...1) What is going on at Carrefour SA? Carrefour S.A. is a retail corporation located in France. Carrefour is Europe’s largest retailer, with 5,200 stores. Over the last four years they have been growing with several large acquisitions, mostly outside of France, which is requiring them to take on debt. In the past, Carrefour management had generally financed company growth through securities denominated in the currency of business operations. But have recently been suggested to consider borrowing in British pounds sterling in order to take advantage of a borrowing opportunity in that currency. Carrefour is exposed to exchange rate risk because of foreign-currency exposure from imported goods. This risk was being hedged through forward contracts. The €13.5 billion of debt on the Carrefour books is 97% hedged in Euro currency, €6.4 billion of that being publicly traded bonds. Carrefour has a large exposure risk to the Euro because of their hedging policy. 2) Why does the Eurobond market exist? A Eurobond is an international bond that is denominated in a currency not of the currency to the country where it is issued. Like many bonds, Eurobonds are usually fixed-rate, interest-bearing notes, although many are also offered with floating rates and other variations. Most pay an annual coupon and have maturities of 3-7 years. Eurobond issues are made to cater to the issuers' and investors' needs, and can vary in terms and form substantially. The Eurobond market exists for large corporations...
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...considering alternative currencies for raising (euros) EUR750 million in the eurobond market. Carrefour’s investment bankers provide various borrowing rates across four different currencies. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds if the exchange rate risk is hedged. The case is designed to serve as an introduction to topics in international finance. Topics of discussion include foreign-currency borrowing, interest-rate parity, currency risk exposure, derivative contracts (in particular forward and swap contracts), and currency risk management. Students are tasked with exploring (1) motives for borrowing in foreign currencies, (2) the exposure created by such financing policy, and (3) strategies for managing currency risk. Suggested Questions for Advance Assignment to Students 1. Why should Carrefour consider borrowing in a currency other than euros? 2. Assuming the bonds are issued at par, what is the cost in euros of each of the bond alternatives? 3. Which debt issue would you recommend and why? Hypothetical Teaching Plan 1. What is going on at Carrefour? 2. Is the Swiss-franc issue, at 3⅝%, a “no-brainer”? 3. What can a firm do to manage the exchange-rate risk of foreign-currency borrowing? 4. Using appropriate forward rates, what is the cost of borrowing in Swiss francs? British...
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...considering alternative currencies for raising (euros) EUR750 million in the eurobond market. Carrefour’s investment bankers provide various borrowing rates across four different currencies. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds if the exchange rate risk is hedged. The case is designed to serve as an introduction to topics in international finance. Topics of discussion include foreign-currency borrowing, interest-rate parity, currency risk exposure, derivative contracts (in particular forward and swap contracts), and currency risk management. Students are tasked with exploring (1) motives for borrowing in foreign currencies, (2) the exposure created by such financing policy, and (3) strategies for managing currency risk. Suggested Questions for Advance Assignment to Students 1. Why should Carrefour consider borrowing in a currency other than euros? 2. Assuming the bonds are issued at par, what is the cost in euros of each of the bond alternatives? 3. Which debt issue would you recommend and why? Hypothetical Teaching Plan 1. What is going on at Carrefour? 2. Is the Swiss-franc issue, at 3⅝%, a “no-brainer”? 3. What can a firm do to manage the exchange-rate risk of foreign-currency borrowing? 4. Using appropriate forward rates, what is the cost of borrowing in Swiss francs? British...
