Hedging risk in risk-management division

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Reference no: EM1310555

Q1) You are bright new analyst in risk-management division at RMS, a multinational technology company, and have newly been put in charge of managing Euro/CAD exchange-rate risk which RMS faces. Let RMS’s operations in Europe and Canada.

a) Assume monthly revenues in Europe average ten million Euros and monthly production and distribution costs average eight million Euro. If resulting profits are repatriated to production unit in Canada monthly, what risk does this production unit face? How might it hedge this risk?

b) RMS’s worldwide retirement benefits unit is located in Canada and has obligation to pay its retired European employees twenty million Euros monthly. What does this unit face and how could it hedge the risk?

c) Provided transactions of production and retirement units as given previously, what do you conclude are exchange-rate risks faced by RMS as whole in Europe? Does RMS require to enter into forward contracts?

Reference no: EM1310555

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