Discuss and compare the use of derivatives including forwards, futures, options and swaps to hedge Foreign Exchange (FX) Risk.

Part A – Suppose you are a Chief Financial Officer (CFO) of a UK based listed
company. The company is currently trading at £10 per share and have 10 million
shares in issue. The total market value of the issued share capital of the company is
£100 million. You have been requested to write a report to the board of directors on
how you aim to raise an additional £50 million to fund the next development stage in
the international project.
Part B – This additional funding will allow the company to expand globally and do
business in the markets of numerous countries where payment can be made using the
local currency. The directors are conservative in their attitude to risk. You have been
requested to provide a report to the directors critically evaluating alternative derivatives
including forwards, futures, options and swaps that are available in the market in order
to minimise the risk with respect to payment in international currencies.
Note for Part A:
For the report in Part A, you should critically review the advantages and disadvantages
of the main funding options and have appropriate academic references to strengthen
your discussions. In your analysis, you should review the different types of financing
choices available in the equity and debt markets, and discuss how beneficial interest
rate swaps are in reducing financing costs and eliminating interest-rate risk.
Note for Part B:
For the report in Part B, you should critically discuss and compare the use of
derivatives including forwards, futures, options and swaps to hedge Foreign Exchange
(FX) Risk. With reference to appropriate academic references, discussions must
include:
 how it works in mitigating FX risk.
 advantages and disadvantages of each type of derivative in managing FX risk
You are expected to link the reports for Parts A and B together in the form of a
single essay.
 The essay must be around 4,000 words (a minimum word count of 3,800 and a
maximum word count of 4,200) excluding the references, tables, figures and notes.
You must provide a word count. Parts A and B are expected to be equally weighted,
i.e., around 2,000 words for each part.
 You should also refer to further references from a variety of academic sources in
relation to this topic.
 All references must be correctly cited following the APA 7th referencing system

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