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...Introduction…………………………………………………………………………………..3 2. Operational Exposure………………………………………………………………………..9 3. Transaction and Translation Exposure…………………………………………….……..11 4. Other Strategies used by Companies to Hedge Exposure……………………...………19 5. Case Studies: Hedging Strategy used by Companies………………………….………..20 2 INTRODUCTION Foreign exchange exposure represents a material risk for multinational corporations which are unrelated to business operations. One needs to identify each foreign exchange exposure, the risk it represents and methods and costs available to limit such exposure. The value of a firm’s assets, liabilities and operating income changes continuously due to change in factors such as exchange rates, interest rates, inflation etc. In other words, a firm is “exposed” to uncertain changes in a number of variables in its environment. Exposure may therefore be defined as a measure of sensitivity of the value of a financial item to changes in the macro economic variables mentioned above. Risk refers to the variability of the value of the item. FOREIGN EXCHANGE EXPOSURE Foreign Exchange Exposure occurs because of unanticipated change in the exchange rate. For example the difference in the spot rate & one month forward rate is 0.30 rupee per USD and after one month rupee depreciates by 30 paisa there would be no FE exposure but if actual depreciation is more, then exposure would be said to exist. The definition of foreign exchange exposure can be summarized using the following...
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...1.0 Introduction Airlines industry faces substantial strategic, financial, operational and hazard risks due to the nature of the operating environment. Financial risks create uncertainties about future cash flows due to changes in economic conditions as well as changes in revenues, operating expenditure and financing costs. Firms are urged to minimise these risks to have higher predictability on future cash flows in order to meet various obligations, for instance shareholders’ required rate of return and debt repayment. This report looks into Air New Zealand in particular to study two of the risks that are significant for an airline company, namely foreign currency risk and fuel price risk. Section 2 of this report gives an overview of the relationships between the operation of Air New Zealand with both the risks. Besides, discussions and suggestions on Air New Zealand risk management approaches are presented in Section 3. Finally, a brief summary and conclusion is included in the last section. 2.0 Risks Description 2.1 Fuel Price Risk The Nature of Fuel Price Risk Fuel price risk is the risk of fluctuations in fuel prices which could adversely affect the financial performance of Air New Zealand as jet fuel is a critical input factor for airlines. Fuel prices are affected by the supply and demand, oil price futures and the downside or upside movement in the US dollar against NZ dollar. In particular, the increase in jet fuel prices adds a significant amount to Air...
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...America’s largest country, Brazil. Carrefour’s strategy until 1998 was to grow organically. But since 1998, its growth has been fueled by acquisitions of other retailers. Carrefour’s Financing Policy Analysis The risk that a business' operations or an investment's value will be affected by changes in exchange rates. Carrefour is exposed to exchange rate risk because of foreign-currency exposure from imported goods. This risk was being hedged through forward contracts. The €13.5 billion of debt on the Carrefour books is 97% hedged in Euro currency. Carrefour has a large exposure risk to the Euro because of their hedging policy. Questions from the Book 1. What is going on at carrefour? • Carrefour is expanding through acquisitions o This will require taking on debt • Current capital structure o Long-term debt ▪ 97% of foreign exchange rate risk hedged in Euros 2 . why does the eurobond market exist? (or, is plentiful debt capital not available domestically?) • Why does this market exist o Market was fueled by growth of multi-national firms o Able to reach global pool of investors • Debt is available domestically o Eurobonds can bring in...
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...Operating, & Accounting (Translation) Exposures Foreign Exchange Exposure – measures the potential for a firm’s profitability, net cash flow, and market value to alter because of a change in exchange rates. Q: What are the three main foreign exchange exposures? A: 1) Transaction Exposure 2) Operating Exposure 3) Accounting Exposure Transaction Exposure – measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. Operating Exposure (Economic Exposure, Competitive Exposure, Strategic Exposure) – measures a change in the present value of a firm resulting from any change in future expected operating cash flows caused by unexpected changes in exchange rates. Accounting Exposure (Translation Exposure) – measures accounting-derived changes in owner’s equity as a result of translating foreign currency financial statements into a single reporting currency. Exhibit 8.1 [pic] Note: In the fourth quarter of 2001 Amazon.com reported a net income of $5 million, due in part to a one-time foreign currency gain of $16 million. Hedging – To take a position that will rise (or fall) in value to offset a change in value of an existing position. |Benefits of Hedging |Costs of Hedging | |Improved the planning capability of the firm. |Risk-averse strategy that benefits management more than...
