Scenario C. Engaging In International Business

Scenario C. Engaging In International Business
Scenario C
Engaging in international business provides many benefits, but also increases complications. One of
the most arduous complications is addressing additional regulations set forth by both domestic and
international regulatory bodies. By engaging in international business, businesses headquartered in
the United States with subsidiaries abroad must provide financial statements of all foreign
operations restated in the U.S. Dollar. Depending on the functional currency of the subsidiary,
financial statements must be translated into U.S. Dollar pursuant to either the Current Rate method,
or the Temporal method. As explained by The Utes' executive team, the functional currency of UDC
is the U.S. Dollar, requiring The Utes to restate UDC ... Show more content on Helpwriting.net ...
After calculating Net Income, I was able to calculate the proper Retained Earnings value for year–3,
and then confirm that the value put the balance sheet in equilibrium. The Temporal translation
method requires certain assets and liabilities to be translated at the current exchange rate, and others
at the historical exchange rate. Those that are translated at the current exchange rate will have values
that change as a function of the current exchange rate. These items are exposed to translation
adjustments, and alter UDC's balance sheet exposure every reporting period. UDC had a total
monetary asset value of $6,611,688; and a total monetary liability value of $3,894,188; thus,
resulting in a net monetary asset position of $3,894,188, meaning UDC was net asset exposed at
EOY 3. When net asset exposure is coupled with foreign currency appreciation, the result is a
remeasurement gain. UDC experienced a remeasurement gain of $918,839, which constitutes
23.85% of net income for the year. As observed, net income can be largely affected by
remeasurement gains and losses. Translation adjustments aren't realized through inflows or outflows
of cash; however, they can be particularly alarming to investors who focus on earnings–per–share,
price–earnings, or other accounting ratios.
Despite the fact UDC experienced a remeasurement gain for the year, a remeasurement loss was
equally
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Operating Exposure
Xian– Janssen Pharmaceutical (China) and the Euro
INTERNATIONAL FINANCIAL MANAGEMENT
Case Questions and Answers 1. How significant an impact do foreign exchange gains and losses
have on corporate performance at XJP? What is your opinion of how they structure and manage
their currency exposures?
During 2003, the dramatic raise in the value of Euro against the dollar resulted in foreign exchange
losses of Rmb 75 billion, out of which Rmb 60 billion were charged as 2003 cost of hedging. The
year of 2003 proved to be fortunate for the XJP Company, housing fund adjustment and inventory
valuation reversal recorded extraordinary gains of Rmb 70 billion. These gains had lessened the
negative influence of the foreign exchange losses on ... Show more content on Helpwriting.net ...
However, as the actual average forward rate of the euro reached 10.5, the company's actual cost of
imports recorded Rmb 1.5246 billion, resulting in Rmb 101.64 million losses due to cost of hedging.
Analyzing the effect of the exchange rate movement and cost of hedging on the financial figures of
XJP, J&J underestimated the significant role played by exchange rate movement and cost of hedging
on the gross cost of product sold of its subsidiary. It's obvious that the parent company had set the
objective of 20% growth in earning without considering the high cost of hedging and foreign
exchange losses. 4. If you were Paul Young, what would you do?
The answer to this question depends on whether Paul wants to tradeoff risk for return, in other
words, it depends on whether he is concerned about meeting J&J's objective of achieving 20%
growth rate.
If he decided to fulfill the J&J's objected growth rate, then he is advised not to hedge against foreign
exchange movements. Under this situation, he will expose the company to a greater currency risk,
while at the same time, he would be able to meet and fulfill the required growth rate by the parent
company.
On the other hand, if Paul decided to hedge XJP's position and its gross cost of goods sold against
currency

Factors Affecting Firm 's Foreign Exchange Risk Hedging...
Factors Affecting Firm's Foreign Exchange Risk Hedging Policy Abstract Mostly foreign currency
derivatives are used for hedging foreign exchange rate risk caused by exchange rate adverse
fluctuation. This study is aimed to determine different factors that affect the foreign currency
derivatives usage. Secondary data of 112 non financial firms, taken from their annual reports and
balance sheet analysis issued by State Bank of Pakistan, is used for analysis for the period 2008 to
2013. Mann Whitney U test was used to check differences in characteristics of foreign currency
derivatives users and non–users. Results show that users of the foreign currency were categorized as
to be those firms having higher liquidity, lower growth options, larger in size, lower leverage, higher
managerial ownership, lower profitability and higher foreign exposure as compared to the non users
of foreign currency derivatives. Logit regression model was used to investigate different factors
affecting firm's derivatives usage for hedging its foreign exchange risk. Results of the logit model
illustrate that there is significantly positive relationship between firm size, liquidity, foreign
exposure and managerial ownership. The results also show that corporations with higher liquidity,
larger size, and larger managerial ownership are more likely to use foreign currency derivatives
usage for hedging. Further results illustrate negative significant relationship between growth
opportunities, leverage

Hedging at General Motors Essay
Executive Summary Being one of the largest automakers in the world, General Motors (GM)
undertakes its manufacturing operations in over 30 countries with vehicles being sold in over 200
countries. Through undertaking its international operations it also subjects itself to various types of
foreign exchange exposures due to fluctuations in the values of currencies; to manage this problem
it has adopted a passive hedging policy and aims to reduce the impact of foreign exchange
exposures on the business. The first part of this report outlines the various types of foreign exchange
exposures that GM can subject itself to and also outlines what methods can be used to reduce the
risk associated with changes in the value of currencies; the ... Show more content on
Helpwriting.net ...
Using Financial Instruments to Hedge Hedging through the use of financial instruments is whereby
instruments such as forwards, options and money markets are used to manage the risk of foreign
exchange exposure. Forward Hedges are where a contractual obligation exists regarding the buying
or selling of a currency at a specified fixed future rate on a specified future date. It requires a source
of funds (Eiteman, Stonehill and Moffett, 2010). Option Hedges are a right not an obligation to buy
or sell a specified currency at a specific rate on a specified future date. It allows for speculation on
the upside while still limiting the loss (Eiteman, Stonehill and Moffett, 2010). Money Market
Hedges is another method, this contract is a loan agreement whereby a firm borrows in one currency
and exchanges the proceeds in another currency (Eiteman, Stonehill and Moffett, 2010). Natural
Hedging This type of hedging is whereby foreign exchange exposures in outflows of cash are offset
by inflows of cash through matching of transactions (i.e. Revenues and Expenses). Natural hedging
focuses on operating cash flows; for example a receivable is offset by a payable in the same
currency without the use of financial instruments, this however requires consideration of
synchronising values of the cash flow and timing of the cash flows (Eiteman, Stonehill and Moffett,
2010). Strategic Decision making by MNE's There are various factors

Foreign Exchange Hedging Strategies at General Motors:...
Introduction
General Motors was the world's largest automaker and, since 1931, the world's sales leader. In 2001,
GM had unit sales of 8.5 million vehicles and a 15.1% worldwide market share. Founded in 1908,
GM had manufacturing operations in more than 30 countries, and its vehicles were sold in
approximately 200 countries. In 2000, it generated earnings of $4.4 billion on sales of $184.6
billion. The company is trying to accurately calculate the risk of a potential devaluation to the ARS.
In doing so the company had to decide between two options on how to proceed; was it worth the
costs to increase the size of GM's hedge position beyond the standard policy or should GM
Argentina rely on other approaches to cope with the expected ... Show more content on
Helpwriting.net ...
Usually, the most common risk management strategies can be subdivided into multi–stage approach
in order to obtain a better impression of the underlying risks and thus to increase the probability of
mitigating the firm's risks properly and successfully. Also General Motors Corporation has
developed various rules and guidelines to help manage minimize the risks associated with their
business and investment operations.
The first stage in defining a risk management strategy includes the formulation of superior
objectives as basis for the firm's foreign exchange risk management policy. Only with respect to
these objectives embedded in the firm's risk management strategy can an appropriate policy in
managing foreign currency risks be developed. For instance, GM Corporation has identified three
primary objectives which should be met by the foreign exchange risk management policy to ensure
the ongoing business results. 1) Reduce the volatility of cash flows and earnings in foreign
currencies 2) Minimize the cost associated with the foreign exchange risk management strategy, i.e.
the management and hedging costs 3) Align foreign exchange management in a manner consistent
how GM Corporation operates its automotive business
According to these it can be concluded that GM Corporation's risk management policy is based on a
mostly passive hedging strategy. In general, passive hedging is used by highly risk–averse
companies that

