Question

2) What are the main financial risk management issues that Cathy and the rest of the management team at Kilgore need to focus on?

Answer 1

Cathy has identified a large number of issues at Kilgore. They are –

1. The potential profitability of the contract (between Kilgore and Japanese based manufacturing company) when embedded options were considered.

2. The potential for an inflation differential between Canada and the USA.

3. Products that can be used to limit the exchange rate risk

4. If the company should limit the full exposure

5. Identifying a person who takes up responsibilities and makes a decision

6. If the company should use exchange-traded products

7. On how to consider the embedded options in the contract

8. How to assess the effectiveness of hedging.