3. Case Debrief
• Barramundi Cycling Company
– Location: Berkeley, CA
– CEO: Adam Munguia
• Conditions
– Ensure 25% profit margin
– Provide Inventory for 10 Northern California stores
– 50% of payment due now
– Remaining 50% of payment due 60 days after delivery (October 1st)
• Service needed
– Foreign Exchange Advice between AUD/USD
– Hedge the risk for import payments
3
7. Comparison
Factors Indirect Guarantee Direct Guarantee
Costs &
Fees
• More expensive
• Fees would be charged
by BOW to client, taxes
• Less expensive
• No fees, no cost charged
to client from BOW
Importer’s
Risk
• More protection due to
guarantee received from
U.S. bank for the importer
• Risk is situational,
depends on stability of
foreign bank
8. Direct Guarantees
8
• Applicable to first 50% payment
• Ensures the buyer receives a refund if supplier fails to
deliver goods (bikes) to buyer
Advance
Payment
Guarantee
• Applicable to remaining 50% payment
• Ensures buyer receives a refund if the delivered goods do
not meet certain performance expectations
• Valid until 6 months after delivery date
• Recourse on faulty product or incorrect shipped inventory
Performance
Guarantee
10. Currency Hedging
10
Why Currency Hedging is important
• Increase certainty when determining returns of investment by mitigating the risk from
fluctuating rate changes
How It Works
• Forward Contract
• Allows purchaser to lock in an exchange rate to buy currency at future exercise date
• Most cost efficient and conservative way to hedge
• Simple and straightforward
• Low transaction cost
Recommendations
• Forward Contract
• Paying with AUD to maximize cost efficiency
12. Revolver
• A revolver is a line of credit that allows customer to use funds when needed.
Balance is carried from month to month.
• Example: Spend $1000, repay $300 and carry over to the next month a
balance of $700 plus interest. Next month spend $1000, repay $400, carry
over to the next month a balance of $1,300 plus interest.
• Bank of the West Revolver Product:
– Available up to $20,000,000
– Interest: 2% rate annually continuous compounded
12
13. 13
June 2nd
July
August
September
1st
October
3th
November
1st
December
1st
Note:
• The rate has taken into account the bank fee
• Details see the appendix
Pay required 50% of total
payment with the spot
rate of 0.723 on 6/2/2016
Pay remaining 50% of
total payment
Payment Scheme Option 1
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
14. 14
Note:
• The rate has taken into account the bank fee
• Details see the appendix
Pay required 50% of total
payment with the spot
rate of 0.723 on 6/2/2016
Pay 12.5% of total
payment
Pay remaining 37.5%
of total payment
Payment Scheme Option 2
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
15. Total Cost
15
• Option 1 offers total cost of $12,133,131;
• Option 2 offers total cost of $12,133,302, with a difference of $172
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
Inputs Date Market rate Bank Fee Actual Payment Rate
USD/AUD 06/02/2016 0.723 35 bps 0.7265
Date Amount Total Cost
Option 1 06/02/2016 USD 6,084,437.50
12/01/2016 USD 6,048,693 12,133,131$
Option 2 06/02/2016 USD 6,084,437.50
09/01/2016 USD 1,512,345
12/01/2016 USD 4,536,520 12,133,302$
Difference 172$
16. Why Payments on a Later Date Saves More Money
16
AUDUSD Historical Correlation with
1) U.S. economy presented by S&P 500 Index, U.S. Unemployment rate
2) Other major currencies (EURUSD)
US Unemployment
S&P 500
AUDUSD Moving Weighted Average
EURO Currency Trust
AUDUSD Historical Monthly Closed Rates (As of June 2nd, 2016)
18. Recommendation
• Use Forward Contract
• Taking into account all risk factors and their potential impact on your business, we
recommend Payment Scheme Option 1 because it minimizes client’s credit and total
payment exposures, especially when client hasn’t generated sales
• Direct Guarantees:
– Advanced Payment Guarantee
– Performance Guarantee
18
Pay required 50% of total
payment with spot rate of 0.723
on 6/2/2016
Pay remaining 50% of
total payment at the
rate of 0.718814
Exercise date 09/01/2016 10/03/2016 11/01/2016 12/01/2016
Forward Period 3M 4M 5M 6M
Forward Rate 0.718732 0.720089 0.719442 0.718814
19. Pricing
• Target: 25% Profit Margin
• Cost per bike unit takes into account the best payment scheme (Option 1)
– With a total payment of USD12,133,131
• The gross profit margin aligns with the average margin sales on bikes among U.S. bike
dealers from the National Bicycle Dealers Association (NBDA)
• Total cost includes operating costs, depreciation and amortization and tax (10% of
taxable income)
• Estimated profit margin for each type of bicycle roughly exceeds the 25% target
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per unit R100 R200 R500 R1000
Revenues/ sales price 949.00$ 1,549.00$ 2,749.00$ 9,049.00$
COGS/ Cost per unit 542$ 903$ 1,625$ 5,417$
Gross Profits 407.33$ 646.21$ 1,123.98$ 3,632.26$
Gross Profits Margin 43% 42% 41% 40%
Total Cost (Inc. Tax) 140.42$ 210.55$ 350.82$ 1,087.23$
Profit 266.91$ 435.66$ 773.16$ 2,545.03$
Profit Margin 28% 28% 28% 28%
20. Resources/References Used
20
Online Sources
Investopedia http://www.investopedia.com/terms/c/currencyforward.asp
XE http://www.xe.com/currency/aud-australian-dollar
Dailyfx https://www.dailyfx.com/aud-usd
Yelp https://www.yelp.com
City of Berkeley http://berkeley.cityapplications.com
National Bicycle Dealers Association http://nbda.com/
External Sources
Adam Munguia
Aditya Prakash
Andres Bergero
Ian Broff (SF office)
Ritwik Roy