Hedging Currency Risk at TT Textiles
rP os t Indian School of Business ISB009 February 15, 2013 Rajesh Chakrabarti op yo Hedging
Currency Risk at TT Textiles It was a hot March morning in Kolkata in the year 2009. Sanjay K.
Jain, –Joint Managing Director of TT Textiles, watched the sunlight stream in through his office
windowpane. But his mind was elsewhere, tracking the movements of the Swiss franc (CHF) in the
last few months and the world events that had caused them. The Swiss franc had touched 1.17
CHF/US$ from the previous year's record of 0.96CHF/US$. That was good news for him. Or was
it? The irony of the situation was not lost on him. Once, the Swiss had franc barely figured among
all the different currencies that vied for his attention in the normal course of ... Show more content
on Helpwriting.net ...
Approximately 75 per cent of TT Textiles' revenues came from exports, and at any particular point
of time, the company had an exposure of roughly US$25 million. The life of a typical export
transaction in the industry  particularly of the kind that TT was party to  was less than three
months. TT Textiles enjoyed a margin of five to six per cent in its business. RISE OF CURRENCY
DERIVATIVE PRODUCTS IN INDIA Do Currency derivative products were relatively new
entrants in India. Most Indian companies depended on their banks to hedge currency exposures. In a
2009 newspaper article, Ramesh Kumar, Senior Vice President and Head, Debt and Currency
Markets of Asit C. Mehta, explained: 2 Implicit in the figures above is an assumption of a CAGR of
eight per cent for textile exports and 10 per cent for textile domestic demand. 2| Hedging Currency
Risk at TT Textiles This document is authorized for use only by Christopher Alt at Clark University
until July 2014. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860. rP os t ISB009 Historically, in a controlled environment, India Inc. relied on
banks for covering its foreign exchange requirements. ... Some of the companies trade actively in
foreign exchange and have a separate treasury management unit for foreign exchange transactions.
However, there are also large numbers of small and medium enterprises which participate in the
currency market passively and depend

Hedging Essay
What is hedging? Hedging is a strategy used to protect risks posed by worldwide currency
fluctuations. One hedges the currency risk by contracting to sell foreign currency in the future, at the
current exchange rate (Fries). If fund managers think the dollar is going to be stronger when they are
ready to change the foreign currency back into American dollars, then they take out a foreign futures
contract (a hedge). Thus, they lock in the exchange rate beforehand, so that they will not lose profits
gained from holding devalued foreign currency (Hedging, 1999). If the manager guesses correctly,
he will boost the fund's overall return because the profits will be worth even more when they are
exchanged into American dollars.
The foreign ... Show more content on Helpwriting.net ...
Selling in foreign currency implies that some time period before a contract is agreed upon, there will
be a quoted price for the goods using an exchange rate that appears appropriate (Gray, 1999).
However, economic events have a habit of upsetting even the best–laid plans. Therefore, one may
want to have a strategy for dealing with exchange rate risks.
The globalization of goods and services has increased rapidly during the last few years. This
challenge offers a great deal of opportunities for multinational corporations, but there is a lot of risk
involved. In order to decrease the risk in multinational operations, companies can be involved in the
process of hedging. The major purpose of hedging is to establish a future price today. Some of the
tools available to corporations that want to use hedging are futures–contracts, forwards–contracts
and currency options (Kaeppliner, 1990). A bank will be able to give advice on the best means of
hedging foreign currency risk, such as futures–contracts.
Futures–contracts are a standardized commitment that describes the key features of a transaction:
· The quantity and quality of the commodity being exchanged
· The date on which the exchange is to take place
· The method of delivery
· The price at which the commodity will be purchased (Hedging, 1999).
Foreign currency bank accounts and foreign currency

Managing Currency Risk with Financial and Operational...
Introduction Overview of the hedging techniques In the financial market, almost all of companies
need to face the currency risk. In order to manage the currency risk, companies will use different
hedging techniques, such as financial and operational hedging techniques. For example, money
market, futures contracts, options and forwards contracts are commonly used by firms, as well as
operational hedging techniques. All of 4 types of financial hedging techniques are short–term hedge.
Money market is a part of financial markets for assets involved in short–term borrowing,lending,
buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts
are future transaction for buying or selling, and made ... Show more content on Helpwriting.net ...
Telefnica, a Spanish telecommunication company, faced the exchange rate risk. Foreign currency
risk primarily show up in connection with1. The international presence of Telefnica, and the
investment and businesses in other countries, such as Latin America, use other currencies, not the
euro. 2. Liabilities denominated in currencies are different with its own country, and this debt is not
likely to be conducted. At the same time, the thing of depreciation in foreign currencies relative to
euro, and the value of cash flow has a loss in such currencies. However, this loss is offset by the
reduction in the euro value of liabilities denominated. The level of exchange rate hedging was
changed by the type of investment. In 2011, Telefnicas net debt was equivalent to about 7,953m
euro in Latin America(Telefnica 2011). However, its currencies in which this debt is denominated is
merged in percentage to the cash flow of each currency. the above hedge of exchange rate risks
whether effective or not relies on which currencies depreciate relative to euro. In order to avoid
decrease of the Latin America currencies relative to the euro, Telefnica group use the dollar–
denominated debt. For instance, in spain, this is linked to an investment when it is suggested to be
an effective hedge or in its own country. Meanwhile, the remaining exchange rate exposure on the
income statement will be limited by the Telefnica Group to manage the exchange rate

Ontario Teacher's Pension Plan
Ontario Teacher's Pension Plan Board: Hedging Foreign Currency Exposure Ontario Teacher's
Pension Plan Board: Hedging Foreign Currency Exposure Issue Identification The Ontario Teacher's
Pension Plan (OTPP) is a defined contribution plan that was created in 1917 to provide and
administer a pension plan for Ontario school teachers. Sponsored by the Ontario Government and
the Ontario Teacher's Federation, the plan currently supports 343,000 teachers, former teachers and
pensioners. The recent government decision to eliminate the 30% constraint on foreign investments
and the increased volatility in the currency market has prompted the OTPP Investment Committee
to address the following: 1. Whether to continue the International ... Show more content on
Helpwriting.net ...
Maintain/Revise FX Hedge Policy The current 50% hedging policy executed at the fund level has
served well for OTPP for the past ten years, contributing to the fund's positive returns. The FX
Hedge Program not only has minimized the downside risk, but has also limited the upside potential.
If OTPP decided not to implement a hedging program in 1996, they would have lost about $983
million CAD over the ten year period (1995–2005) which is valued at 2% of the portfolio. With the
hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also
limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short–term
risk minimizing strategy for long term investors, sustaining a continual payout of pensions during
volatile times in OTPP's invested currency markets. Currently, approximately 21% of OTPP's net
assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk
management program of hedging, as slight currency fluctuations can significantly affect the value of
the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk
management strategy. Decision/Recommendations Based on the thorough analysis completed on the
possible actions the Investment Committee could pursue, it is recommended that the International
Equity Swap Program remain in place and the Foreign Exchange Hedging Policy be

Hedging Currency Risk at Aifs
Summary
AIFS is an American based company that offers travel abroad and exchange study services to both
college and high school students. While AIFS's revenues are denominated in American Dollars
(USD), most of their costs are in foreign currencies as Euros (EUR) and British Pounds (GBP).
Consequently, foreign exchange hedging has a crucial importance for the company because it
provides protection against different types of risk that derive from its activity.
In order to reduce risk, the company is using two hedging derivatives: forward contracts and put
options to sell dollars. The aim of the paper is to determine an appropriate hedging policy which
answers two main questions: how much to hedge, and in what proportions of forwards ... Show
more content on Helpwriting.net ...
Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we
analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR),
stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with
hedging was also introduced in the analysis. The three main policies are of not hedging, 100%
hedging with forward contracts and 100% hedging with options.
All the future computations are in comparison with the "impact zero" scenario of a rate of USD
1,22/EUR and a volume of 25 000 sales. (Exhibit 2)
If the company chooses not to hedge the costs, and the dollar weakens against the euro reaching a
rate of USD 1,48/EUR, then it will encounter losses of $6,500,000 (Exhibit 1). On the other hand, if
the dollar strengthens to the level of USD 1,01/EUR, then the company will register a gain of
$5,250,000. (Exhibit 3)
But, even though the possibility of winning exists, the company is exposed to a greater risk if it does
not hedge. Moreover, the policy of the company is to ensure against the risk, not to speculate on the
foreign exchange market.
Exhibit 7 from the case study describes the currency development in medium term of the GBP and
EURO against the dollar. We can observe that the currencies are exposed to high volatility, which
means the company may register greater risk

