A Turkish company manufactures goods with heavily relying on imported direct materials, however it only sells in the domestic market. What are the financial risks for this company related with its operations? How can the managers hedge these financial risks and what are the expected costs of hedging? (25 pts)

The financial risk for this company related to managing of the operations are as follows-

A. Transaction risk of the company is one of the most important because this company is trying to to import higher amount of direct material and it will be having a risk related to increase in the payables in in foreign currencies so it will be having a risk related to increase in the value of foreign currency which will increase the value of payables.

This type of transaction risk can be hedged through forward contracts or it can also be through future contracts and option contracts in which the foreign currency in which the exposure of the company is there will be held with deposit contracts.

B. Lack of diversification because the company is only selling into the domestic country and it needs to diversify its overall selling portfolio in other currencies also so it is a risk related to the concentrated selling in the market.

C. Systematic risk associated with changing monetary policies and other fiscal policy in relation to both the countries because these risks are highly impacting the overall performance of the company and this can only be minimised through proper asset allocation.

D. Various types of operating exposure as well as economic exposure in relation to the cash flows payments are also impacting the overall business of the company

These ways can also be managed through proper forex contracts.