports of 8 million dollars from USA. This is expected to continue for the next six years.
The company’s cost of capital is 10% per year. Assume that cash flows occur at the year end. Ignore taxation.
Required:
Assuming that there is no change in the physical volume or dollar price of imports, estimate the impact on the expected market value of Linko Plc, if the market expects the dollar to strengthen by 4% per year against the pounds. The current spot rate exchange rate (US$ per £1) is 1.9156 – 1.9210. (7 Marks)
Find Related Questions by Tags, levels, etc.