4）

Fluctuating exchange rates is a problem for trade-engaged businesses because it can

lead to unpredictable profit margins (Vohra and Fabozzi 2019). Corporations normally will use
derivatives techniques and instruments such as currency forwards, futures, options and swaps
to reduce the volatility of their earnings stream by hedging exposures to interest rate, exchange
rate and commodity price risks. Hedging with derivatives can transform financial risks by
essentially taking offset positions in the derivatives market and/or the spot market for the
purpose of shielding the revenue stream against adverse price movements.

Forwards are OTC future contracts, not standardised and created upon request by
customer. It showed to have almost the same properties of futures as it indicates the future
delivery of an underlying asset at an agreed price. Futures contracts are widely used to hedge
and speculate, both on financial and commodity markets. Notional value of future contract does
not represent the exposure of the two counterparts, as long as they settle their position each day
through margins(Tebogo 2012). Option contracts have the same effects of futures on markets.
The only drawback can be the unclear effect on volatility of the underlying, because futures
tend to lower underlying asset’s volatility, whereas option do not give unique empirical results.
Swaps are generally OTC contracts with a longer duration than futures and options, and satisfy
the need of a single client of the bank (a firm or financial institution). They tend to create new
investment opportunities in order to hedge against any type of risk such as currency, interest
rate, hearth-quake, credit default, and so on. In these contracts the notional value of the contract
do not represent the risk taken by the two (or more) counterparts, but periodical payments
(Muff 2008).

Based on the table 1 (Appendix1), it shows the summary of the use of currency
derivative determined by company size. The 1st quartile represents the smallest firms defined
by market value; the 4th quartile represents the largest firms. The table shown that the largest
firm was the highest firms that will use currency forward to hedge currency exposure while the
least derivative instruments used by largest company was currency option. However, in overall,
the currency forward contract was the derivative instrument that mostly used by the different
size of company to hedge currency exposure. Different technique was introduced different
impact on the company, it is important that the company should understand the feature of
different technique that suitable to hedge for the exposure. Apart from that, table 2(Appendix2)
shown the summary of currency derivatives used by different type of industry. Engineering
firms was the highest industry that using currency forward to hedge exposure. In overall, the
most common derivative instrument used by company was also currency forward. The oil and
extraction industry are the highest industry that using the swaps and option. As compare to the
result, most of the company will choose forward contract rather than other derivative
instruments such as option, futures and swaps to hedge the currency exposure because forward
contract is tailor-made, which do not have fixed term and condition on the contract and it has
greater flexibility than others.

5i) The 10 dealers that we can exchange currencies in the UK are Travelex, OFX company,
Currencies Direct, Moneycorp, International Currency Exchange, Currency Solution,
CityCurrencyExchange.com, Eurochange Ltd, Post Office Ltd and Kanoo Foreign Exchange
company. Based on the research, the 3 best deals were from OFX, Currency Solutions and
Currencies Direct, as offering better exchange rate which is DKK8.2700/£ and CHF1.227/£.
The 3 worst deals were from Travelex, Post Offices Ltd and Eurochange Ltd as exchange rate
were lower and incur higher transaction fees.

ii) Based on the quotation (Appendix3 and 4), it obviously shows that exchange rate offers
in whole sale market was better than retail market. The exchange amount was 2298.60 DKK
and 2,480.64 DKK respectively and the quotation for Pound and Swiss franc was 356.22 CHF
and 368.10 CHF respectively in retail and wholesale market. Apart from the exchange rate, the
reason wholesale market better than retail market is because the retail customers will be charge
in the form of commission as to cover the provider’s costs and to generate profit. In other words,
the higher prices exist because retailer has to mark up prices to cover the cost.

iii) The 10 dealers in Malaysia are BFC Exchange, My Money Master Sdn Bhd, UAE
Exchange, Metro Exchange, Antara Duit Agency Sdn Bhd, Jalinan Duta Sdn Bhd, M.H.Din
Sdn Bhd, Vital Rate Sdn Bhd, Max Money and NS Cashpoint Sdn Bhd.

Based on the research, the 3 best deals in Malaysia were M.H.Din Sdn Bhd, UAE Exchange
and Vital Rate Sdn Bhd (Appendix5). As compare to the dealer in UK, if exchange currencies
in Malaysia, it may incur higher transaction fees such as commission to be charge.
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[18 July 2019]

Appendix 4
Appendix 5