Contents

• Part A 3
• Introduction 3
• Reason for expanding the business 3
• Sources of raising long term finance 4
• Concept of Debt financing 4
• Concept of equity financing 5
• Comparison between debt financing and equity financing 5
• Advantage of debt financing over equity financing 5
• Disadvantages of debt financing and equity financing 7
• Conclusion 9
• Part B 10
• Concept of Forwards, Futures, Options and Swaps Market 10
• How forward market helps to mitigate the risk in foreign exchange 13
• How future market helps to mitigate the risk in foreign exchange 13
• How options market helps to mitigate the risk in foreign exchange 13
• How swap market helps to mitigate the risk in foreign exchange 13
• Comparison among forwards, futures, options and swaps market in mitigating the risk of foreign exchange 14
• Advantage and disadvantage of forwards market in mitigating the risk in foreign exchange 15
• Advantage and disadvantage of future market in mitigating the risk in foreign exchange 15
• Advantage and disadvantage of option market in mitigating the risk in foreign exchange 17
• Advantage and disadvantage of swap market in mitigating the risk in foreign exchange 17
• References 18

Description

This report is based on the following requirement -
Part A – Suppose you are a Chief Financial Officer (CFO) of a UK based company. You have been requested to provide a short briefing report to the other directors of your business with respect to raising an additional £500m of funding to enable the next stage of development of the business to be carried out. Assume that all avenues of funding are available to the business, which is currently a listed company with 100 million shares and current market price of £10 per share.
Note:
For the report in Part A, it should critically review the advantages and disadvantages of the main funding options. Especially, it would be expected that this report would include the different options available through the equity and debt markets.
Part B– This additional funding will allow the business to become more global with the opportunity to develop a market in numerous countries with payment being made in the local currency. The directors are conservative in their attitude to risk. 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 the report in Part B, it should critically discuss and compare the use of financial derivatives including forwards, futures, options and swaps to manage Foreign Exchange (FX) Risk. Discussions may include:
 How it works in mitigating FX risk?
 Advantages and disadvantages of each type of derivative in managing FX risk?