Question 1:

(a) "A tourist resort which does business in a single currency is not exposed to currency risk." Discuss (use example to support your answer).

(b) Case: Hedging foreign currency receivable using futures contract A UK Firm export garments to US on Jan1, 2005. The supplier will pay $100,000 with delivery and payment to take place on 1st Feb 2005. The spot exchange rate (1st Jan) is Pounds 0.5/$.

(i) Assess the currency risk concerns for the UK firm.

The UK firm decides to make use of a futures contract to hedge the company's foreign currency exposure. Assume that a futures contract is listed on the Chicago Mercantile Exchange (CME) for the purchase of $ 100,000 priced in pounds. Also, on 1st Jan 2005, the futures price is Pounds 0.3/$.

Assume also that the spot exchange rate turns out to be Pounds 0.6/$ on 1st Feb 2005.

(ii) Set up a hedge to manage the currency risks using the futures contract.

Question 2:

"Credit-linked notes are important for banks with regards to the management of credit risks. However, there are also other means to mitigate credit risks." Discuss with supported examples.