You are a Polish manufacturer of leather goods and have currently signed a contract with a UK retailer. The contract is in GBP for £500,000 payable in one months’ time.
You are a Polish manufacturer of leather goods and have currently
Assessment 3 – Academic essay on selected topic (40% weightage)
Each student will submit fully-referenced academic paper (about 2,000 words) on the assignment topic. The full text of the assessment – which includes a numerical exercise – will be posted to the Blackboard
Learning outcomes tested:
FIRSTLY, LO1. Demonstrate a good understanding of International Finance and International Financial Markets
SECONDLY, LO2. Evaluate the available sources of finance and financial products that are available to business
Question 1 – 30 marks
You are a Polish manufacturer of leather goods and have currently signed a contract with a UK retailer. The contract is in GBP for £500,000 payable in one months’ time. Whilst there is no credit risk arising from contracting with the UK retailer there is still the exchange rate risk and that is why you must decide whether or not to hedge against currency movements.
In one months’ time the Polish exporter must pay its suppliers and employees in Euros.
How would you protect your business against an adverse currency movement using forward exchange contract? Calculate what the one month forward rate should be given that the current one month Euro bank interest rate is 2.5% and the one month Gilt rate is 1.2%.
In your answer please:
1. FIRSTLY, Define a forward exchange contract (no more than 200 words, based on financial literature) – 5 marks
2. SECONDLY, Explain why would you like to use this protection (no more than 300 words) – 10 marks
3. THIRDLY, Clearly show your calculations and flow of transaction – 15 marks
The spot exchange rates are given below:
Spot (bid – ask)
€ / £
1.1128 – 1.1152
Question 2 – 70 marks
Your uncle, an experience engineer, is considering starting a new venture manufacturing blades for fans produce d by larger firms. Your uncle has a clear technological advantage over competitors as he came up with a revolutionary galvanizing process for blades which offers huge cost savings, although it is not patent ed yet. He has also an extensive managerial/operational experience. What he lacks is the necessary funding to finance the new venture – and he hopes that you, as a UWL accounting & finance student, will be able to help him in his venture.
For a start, he asked you to write him a memorandum about start-up financing – how a small company is usually financed. He is particularly interested whether he will be able to borrow money from the bank from the very day of establishing his company. He also wants to learn if there are any differences between accessibility of finance for start-ups and for small companies which already have some business history.
Please prepare a memorandum to answer your uncle’s questions. In particular, in very clearly separated sections, please:
1. FIRSTLY, Identify the sources of finance in different growth stages of the company,
2. SECONDLY, Describe banks’ preferences while lending to companies in general,
3. THIRDLY, Assess the role which venture capital might play in his venture and in what stage it might become a realistic financing option and
4. FOURTHLY, Advice your uncle on steps he should take to make his venture successful.
Your uncle requires a fully referenced paper (using Harvard Referencing) so that he can check the original ideas behind your views.
Total length of this report (questions 1 and 2) should be about 2,000 words (+/-10%) – footnotes and appendices are NOT included in the word count.