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...Problem set 1 (*optional items) Questions and problems on global firms and governance, international monetary systems, forex markets, and parities. Global firms and governance: 1. How would you define and measure multinational corporations? A firm is called a MNC if it has controlling real assets or operating facilities in multiple countries. Operationally, it can be measured by the extent of “foreign content,” proxied by foreign sales ratios, foreign asset ratios, and foreign employee ratios, or their averages, augmented by the number of countries in which the firm has operations. 2. Define greenfield investment versus foreign direct investment. FDI involves corporate investments in real assets located aboard and includes both greenfield investment and international mergers and acquisitions. The greenfield investment involves construction of plants and equipment or R&D facilities from the scratch. 3. ESM13, chapter 2, question 8. Labor Unions. In Germany and Scandinavia, among others, labor unions have representation on boards of directors or supervisory boards. How might such union representation be viewed under the shareholder wealth maximization model compared to the corporate wealth maximization model? Labor union representation that may be required by statute is an example of governmental direction toward the corporate stakeholder model (or corporate wealth maximization model), in that such a requirement is...
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...Executive Summary ___________________________________________________________________________ The foreign exchange market does not have a physical market place called the foreign exchange market. It is a mechanism through which one country's currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. The market comprises of all foreign exchange traders who are connected to each other through out the world. They deal with each other through telephones, telexes and electronic systems. The foreign exchange market operates twenty four hours a day during the business week; the only time it is silent is after the New York market closes on Friday afternoon and before the Sydney market opens on Monday morning (which would be Sunday evening New York time). In the aftermath of the Asian crisis, which curbed and restricted offshore trading in regional currencies, most derivatives markets in Asia are still in their infancy. Financial institutions trying to introduce or transplant products from mature markets to those that are lesser developed are meeting with limited success. The RBI has ushered rupee derivatives trading into the country: it has formally allowed banks and corporate to hedge against interest rate risks through the use of interest rate swaps (IRS) and forward rate agreement (FRA). According to the guidelines issued by RBI there will be no restriction on the tenure and size of the...
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...Why should we hedge? Business is exposed to several risks, currency risk being one of them Objective of hedging is to ensure: Predictability in Income Statement thereby reducing cash flow volatility. Revenue is generated & receivables are collected at budgeted rates Maintaining margins on long term projects as these projects are priced & bid with an exchange rate assumption, which needs to be protected to ensure desired margins Managing the translation risks in case of multiple geographies & overseas entities Best Practices A good risk management and hedging policy should be debated, understood & approved at the highest level (Board) The policy should indentify risks entity is exposed to, ways to measure these risks & suggest methods to mitigate these risks Should specify clear identification of responsibilities, authorities & limitations on its implementation Should state the purpose of hedging clearly - profit, protection, reducing volatility. Should suggest appropriate risk management tools like Sensitivity Analysis, VAR to contain risks Should be reviewed periodically by board in view of changing risks, market dynamics. Enctheirage use of natural hedges to reduce hedging costs METHODS OF HEDGING Methods of hedging can be classified as a. Internal methods b. External methods ...
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...domestically and internationally. In addition, the company operates over 100 Best Buy Express Automated Retail stores or "ZoomShops", operated by Zoom Systems, in airports and malls around the U.S. The company is headquartered in Richfield, Minnesota, United States. On March 9, 2009, Best Buy became the largest electronics retail store (online and bricks and mortar) in the eastern United States, after smaller rival Circuit City went out of business. Fry's Electronics remains a major competitor in the western United States, while Hhgregg remains competitive in the eastern United States. Many locations feature in-store pickup, which can be arranged through the company's website. As of December 28, 2008, the company operated 1,010 Best Buy Stores, 13 Magnolia Audio Video Stores (specializing in high-end electronics), 7 stand-alone Geek Squad stores, 3 Audio Visions Stores, 13 Best Buy Mobile Stores (standalone) and 17 Pacific Sales Stores (in Southern California, Arizona, and Nevada), all through its U.S. retail subsidiary. They also operate 51 Best Buy and 140 Future Shop stores throughout Canada. In 2003, the company opened its first international global procurement office in Shanghai, and also operates sourcing offices in Beijing and Shenzhen, primarily to reduce costs and increase the speed to...