Conventional Hedging Currency : A Conventional Currency
A conventional pegged currency is one in which a country decided to have an exchange rate that is
set and not able to fluctuate freely with the market forces. They set their currency by pegging their
exchange rate to another countries currency or a basket of currencies, where a basket is made up of
the countries major trading partners and weighted by geographical distribution of trade, services or
capital flows. In the past countries have also pegged their currency to another measure of value such
as the price of gold. A pegged currency does not have to maintain absolute parity and the exchange
rate is generally allowed to fluctuate within a 1% range, or the max and min values for the exchange
rate stay within a 2% range over a 3–month period.
The countries central bank maintains a fixed parity through direct intervention in the foreign
exchange markets, for this reason the central bank must hold large reserves of foreign currency so as
to mitigate the changes in supply and demand of their currency. If demand for a currency were to
increase the exchange the central bank would have to sell enough of that currency in exchange for
their own, to meet demand and maintain the exchange rate. A countries central bank is also able to
maintain their exchange rate peg indirectly through the use of interest rate policy, imposition of
foreign exchange regulations or intervention by other public institutions.
Using a conventional peg system does have advantage and disadvantages
It

Currency Hedging
What is hedging? Hedging is a strategy used to protect risks posed by worldwide currency
fluctuations. One hedges the currency risk by contracting to sell foreign currency in the future, at the
current exchange rate (Fries). If fund managers think the dollar is going to be stronger when they are
ready to change the foreign currency back into American dollars, then they take out a foreign futures
contract (a hedge). Thus, they lock in the exchange rate beforehand, so that they will not lose profits
gained from holding devalued foreign currency (Hedging, 1999). If the manager guesses correctly,
he will boost the fund 's overall return because the profits will be worth even more when they are
exchanged into American dollars.
The foreign ... Show more content on Helpwriting.net ...
For example, if one expects to receive payment in foreign currency in three months time, one could
buy an option to convert into American currency in three to four months. Options can be more
expensive than a forward contract. However, if the currency movement is in the buyer or sellers
favor, they may not need to use an option. If awarded a contract, there will be no reason to be
satisfied, if you are obligated to contract at a loss, because the exchange rate has moved. You could
price a margin or an option into the bid; however, this may mean you are uncompetitive.
There is a risk that a business ' operations or an investment 's value will be affected by changes in
exchange rates. For example, if money must be concerted into a different currency to make a certain
investment, changes in the value of the currency relative to the American dollar will affect the total
loss or gain on the investment when the money is converted back. This risk usually affects
businesses, but it can also affect individual investors who make international investments, also
called currency risk (Investorworld). References
http://www.investorwords.com/1808/exchange_rate_risk.html retrieved February
27, 2005
Fries, Bill. Thornburg Articles. Currency Hedging retrieved February 24, 2005 from
http://www.thornburginvestments.com/research/articles/Currency%20Hedging.asp Gray, Phil and
Irwin, Tim. (2003). Allocating Exchange Rate Risk in

Hedging Currency Risks at AIFS
AFM 322 Hedging Currency Risk at AIFS 1. Case Synopsis Christopher Archer–Lock and Becky
Tabaczynski both work for American Institute for Foreign Study ("AIFS"). Archer–Lock is the
controller of AIFS and Tabaczynski is the CFO of AIFS's high school travel division ACIS. AIFS a
student exchange organization that organizes educational and cultural exchange programs
throughout the world. Founded in the U.S. in 1964, AIFS has annual revenues of close to $200
million and sent more than 50,000 students on their programs each year. AIFS has two major
divisions, the Study Abroad College division, which sends college–age students to universities
worldwide for semester–long programs, and the High School Travel division, which organizes one
to four ... Show more content on Helpwriting.net ...
The downside of using only forwards is that AIFS will not be able to experience any gains if the
U.S. dollar strengthens. If Archer–Lock and Tabaczynski completely hedged with options, they
would be able to get rid of their downside currency risk and still experience some of the upside
gains if the U.S. dollar strengthens, but they must pay the option premiums of $1,525,000. As shown
in Appendix A, If the U.S. dollar strengthens and the exchange rate was 1.01 USD/EUR, AIFS
would positively impacted by $3,725,000. This is not as much gain as AIFS would have gotten if
they has not hedged at all because they needed to pay the option premiums. If the U.S. dollar was
stable and the exchange rate stayed at 1.22 USD/EUR, AIFS would be negatively impacted by
$1,525,000 because no matter what happens, they would still have to pay the option premiums.
Lastly, if the U.S. dollar was weak and the exchange rate was 1.48 USD/EUR, AIFS would again be
negatively impacted by $1,525,000. In this situation, AIFS would be protected from the full loss of
the weakening dollar, but they again they would still need to pay the option premiums. The analysis
in Appendix A assumes that the sales volume will be the same as the predicted 25,000 amounts.
However, there is a risk that the volume of sales may fluctuate. If we compare Appendix B, which
analyses the situation where

Currency Hedging at Aifs
––––––––––––––––––––––––––––––––––––––––––––––––– Q1. What gives rise to the currency
exposure at AIFS? * Currency exposure is the extent to which the future cash flows of an enterprise,
arising from domestic and foreign currency denominated transactions involving assets and
liabilities, and generating revenues and expenses, are susceptible to variations in foreign currency
exchange rates. * AIFS organizes educational and cultural exchange programs throughout the world.
AIFS receives most of its currencies in American dollars (USD but it incurs costs in other currencies
mainly in Euros (EUR) and Pounds (GBP). * AIFS hedged its future cost commitments up to 2
years in advance. The problem was that the hedge had to be put ... Show more content on
Helpwriting.net ...
But for currency rate $1.22 & $1.44, it's a loss & there is risk. * Refer sheet "100%
Options" of the attached excel. It shows the Cost that would be incurred with 100% hedge using
Options for different scenarios. When currency rate is $1.01, the actual cost incurred is less than the
forecasted total cost. Hence, there is a gain for AIFS. When currency rate is $1.22, the actual cost
incurred is same as the forecasted total cost. Hence, there is no gain or loss for AIFS. But for
currency rate $1.44, it's a loss & there is risk.
––––––––––––––––––––––––––––––––––––––––––––––––– Q4. What happens if sales volumes
are lower or higher than expected as outlined at the end of the case? * Refer sheet "10000 Sales" for
cost incurred and Gain/loss for AIFS for different scenarios and actual sales volume of 10000. *
Refer sheet "25000 Sales" for cost incurred and Gain/loss for AIFS for different scenarios and actual
sales volume of 25000. * Refer sheet "30000 Sales" for cost incurred and Gain/loss for AIFS for
different scenarios and actual sales volume of 30000. * There will be 4 outcomes with the 'in the
money' and 'out of money' positions and high and low sales volume (30000 or 10000). * Square 1
shows low sales volume (10000) with strong USD that when the company is out of money
(1.01USD/EUR). AIFS has an excess of currency. In this case, if it locked into surplus forward
contracts then it would lose money. So the option

Foreign Exchange Hedging Strategy at General Motors...
Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposure
Problem Statement In September of 2001 General Motors (GM) was faced with a billion dollar
exposure to the Canadian dollar. At the time, North America represented approximately three–
quarters of GM's total sales and this large exposure to the CAD could significantly affect GM's
financial results. GM had a passive strategy of hedging 50% of its exposure; this paper explores the
impact of hedging 75% of the exposure. Additionally, GM faced a unique problem in Argentina,
which was at risk of defaulting on its international loans. A default would also cause the Argentine
Peso to be devalued from 1 peso to 1 dollar to 2 pesos to 1 ... Show more content on Helpwriting.net
...
2. To minimize the management time and costs dedicated to global foreign exchange management
Foreign exchange management could take hours and hours of management time in order to create an
effective policy, and can also be seen as a time waster. GM is trying to reduce the amount of time
and money it spends in this area by employing a passive foreign exchange strategy. GM conducted
an internal study that determined that the investment of resources in an active foreign exchange
management scenario did not result in any remarkable outperformance of passive targets from years
past. 3. To align foreign exchange management with the firm's core automotive business Tailgating
on their second objective, GMs foreign exchange management has adopted a passive policy, which
states that they will hedge 50% of all significant foreign exchange commercial exposures on a
regional level. This includes GM operations in North America, Europe, Asian Pacific, Latina
America, Africa, and the Middle East. Each of these regions has a treasury center that is required to
use particular derivative instruments over a specified time allotment. The guidelines for this policy
are laid out as follows: ...forward contract to hedge 50% of the exposures for months one through
six and options to hedge 50% of the exposures for months seven through twelve. In general, at least
25% of the combined hedge on a particular currency is to be held in options in order to assure
flexibility...

