Mr Smalltalk the Director of Wundermunder plc has just returned from a presentation by his bank on how they might improve their financial management
You are required to critically evaluate each of the following concerns separately:
a. Mr Smalltalk calls you in and shows vou this:
He remarks: “Our bank showed me this and said that it would be a costless way of protecting against variation in the dollar. As you know we do a lot of buying and selling in dollars and we can get caught out by quite small changes in value – our margins ar<: small. Anyway this just looks like the London Underground map to me, so would you please explain it to me and comment on whether you think this would be a good form of protection”
b.Mr Smalltalk continued: “The bank also talked about swaps and save this as an illustration:
He then explained that by engaging in a swap arrangement with Example plc we could lower our interest rate expense in dollars and Example plc would also benefit. Firstly, I did not understand how and I would like you to explain. Secondly, we worked hard to get the lowest rates we could, how is it that we can get an even lower rate without proving that we are an even lower risk than the market thinks?
c.The third way the bank thought we could improve our financial management was to use Futures. This I simply did not understand, we commit ourselves to buying currencies and commodities in the future but never actually receive anything and we have to make daily payments or receipts. Can you explain all this please and evaluate any long term