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...Risk Management Analysis for Air NZ Abstract Recent financial theories argued firms can increase their values through hedging by reducing taxable income, agency cost and the cost of financial distress. This report provides a qualitative and quantitative analysis of corporate risk management for the company Air New Zealand. We uses a time series OLS regression model. The fair value of derivatives is used as dependent variable to measure the extent of financial instrument usage. The result shows that the use of derivatives by Air NZ fails to add value to the company. FINA781 Report Page 1 1. Introduction Air New Zealand Limited is the national airline and flag carrier of New Zealand. Based in Auckland, New Zealand, the airline operates scheduled passenger flights to 56 destinations locally and internationally. Air New Zealand is a member of the Star Alliance global airline alliance, having joined in 1999. Air New Zealand originated in 1940 as Tasman Empire Airways Limited (TEAL), a flying boat company operating trans-Tasman flights between New Zealand and Australia. TEAL became wholly owned by the New Zealand government in 1965, whereupon it was renamed Air New Zealand. The airline was largely privatized in 1989, but returned to majority government ownership in 2001 after a failed tie up with Australian carrier Ansett Australia. As of 2008, Air New Zealand carries 11.7 million passengers annually. Do hedging create firm value has been a popular topic argued through...
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...middle East and Australia GHC also owns 100% of the Real Furniture Company (RFC). RFC imports a range of hardwood and cane furniture, which is manufactured in overseas locations. The hardwood for RFC is imported from South America and Asia and is imported to other countries in finished form. Both ghc and rfc are handled separately. From the above introduction its quiet clear that ghc and rfc are two separate companies and I am going to now look into the financial practices and some other pros and cons of both companies. Further moving on to the discussions of GHC with the overseas Government, understanding the benefit expected by the overseas government from GHC and the benefits GHC request from the government, then looking into the risks associated with the investments made in the different countries of the world and at last moving on to the responsibilities that are assigned to the group treasurer and the...
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...world production c) minimize debt d) minimize the cost of doing business globally d 3. Exchange rates depend primarily upon which of the following? a) monetary systems b) political systems c) trade deficits d) inflation rates between nations b 4. Replacing the local foreign currency with the dollar is> a) Seignorage b) Dollarization c) Depreciation d) Appreciation d 5. Adjusting national economic policies to maintain foreign local exchange rates within a specific margin around agreed-upon, fixed central exchange rates is called a) managed float b) ‘beggar-thy-neighbor” devaluation c) dirty float d) target-zone agreement b 6. Nonconvertible paper money backed only by full faith of the government is called? a) Specie b) Fiat money c) Seignorage d) Par value b 7. Theoretically, relative purchasing power parity states, between nations, the a) inflation rates are unrelated b) exchange rate differential reflects the inflation rate differential c) inflation rate is smaller in weaker currencies d) the interest rate is greater than the inflation rate during depreciations c 8. The _________ rate is made up of a real required rate of return and an inflation premium with respect to the Fisher effect. a) nominal exchange b) real exchange c) nominal interest d) adjusted dividend...
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...which multinational financial management is different from domestic financial management. Multinational financial management is conducted in an environment that is influenced by more than one cultural, social, political, or economic environment. 1.2 What is country risk? Describe several types of country risk one might face when conducting business in another country. Country risks refer to the political and financial risks of conducting business in a particular foreign country. Country risks include foreign exchange risk, political risk, and cultural risk. 1.3 What is foreign exchange risk? Foreign exchange (or currency) risk is the risk of unexpected changes in foreign currency exchange rates. 1.4 What is political risk? Political risk is the risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. 1.5 In what ways do cultural differences impact the conduct of international business? Because they define the rules of the game, national business and popular cultures impact each of the functional disciplines of business from research and development right through to marketing, production, and distribution. 1.6 What is the goal of financial management? How might this goal be different in different countries? How might the goal of financial management be different for the multinational corporation than for the domestic corporation? The goal of financial management...
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