Carrefour
Carrefour
FIN4812
International Finance
Case Analysis
CARREFOUR S.A
This report is created with a discussion over several important international finance topics for
instance, interest–rate parity, currency risk management, regarding description on Carrefour S.A.
financing policies as well as hedging strategy. Additionally, we also discussed on which currency
Carrefour should issue its 10–year, 750 million euro, annual coupon bond, its foreign currency risk
exposure and a possible hedging decision in dealing with any or all of the identified risks.
Summary of the Case Study
This case is related to Carrefour S.A. planning to finance its growth by issuing debt securities and
considering borrowing in British sterling in order ... Show more content on Helpwriting.net ...
Hedging can be done in several ways, for instance engage in money market and a call/put option. |
France | U.K. | Switzerland | U.S. | Spot rate –Foreign /Euro as of 7/31/2002 | 1.000 | 0.628 | 1.453 |
0.980 | Coupon Rate | 5.25% | 5.375% | 3.625% | 5.5% | Risk–free rate – 10 years | 5.087% | 3.499%
| 5.413% | 5.413% | Annual Inflation Rate – 2002 | 2.5% | 3.0% | 1.8% | 1.8% |
Back to the case, the coupon rate of Swiss Franc is much lower than other currencies. But it is not
the standard of evaluating which currency should be borrowed. We will use forward rates computed
from the parity to evaluate the borrowing cost of each currency and the currency has the lowest cost
should be chosen. The basic known information is listed as following:
Besides the lowest coupon rate in Switzerland, we further calculate the bond repayment in
determining which currency Carrefour better choose to issue its 10–year bond. Given all the data in
which we will use it as out inputs in this case, using Excel to calculate the bond repayment and total
interest rate over 10 years period.
| Home | Foreign | Interest rates differential | Euro | 3.625% | 5.250% | –1.625% | Pound | 5.625% |
5.250% | 0.375% | Swiss Franc | 5.500% | 5.250% | 0.250% | USD | 5.250% | 5.250% | 0.000% |
For Swiss franc the coupon rate is the lowest this can be another prove the benefits from low cost
borrowings Swiss Franc is the best alternatives.

We go ahead and calculate the

Pdf, Doc
South–Eastern Europe Journal of Economics 2 (2006) 129–146
EXCHANGE RATE RISK MEASUREMENT AND MANAGEMENT:
ISSUES AND APPROACHES FOR FIRMS
MICHAEL G. PAPAIOANNOU, Ph.D.
International Monetary Fund
Abstract
Measuring and managing exchange rate risk exposure is important for reducing a firm's
vulnerabilities from major exchange rate movements, which could adversely affect profit margins
and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms,
namely transaction, translation and economic risks, presents the VaR approach as the currently
predominant method of measuring a firm's exchange rate risk exposure, and examines the main
advantages and disadvantages of various exchange rate risk ... Show more content on
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The organization of the paper is as follows: In section I, we present a broad definition and the main
types of exchange rate risk. In section II, we outline the main measurement approach to exchange
rate risk (VaR). In section III, we review the main elements of exchange rate risk management,
including hedging strategies, hedging benchmarks and performance, and best practices for
managing currency risk. In section IV, we offer an overview of the main hedging instruments in the
OTC and exchange–traded markets. In section V, we provide data on the use of various derivatives
instruments and hedging practices by US firms. In section VI, we conclude by offering some general
remarks on the need for hedging operations based on recent currency–crisis experiences.
M. PAPAIOANNOU, South–Eastern Europe Journal of Economics 2 (2006) 129–146
131
1. Definition and types of exchange rate risk
A common definition of exchange rate risk relates to the effect of unexpected exchange rate changes
on the value of the firm (Madura, 1989). In particular, it is defined as the possible direct loss (as a
result of an unhedged exposure) or indirect loss in the firm's cash flows, assets and liabilities, net
profit and, in turn, its stock market value from an exchange rate move. To manage the exchange rate
risk inherent in every multinational firm's operations, a firm needs to determine the specific type of
current risk exposure, the hedging strategy

Cash Flow Hedging
I (briefly) worked for a notorious figure in the FX industry whose favorite dictum was: "That which
gets measured gets made." Trite but true; well–thought–out performance metrics are critical in
optimizing results and there is plenty of anecdotal evidence showing how various failures in the
workplace can be traced back to poorly constructed or out–of–date practices.
Shareholders certainly have common ways of measuring the performance of publicly–owned
companies: quarterly earnings, revenues, and expenses among others. Given the international nature
of most businesses, foreign exchange can obviously have a significant impact on results, and yet
these FX impacts are often poorly understood, both inside and outside the company.
Many ... Show more content on Helpwriting.net ...
For this reason, the gains or losses from the cash flow hedges are more likely to be allocated to the
various businesses and regions within the company, and therefore the need to understand the
impacts goes well beyond the Treasury team. Since these hedging impacts often show up on the
revenue and expense lines of the income statement, they become important for investors to
understand as well.
When done well, the financial, strategic, and operational benefits of hedging can go beyond merely
avoiding financial distress by opening up options to preserve and create value. But done poorly, FX
hedging can overwhelm the logic behind it and can actually destroy more value than was originally
at risk. Perhaps individual business units hedge opposite sides of the same risk, or managers expend
too much effort hedging risks that are immaterial to a company's health. Managers can also
underestimate the full costs of hedging or overlook natural hedges, instead applying costly financial
ones. Nevertheless, a few simple pointers can help avoid problems and make hedging strategies
more effective.
Good information leads to better decisions
A corporation's value is based on the size and stability of future cash flows. Reducing earnings
volatility

The Modern Day Financial Instruments Involving Option...
Risk Management involving the commodities market has always been a concern for several
international companies. The best substantial method to cope with currency risk is using currency
derivatives. Many countries are interdependent on each other due to Globalization, which has led to
increasing exposure to exchange rate volatility. Recent studies have shown that risk cannot be
eliminated completely but it can be minimized when companies make decisions, which are backed
by the correct risk management policies. We found out in this paper that there is no single best
method to manage currency risk, but hedging using options provides us with the most accurate or
profitable outcomes.
In this paper we will try to study the modern day financial ... Show more content on Helpwriting.net
...
Various companies including insurers and banks were exposed to high risk in terms of rate of
interest, exchange rates and price of commodities and raw materials. Derivatives then became
increasingly popular to minimize the risk of volatility in the market.
Financial derivatives are basically contracts between two parties under which they agree to
exchange a commodity on a certain date. In simple words derivatives are insurance policies used by
a company to minimize its exposure to volatility.
It was found out that during the period of 1975 to 2009 the volatility in foreign investments was
reduced due to currency hedging. In this paper we talk about the various currency options, which are
used by various corporations and banks for hedging. We use the example of crude oil to better
understand the concept.
The various types of currency derivatives are– futures, options, currency swaps and forwards. There
are three types of exchange rate risks– translation, transaction and economic exposure.
Globalization has made the world a smaller place and the exposure to overseas markets is
increasing. In order to last long this competitive environment the companies have to focus on all the
aspects to make the maximum profits, which makes it essential for them to manage risk in exchange
rate. The graph below shows the volatility of the GBP as compared to INR.
LITERATURE REVIEW
The academic literature offers varied suggestions

