Your aunt runs a very successful manufacturing company based in Ealing. In a timehonoured local tradition, the firm produces high-quality “London-yellow” bricks, sold nationwide in premium shops, aimed mostly at restoration and high-end residential building. The annual turnover of the company was GBP 5 million last year and your aunt expects a steady 5% growth from the UK sales, although her net profit margin is only 5%. Recently she participated in a trade-mission to South Asia and was surprised with a positive response of potential buyers interested in purchasing a “piece of Old Merry England”. After her trip she has already signed firm contracts which will double the turnover of the firm next year and she expects further orders which together will comprise 2/3 of the total firm’s turnover. The profitability of overseas orders is the same as the UK ones at the current spot exchange rate. All the costs of the company are in Sterling, while all overseas buyers insisted on signing contracts denominated in their local currencies: Indian rupee and Chinese yuan - she agreed. Whilst she has a strong managerial background in operational management and she is convinced that she will be able to expand operations to meet the new demand, she currently lacks the necessary financial knowledge with respect to foreign exchange and risk management. She hopes that you, as a UWL finance student, will be able to help her. The last finance course your aunt took was several years ago but she clearly remembers being taught that derivatives may play a role in managing her new foreign currency exposure. She read, however, that in 2002Warren Buffet in his report to Berkshire Hathaway shareholders wrote that “I view derivatives as time bombs, both for the parties that deal in them and the economic system… In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”. Your aunt wants you to write her a memorandum outlining how the derivatives would help her business to manage risks. Please prepare a memorandum to answer your aunt’s query. In particular, in very clearly separated sections, critically evaluate: 1. The key risks her business will face as a result of international expansion - 20 marks 2. Presentation of key derivatives she can use in managing the above risks - 20 marks 3. Critical analysis of Warren Buffet words and their applicability to this case