You have just been appointed as the Financial Director of a large international
construction company which is undertaking major projects in a number of
countries. The CEO is also new and has a background in construction and is
not particularly knowledgeable about finance. He is concerned about the
foreign exchange risks to which the company may be exposed.
a) As the Financial Director, you are requested to write a briefing report for
the CEO explaining:
1) What foreign exchange risks that company may be exposed, and what
business activities can be modified to reduce these risks.
(12 marks)
2) What financial instruments can be used to reduce these risks? In your
report you should give priority to outlining the most fundamental and important
financial instruments used for this purpose.
(13 marks)
b) One of the best friends of the CEO works for a large investment bank. He
has advised the CEO that the best way to mitigate any foreign exchange risks
facing the company is by extensively using advanced derivatives. He
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particularly has advocated the use of Barrier Options, Asian Options and
Compound Options. He says Swaps and Forwards are old fashioned and
outdated. He further states that his bank is a leader in the area of advanced
derivatives and can implement a suitable programme for reasonable ongoing
fees.
As the Financial Director, you are requested to write a note to the CEO with the
following content:
1) A concise explanation of the operation, purpose, and differences of
Barrier Options, Asian Options and Compound Options.
(12 marks)
2) A critical evaluation of the comments of the banker discussing whether
it appropriate to follow his advice.

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