Aifs Case Study
This case shows us the problems faced by AIFS due to the fact that it receives most of its revenues
in US–Dollars but with its costs incurred in foreign currencies (Euros and Pounds). AIFS uses
currency hedging to protect their bottom line and to cope with changes in exchange rates which can
increase cost base and also purchase foreign currency based on projected sales volume because they
don't know what future sales volume will be.
In the event of the above risks, Tabaczynski considers three alternative strategies with diiferent
exchange levels with the price of each hedging strategy incorporated in the calculations.
The AIFS is a company that organises educational and cultural exchange programs for students. It
receives most ... Show more content on Helpwriting.net ...
Mr. Archer–Lock visualized this „dilemma" in a two–by–two–matrix that shows three more or less
critical scenarios. Starting from this insights Mrs. Tabaczynski developed a spreadsheet which
should enable them to optimize their hedging strategies – more or less forwards or options
respectivly the quota of hedging at all – by executing multiple sensitivity analysis on the key
variables sales and exchange rates at different proportions of contracts (forwards) and options as
well as different hedging ratios (0%, 25%, 50%, 75% and 100%). This tool doesn 't solve the risks
totally, but seems to help choosing the right hedging strategy.
The ultimate success of AIFS hedging activities depend on the final sales volume and the ultimate
market value of the USD. Therefore a model which brought the actual sales volume compared to the
projected sales volume in correlation to the exchange rate was created. The idea is to find the right
balance concerning the amount of currency to be hedged, the way hedging was done (contracts or
options) was done in detail and the estimation of the sales volume never leaving out of consideration
whether the USD value might rise or fall.
Finally a spreadsheet was developed in order to find out how much of the volume should be covered
in total and what is the right proportion in between the more flexible short term, but more expensive
options and the more long term, but

A report on the hedging strategy of CITIC Pacific Limited
IntroductionThis report is to check the hedging strategy that was used and lead to the huge loss of
CITIC Pacific Limited and point out the importance of managing foreign exchange exposure
through select appropriate hedging strategies. The huge loss of CITIC Pacific Limited and its cause
is discussed in the first part. The importance of hedging and the tools of hedging are respectively
reviewed in part two and part three. Finally, suggestions are given out on how to design proper
hedging strategies for different enterprises. The huge loss of CITIC Pacific LimitedOn October
2008 21st, shares in CITIC Pacific (Listed in the HKEx) halved
(http://news.bbc.co.uk/1/hi/business/7683160.stm) after the news of huge loss of foreign exchange
was ... Show more content on Helpwriting.net ...
In theory, it has been proved that futures and swaps can be equal to the combination of forwards.
(Hull J C, 1997)Generally, a foreign exchange settlement contract will be signed by banks and their
customers, which stipulates the type of foreign currency to be used, the sum, the exchange rates and
duration. On the due date when income or expenditure of foreign exchange occurs, currency
exchange settlement will be operated in accordance with the contract. In order to improve
efficiency, it's necessary to adjust the hedging when using forward contracts. (Brealey R, Kaplanis
E. 1995)When the interest rate fluctuates randomly, the forwards strategy can be divided into three
smaller parts: the Minimum Variance Hedging, Merton / Breeden Hedging and speculation. (Briys
E, Solnik B. 1992)When the interest rate is certain, there is no price difference between futures
contracts and forward contracts. Perfect hedge can be achieved, no matter what type of hedging
tools is used. However, the two is no longer able to replace each other when interest rates move
randomly, because of the existence of marking to market in futures market operation. The above
selection is based on the effectiveness of futures and forwards. Next, the selection rules will
emphasis on other features. Futures contracts are standardized by the Exchange, where the
transactions usually take place. Forward contracts are signed between

Evaluate Gm's Currency Hedging Policies Essay
3. Evaluate GM's currency hedging policies. [3 pages] {Gavin} {Ryan} The issue here may lie with
the 50% to 75% hedge as it is doubtful as to why GM does not hedge its receivables / payables by
100%. Perhaps the issue is related to high costs of using options and their receivables / payables run
into huge amounts. Additionally, GM is not keen on committing to a forward because they have
positive expectations about the future exchange rate and the forward would only serve to limit their
possible gains.
Inherency: Does the plan exist in the status quo (the way things are now), and what ... Show more
content on Helpwriting.net ...
However by paying a small premium for an option, GM would be able to preserve the upside of any
exposure. This is because an option gives them the right to choose whether to exercise it or not upon
maturity. Hence, if the CAD dollar weakens against the USD, GM's large Canadian assets and
liabilities and payables owed to Canadian suppliers would weaken considerably. GM could then
choose to exercise the option for a better exchange rate. Conversely, if the CAD dollar strengthens,
then GM would choose not to exercise the option as their cash flows denominated in Canadian
dollar is now worth more compared to the USD.
The level of risk adverseness plays a huge role because GM may be inclined to hedge all exposure
using a forward if they are highly risk adverse. On the other hand, GM may be willing to pay a
premium for an option to ensure the still receive the upside if they are not so risk adverse. This links
to expectations on future spot rates and how GM anticipates the CAD to fluctuate vis–à–vis the
USD in the coming months. If GM anticipates future spot rates of CAD/USD to weaken, it would
prefer to buy a forward and the reverse holds true as well.
After conduction an analysis, it shows that the fluctuations in exchange rate could cause a lot of
trouble for GM. Hence, it reverts back to the issue of GM's expectations of the future spot exchange
rate. From this, they can then determine which hedging method is more

Exchange Rate Mechanisms
Exchange Rate Mechanisms Paper – Currency Hedging Exchange Rate Mechanisms Paper –
Currency Hedging
Currency hedging involves deliberately taking on a new risk that offsets an existing one, thereby
reducing a businesses' exposure to negative change in exchange rates, interest rates, or commodity
pricing (Economists.com, n.d.). "Currency hedging allows a business owner to greatly reduce or
eliminate the uncertainties attached to any foreign–currency transaction" (Fraser, 2001). It is
impossible to predict the how much a currency will be worth on the exact day that a company will
be converting it. With hedging, the uncertainly is gone. Many companies that have international
operations are constantly juggling multiple transactions, with ... Show more content on
Helpwriting.net ...
"Options are contracts that guarantee, for a fee, a worst–case exchange rate for the future purchase
of one currency for another" (Wachovia). Options are different from foreign contracts in that the
buyer is not obligated to deliver the currency on the settlement date unless the option is exercised.
Currency swaps are a way for companies with recurring cash flows in a foreign currency, or a
company that is seeking financial backing in a foreign country. Lastly, in a market where forward
market does not exist or is restricted, although like a forward transaction, a non–deliverable forward
makes it possible to hedge future currency exposure (Wachovia). It should be noted that this type of
hedge is settled in U.S. dollars.
The text cites the case of Japan Airlines (JAL), which is one of the world's largest airlines and a
huge customer of Boeing (Hill, 2003, p. 307). Boeing aircraft are priced in U.S. dollars, and those
ordering normally pay a 10% deposit. When JAL purchases aircraft from Boeing, it must change its
yen into dollars. The length of time between ordering the aircraft and taking delivery can be up to
five years, and the value of the yen can change in that time period. When placing the order, JAL has
no way of knowing what the value of the yen will be against the U.S. dollar in five years, therefore,
one way of mitigating this risk was to enter into a forward exchange contract (Hill). JAL entered
into

Aspen Technology, Inc. Currency Hedging Review
Executive Summary
Aspen has become a public company withmore risk adverse investors who want to invest in the core
business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk
to Aspen's business because they have many customers outside of the United States. We believe that
transferring this risk to the customers would limit Aspen's growth on the foreign markets: Aspen
should keep its current marketing strategy, which includes credit installment payments and
payments in local currencies for Japan, the UK and Germany. The current risk management program
hurts the company because it doesnot consider Aspen's expenses abroad that balance sales exposures
to currency fluctuations. We then recommend that ... Show more content on Helpwriting.net ...
This move would cut Aspen's exposure to cash flow risk, but it would be a sign of bad faith with
their customers. The customers have freedom to make installment payments and do not have to
worry as much about their own risk exposure in these transactions (although any company making
foreign transactions will always be open to accounting risk exposure and foreign exchange rate
exposure). Also, billing in local currency is also a way for local companies to compare offers more
easily with competitors. Not doing so could decrease Aspen's growth abroad. While Aspen could
reduce its foreign exchange exposure by reducing the amount of installment payments or by using
other methods, this may not sit well with their current customers who may in turn reduce orders and
find other suppliers in order to reduce the risk or the heavy costs that Aspen's choices would leave
with them. Because foreign exchange risk is a core risk for Aspen and has been managed fairly well
until this point, we see no reason for them to overhaul their business model and risk alienating their
customers.
Foreign Exchange Exposure
While we assume that 50% of German sales are still made in DM, in 1995, 25.9% of Aspen's 1995
revenues are made in foreign markets, but only in Japan, in the UK and in Germany (increasingly)
has the firm priced its products in local currencies. That means that, about 23.8% of Aspen total
sales are made in foreign currencies, implying a foreign

Hedging Currency Exposures in a Multinational Corporation
ABSTRACT OF THE MASTER'S THESIS Financial theory offers several rationales for financial
risk management. Hedging enables firms to maintain their access to internal funds as well as
reduces the costs of financial distress. The theoretical framework offers, however, few tools for
currency risk identification and for choosing a proper hedging instrument. This Thesis seeks to help
firms manage risks better by defining the currency risk exposures of a multinational corporation, by
describing their effects on the cash flows, profit and loss and balance sheet of the corporation as
well as by comparing the applicability of currency forwards and currency options in hedging these
exposures. The exposure framework is constructed based on an ... Show more content on
Helpwriting.net ...
Tämän diplomityön tavoitteena on mahdollistaa parempi rahoitusriskien hallinta kuvaamalla
kansainvälisen yrityksen eri valuuttariskipositiot ja näiden vaikutukset yrityksen kassavirtoihin,
tuloslaskelmaan ja taseeseen sekä lisäksi vertailemalla laajasti valuuttatermiinien ja –optioiden
käyttöä edellä mainittujen riskipositioiden suojaamisessa. Työssä tehty riskipositioiden kuvaus
perustuu kattavaan kirjallisuustutkimukseen rahoitusriskien hallintaa käsittelevistä artikkeleista.
Riskipositioiden vaikutukset yrityksen kassavirtoihin, tuloslaskelmaan ja taseeseen mallinnetaan ja
mallissa huomioidaan myös vallitsevat valuuttajohdannaisia koskevat kirjanpitosäännökset. Mallilla
havainnollistetaan valuuttariskien ja suojausinstrumenttien vaikutus eurooppalaiseen
pörssiyritykseen tekemällä historiallinen simulaatio EURUSD–kurssiriskistä. Yritysten altistuminen
valuuttariskeille jaetaan työssä sopimukseen perustuvien kassavirtojen, epävarmojen kassavirtojen,
kilpailutilanteesta aiheutuvaan, ulkomaisten nettoinvestointien, ulkomaisen tuloksen, lainojen,
sijoitusten ja kovenanttien valuuttariskiin. Mallin avulla näytetään, että eri valuuttariskipositioilla ja
toisaalta eri suojausinstrumenteilla on varsin erilaisia vaikutuksia. Nämä vaikutukset kvantifioidaan
erotellen ne kassavirtoihin, tulokseen ja taseeseen vaikuttaviin osiin. Malli osoittaa, että selvästi
yleisimmin käytetty

The Foreign Exchange Reform in China and Hedging Currency...
1. Introduction
China, one of the large emerging markets, with the implementation of its "reform and opening up
policy" made in 1978. China has successfully transformed itself from an inflexible centrally–
planned economy to an open and market–oriented economy, and accomplished remarkable progress
in trade market. China has maintained high and stable growth rates for over two decades. Since
China is becoming an increasingly important member in the world's economic scene, the
movements of the foreign exchange rate could be an important issue for Chinese firms. On 19 of
June 2010, China's central bank declared that it will further implement the reform of foreign
exchange and enhance the flexibility of RMB exchange rate (Money for life ... Show more content
It also introduced the agency system for increasing the initiative and autonomy to the trading
companies in the early 1980, and permitted them to assume independent accountability through the
contract responsibility system (CRS) since the late 1980s. However, Iwatsubo & Karikomi (2006)
states that the past reform on China's exchange rate system did not seem to have significant effects.
Figure 1 Exchange Rates of the RMB – US dollar (1979–1994)
(Source from Zhang, 1997)
To summarize the whole process of the China's foreign exchange reform, it can be divided into 3
main stages. In 1994–1996, that was the first stage of foreign exchange reform, which is called
"stable development stage". China started to prepare for its regaining of membership in WTO and
GATT by reducing substantially tariffs and import licenses. In order to enlarge Chinese markets,
China started to implement socialism and market–orient policy and reformed the foreign exchange
system in 1994. It launched a new exchange rate policy which based on the market's supply and
demand, and managed floating exchange rate regime. China adjusted the exchange rate from 1
USD= less than 6 RMB to 1 USD= 8.7 RMB (see figure 1). The competitive advantage of China's
product kept increasing in the international markets because of the depreciation of RMB, which can
benefit the exportation and attract foreign investments. In general, China's economy, foreign reserve
account, capital, and

Notes On Foreign Exchange Risks
An owner of a small business that exports all of its products to Europe, and receives 100% of their
revenue in Euros needs to be concerned about foreign exchange risks. Foreign exchange risks are
defined as an appreciation or depreciation in the exchange rate will lead to a change in the value of
assets or liabilities that are denominated in the prearranged currency (Agarwal, 2009). Foreign
exchange rates are determined by the market forces for most currencies. Exchange rates fluctuate
when because of demand and supply. A currency (Euro) will appreciate when its demand increases
and depreciates when its demand falls. As an owner one will need to watch the fluctuation in the
currency, and understand there will be unexpected gains and losses.
One will have to have an understanding of the transaction, translation, and economic exposure.
Transaction exposure is the risk that the base currency value of the euro will vary while your
company continues to export. Translation exposure occurs when foreign currency assets and
liabilities are translated into the home currency for the purpose of completing and finalizing the
accounts for a period of time. When exporting to Europe it is critical to watch the economy of the
countries you are exporting to while limiting economic exposure. Economic exposure is the change
in future earning power and cash flow. Changes in exchange rates will affect the company's position
in the market while impeding potential gains (Agarwal, 2009). The owner

Aspen Technology, Inc: Currency Hedging Review HBS
Introduction:
Aspen is a software company which was established in 1982. The company mainly provides
simulation solutions to process manufacturing companies. The main industry which the company
focuses on is chemical processing. The entire idea began with the project of Advanced System for
Process Engineering in MIT in 1976. This project was than acquired by Lawrence Evans whom
founded Aspen. In a very short amount of time Aspen became a major player in the simulation part
of the software industry. The company started off as a privately owned firm but in 1995 turned into
a publicly traded company with a capitalization of 200 million dollars. The leading product of
Aspen is Aspen Plus; we have to note that 48 % of sales were stemming from ... Show more content
The sale of receivables also depends on the purchasing willingness of counterparties. Aspen could
find itself in a contracting finance cycle if the deferred payments are not paid on time and the
finance institutions are willing to accept any further long term installment receivables. We also have
to note that the company has further liabilities such as the 4 million dollar subordinated debenture to
the Massachusetts Capital Resource Company. In the case of delayed payments of receivables, the
purchasing unwillingness of finance institutions towards future sale of receivables and currents
loans could trigger bankruptcy of Aspen. The long term deferment plan increases business but poses
grave risk for the cash flow of the company. We also have to note that positive cash carries great
significance as Aspen is now a publicly traded company, the cash flow could directly affect the
stock price of the company and therefore influence the interest of investors towards Aspen. The
company is also subjected to foreign exchange exposures due to the sales in foreign markets. The
data shows us that 48 % of Aspen's revenues come from United States, 31 % comes from Europe,
12 % from Asia and 9 % from other regions of the world. This subjects the company to have a hedge
plan for British pounds, Yen, Yuan, Mark. We have to distinguish the fact that the company has
hedging for receivables however this does not apply to expenses. We can come to the conclusion
that the

Link Technologies Case Report
Amulya Gattu, Hanny Gomez, Tamta Kavtaradze, Sandra Vargas Amulya Gattu, Hanny Gomez,
Tamta Kavtaradze, Sandra Vargas Link Technologies Case Analysis Link Technologies Case
Analysis Link Technologies Case Report The derivatives program was reducing risk when the firm
was investing in foreign currency futures for the first four months from the implementation date
(February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the
derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain
a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a
correlation is negative, as it was for the first three ... Show more content on Helpwriting.net ...
This can be seen through the positive correlation of 0.59601630 from the use of options contracts
from May 1991. Also, the overall correlation is effected and yields a correlation of 0.18316670
which indicates that the hedging program was not applied to minimize risk. This is further supported
by the fact that the variance of the unhedged cash flow is smaller than the variance of the hedged
cash flow as shown in the below table. Options Variance | | Unhedged CF | 7,660,828,949.06 |
Hedged CF | 37,023,798,317.69 | Difference | (29,362,969,368.63) | | | Overall Variance | | Unhedged
CF | 10,292,387,271.33 | Hedged CF | 33,529,561,494.82 | Difference | (23,237,174,223.49) | Ms.
Cohen's argument was irrelevant because not only did she provide any supportive facts, but she is
also incorrect because the hedging program did not create any new risks. In fact, it was perfectly
implemented since it reduced the firm's foreign currency fluctuation risk as seen above. Mr. Lee and
the other executives expect to generate a higher profit from hedging since they have majority of
their personal wealth invested into the firm. The focus of any hedging program should always be to
minimize the firm's risk of loss, but that does not mean the they will

Essay about Aspen Technology, Inc. Currency Hedging Review
Executive Summary Aspen has become a public company with more risk adverse investors who
want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign
exchange risk is a core risk to Aspen's business because they have many customers outside of the
United States. We believe that transferring this risk to the customers would limit Aspen's growth on
the foreign markets: Aspen should keep its current marketing strategy, which includes credit
installment payments and payments in local currencies for Japan, the UK and Germany. The current
risk management program hurts the company because it doesnot consider Aspen's expenses abroad
that balance sales exposures to currency fluctuations. We then recommend that ... Show more
content on Helpwriting.net ...
Not doing so could decrease Aspen's growth abroad. While Aspen could reduce its foreign exchange
exposure by reducing the amount of installment payments or by using other methods, this may not
sit well with their current customers who may in turn reduce orders and find other suppliers in order
to reduce the risk or the heavy costs that Aspen's choices would leave with them. Because foreign
exchange risk is a core risk for Aspen and has been managed fairly well until this point, we see no
reason for them to overhaul their business model and risk alienating their customers. Foreign
Exchange Exposure While we assume that 50% of German sales are still made in DM, in 1995,
25.9% of Aspen's 1995 revenues are made in foreign markets, but only in Japan, in the UK and in
Germany (increasingly) has the firm priced its products in local currencies. That means that, about
23.8% of Aspen total sales are made in foreign currencies, implying a foreign exchange exposure of
$13,670,000. 29.7% of Aspen expenses are abroad and made in local currencies. So, Aspen is also
exposed to foreign exchange risk with these expenses, mostly in Japan, Belgium and the UK (28.1%
of the total expenses in 1995). Those expenses act as a natural hedge that decreases the total
exposure of Aspen to foreign exchange risk. For its revenues and expenses, after "natural hedging",
the overall exposure of Aspen to foreign exchange risk is $9,484,000, with Belgium

Aifs Currency Hedging Solution
AIFS Case Finance in a Global Environment Rochester Institute of Technology Group 4 Mengjie
Ban Liu Gu Danielle Sherwood Bill Speight Mohamed Waheed Summary The American Institute
for Foreign Study, also known as AIFS, is a student exchange organization that specializes in
academic and cultural exchange programs for both college and high school students. The AIFS was
founded by Sir Cyril Taylor in 1964, in the United States, and is split into two divisions: the Study
Abroad College division, based in London, and the High School Travel Division, based in Boston.
Christopher Archer–Lock and Becky Tabaczynski, are the controller and CFO for the college and
high school divisions, respectively. Approximately 50,000 ... Show more content on Helpwriting.net
...
There are three types of risk that AIFS faces with respect to currencies: bottom–line risk, volume
risk, and competitive pricing risk. Bottom–line risk is defined as "the risk that an adverse change in
the exchange rates could increase the cost base". Volume risk is the risk of having too much or too
little of the currency based on the fact that projected sales will be different than the actual sales. The
third type of risk is competitive pricing risk and is the fact that AIFS cannot change its prices even if
the currencies are changing for fear of losing their customers. In order to manage, or ultimately
minimize, these risks, AIFS uses currency hedging techniques. Hedging activities begin
approximately six months before the prices are due for the catalogs for the college division. For the
high school division, the hedging took place throughout the year: 25% by December, 40% by the
end of March and 100% by June when the pricing for the catalog is due. Problem Statement AIFS
wants to offset any change in the exchange rates that may adversely affect their profit margins by
using currency forward contracts and currency options. These hedging activities work to offset the
three types of risk defined above as bottom–line risk, volume risk, and competitive pricing risk.
Since these hedging activities must be put in place two years before the actual year of sales, AIFS
must decide the proportion and cost

Currency Risks At AIFS
Xiaoling Tang FIN 46059 summer 2015 William Billik 08/08/2015 Hedging Currency Risks at
AIFS Risk is an inherent aspect of every business activity and its effective management can
determine the success or failure of a company. Companies dealing with foreign currencies are at a
risk of significant losses caused by fluctuations in the exchange rates. The American Institute for
Foreign Study (AIFS) operates in more than one currency and this exposes it to currency risks. The
company incurs its expenses in dollars but receives its revenue in other currencies and, therefore,
adverse fluctuations might result in huge losses to the company. The company employs a hedging
strategy as its core approach to risk management. Hedging involves entering into contracts that lock
up exchange rates in future so that a company obtains its revenues or makes payments in constant
exchange rates despite fluctuations. By hedging its currency risks, AIFS is able to avoid losses that
result from huge fluctuations in currency exchange rates. However, the company has to pay a
commission for the hedging as compensation to entities that assume this risk. AIFS has employed
two primary methods of hedging: currency forward contracts and currency options. Forward
contracts are agreements that give an entity a right to exchange specified amounts of one currency
for another at pre–determined exchange rates in a future date. On the other hand, options give the
holder a right but not an obligation to engage in

Why Companies Use Currency Derivatives?
Essay topic: why companies use currency derivatives?
Currency derivative can be defined as a contract or financial agreement to exchange two currencies
at a given rate or a contract whose value is derived from the rate of exchange of two currencies on
spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known
as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in
value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the
incentives and rationales behind an organisation that uses currency derivatives.
There are three types of currency derivatives used in hedging, future contracts, forward contracts
and options, ... Show more content on Helpwriting.net ...
The second is to combat the unfavourable currency movement by reducing the negative impact of
currency exposure (Eiteman et al, 2009). This can be understood by the fact that for an organisation
who is involved in international business, exposure to currency fluctuation accounts for the dramatic
variance of the organisation's income and expenses (Cusatis & Thomas, 2005). It is found that
forward contracts are normally used to eliminate the variance involved in contractual commitments
while option–type contracts are used to reduce the impact caused by uncertain foreign currency
denominated future cash flows (Bodnar & Gebhardt, 1999). As in most cases, payment and
experiences are contractual obligations, forward contracts are more popular, but for big
organisations who have a bigger number of uncertain payments received from overseas customers,
options can be also commonly seen (Bodnar & Gebhardt, 1999). In general, an organisation that has
a higher level of foreign pretax income is more likely to benefit from hedging in this case (Geczy, et
al, 1997).
A good example to illustrate this is that assuming Fonterra is to receive a payment from a US
customer due in six months, Fonterra might enter a forward contract with the speculation that the
NZ dollars will be appreciated during this period (leading to a lower income when the USD–
dominated payment is converted into NZ dollars). In this situation, a forward

Baker Adhesive Case Essay
John Kroeger FINA 470 Baker Adhesive Case March 22, 2012 1. How profitable is the original sale
to Novo once the exchange–rate changes are acknowledged? How has the exchange–rate risk, which
affected the value of the order, been managed? In the original order, Nova was billed BRL
104,338.30 for their purchase. After the exchange of currency from BRL to U.S. dollars, Baker was
estimated to receive $48,371.24 (104,338.30 * .4636). This means that Baker brought in $55,967.06
less from their deal with Nova than was expected. Since the exchange–rate risk was not managed,
Baker brought in significantly less than was estimated from their deal with Nova and after
subtracting their total cost from what they brought in, Baker only made a ... Show more content on
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Novo's first order to Baker consisted of 1210 gallons of adhesive. Their second order increased in
size by 50% to result in an order of 1815 gallons of adhesive. Baker also faced an increase in costs
of their materials by 10%. Baker only had to buy 25% of the products needed to create the order
Novo requested because they had the other 75% on had so the 10% increase in cost only applied to
the new 25% of materials. Novo's price per gallon of adhesives for their first order was 86.23 in
Brazilian real. To find the new price per gallon for the adhesives we need to take into account the
change in material cost. We then come up with the following equation: 86.23*(.25*.1)
=2.16+86.23=88.39 New price per gallon The component (.25*.1) comes from the increase in
material cost and the amount of materials that increase applies to being that only 25% of the
materials needed for the order had to be purchased because the other 75% was already on hand.
Baker's costs for Novo's new order are as follows (given the 50% difference in size order between
the first order and the new order): Labor | 9000 | Materials (with 10% increase in costs) | 52000 |
Manufacturing Overhead | 6000 | Administrative Overhead | 3000 | Total Costs | 70000 | Now, to
find the price of the sale in real for Novo and the revenue for Baker we have the equation:
1815*88.39 = 160,430 1815 is the amount of gallons Novo needs, 88.39 is the price per gallon we
found

Hedging Currency Risks At AIFS
PLEKHANOV RUSSIAN ECONOMIC UNIVERSITY
INTERNATIONAL FINANCIAL MANAGEMENT
Case Study REPORT
Hedging Currency Risks
At AIFS
Professor: Yulia Y.Finogenova
Performed by: Budeanu Diana Gabaydullin Ilnar Kulikova Ekaterina Malev Mikhail Content:
Introduction and problem statement................
Identification of major risk factors:
Risk assessment.......................................................... Map of ... Show more content on
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1. Fluctuating Dollar exchange rates / Unknown Final Sales Volume
2. U.S Trade Deficit trend versus U.S GDP
3. Political instability/ Terrorist attacks (1986 terrorism acts, 1991 Gulf War, 2001 September 11
attacks, 2003 war in Iraq
The risks AIFS exposed to and hedging instruments used to manage them:
Basic hedging techniques for managing risks:
➢ Vanilla options – the portion of currency is hedged through

India's Small and Medium Enterprises Export Goods Around...
1. Introduction
Explanation and definition of SME´s
In India, Micro, Small and Medium Enterprises (MSMEs), contribution to GDP exceeds 17% and
over 40% to industrial production. MSMEs' share of total exports is 40% and a large share of
additional exports indirectly, through third parties, trading houses, etc. Traditionally, export sectors
in which MSMEs operate in India have been Textiles and Garments, Leather products, Gems and
jewelry and Handicrafts. MSMEs' also have a large share of market in industrial goods segments
like Electricals, Electronics, machine parts, plastics, etc.
Risks for SME´s:
1. Financial risk
With increasing Labour costs, fuel costs and an intense competition in a global economy, the
companies have to deal with ... Show more content on Helpwriting.net ...
An SME must ensure that a diligent credit assessment is carried out to find out the ability to make
payments before giving credit to a potential customer.
SMEs can also use the credit ratings and business information that is readily available from sources
such as the Credit Bureau. Even after a potential business partner has been assessed as credit
worthy, SMEs should continue the diligence to either impose or monitor credit limits to limit and
proactively manage their credit exposure.
In this project, we deal with ways in which currency exchange risk can be mitigated by SMEs in
India.
2. Currency exchange risk:
Exchange rate risk is faced by businesses and investors due to change in exchange rates. An
exporter is likely to experience shrinking sales, gross margins or both when domestic currency
appreciates or foreign currency depreciated. The impact of fluctuation in exchange rates has
significant impact on SMEs. In general, when the domestic currency appreciates, importers benefit
and exporters are adversely impacted and vice versa. However, the impact varies from sector to
sector. Furthermore, the ability of different sectors to withstand the impact is not the same. For
instance, the IT sector having higher margins than the handicrafts sector, can relatively withstand
the adverse impact of the appreciation of the rupee to a greater level.
1. Impact on exporters: Currency fluctuation impact exporters

How Companies Are Managing The Foreign Exchange Risk...
1. Executive Summary
This paper discusses how companies are managing the foreign exchange risk through the use
currency options. For instance, some companies who didn't not take risk management seriously had
resulted in inefficient use of capital, increased liabilities, and reputation risk. Moreover, a lack of
certainty can cause confusion as to what a company's acceptance of risk is, such as a level of
acceptance. Without risk management, a company can become overconfident in its methods, which
could lead to a financial crisis. The failure to objectively take risks leads to bad results like a
company taking inappropriate risks not in the best long–term interests of the firm. Furthermore,
poor risk management in finance could amount to ... Show more content on Helpwriting.net ...
In order to minimise the effect of the potential losses due to foreign currency exchange rate, it
essential to understand the use of financial instrument.
Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when
a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a
currency that is different than its home currency. Transaction exposure has an effect of the firm's
income statement because the accounts payables or receivables can be affected by currency
exchange rates. Second foreign exchange exposure is the translation which impacts the balance
sheet of the firm. It occurs when consolidating financial statements of foreign units into a company's
home currency. The third type of foreign exchange exposure is the economic which influences a
firm's cash flows when exchange rates change. This type of exposure can impact assets, liabilities,
or any type of anticipated foreign currency cash exchange.
The starting point of any foreign exchange risk management plan is to identify the exchange
exposure faced. In controlling the foreign exchange risk, currency options have attained acceptance
as very helpful tools due to their exclusive nature. They are very critical and convey a much wider
range of hedging alternatives. Call options provide the right to the buyer to purchase the

Foreign Exchange Risk Essay
Foreign exchange risk is commonly defined as the additional variability experienced by a
multinational corporation in its worldwide–consolidated earnings that results from unexpected
currency fluctuations (Jacques, 1981). Multinational businesses exporting or importing goods and
services or making foreign investments throughout the global economy are faced with an exchange
rate risk, which can have severe financial consequences if not managed appropriately.
Multinational corporations often sell products in various countries with prices denominated in
corresponding local currencies. It is widely recognized that as the volatility in exchange rates has
increased dramatically after the breakdown of the Bretton Woods system of fixed exchange rates
(Smith, Smithson and Wilford, 1990), multinational corporations may have become increasingly
vulnerable to exchange risk since the short term movements in exchange rates are often not
accompanied by offsetting changes in prices in the corresponding countries (Shapiro, 1992).
Exchange rate exposure is an important source of risk for multinational corporations such as
transaction exposure, economic exposure, and translation exposure. Thus, managers of multinational
firms employ a number of foreign exchange hedging strategies in order to protect against exchange
rate risk. The primary reason companies would hedge foreign exchange risk is so that they do not
want to lose money on capital or assets they have stored in different

Foreign Exchange Hedging Strategies at General Motors
Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures
Prepared By: Danial Wahaj Khan EXECUTIVE SUMMARY: This report is based on a practical
scenario solution of General motors. The report addresses the problem given in scenario which is
the change in policy of hedging with detailed reasoning. The report then looks at the different
available hedging instruments to the firm. Profitability of both instruments has been compared and
lowest cost option was selected to mitigate the transactional risk. Translation risk has also been seen
at different hedging ratio levels; current one and the proposed one. The options were more profitable
to the firm that has been recommended. Argentinean subsidiary's ... Show more content on
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Alternative strategies can also be used by netting off the amount or using futures however for that
management's time will be an issue. THE ARGENTINEAN PESO: The case with the Argentinean
subsidiary is not similar to the first one. The Argentinean government is facing significant financial
problems which throws doubts on its default. The country has very poor economic situation with no
reforms and recent devaluation of currency has caused the managers to think over the strategy that
should be followed. The manager did perform some hedging calculation though however hedging is
used where there is risk in the short term and where risk cannot be transferred. In this case where we
can easily see that local currency is devaluing with great pace we should look for a long term
strategy. Hedging strategy of GM should not be altered in this regard however by other options we
can find a solution. In such situations where government is facing hard times financially,
government puts restriction on the level of remittance to the parent company. There is a significant
risk involved with this investment and if there are any chances of this restriction then company
should assess whether it is worthwhile to stay in operations there as it may cause severe problems
for a company if it can't withdraw its investments. Other options to deal with that could be

Scenario C. Engaging In International Business

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