...Case Study on PepsiCo’s Use of Financial Derivatives 1. Introduction 1.1 PepsiCo’s History The Pepsi-Cola Company was incorporated in 1919 by Caleb Bradham, the inventor of the Pepsi-Cola soft drink. PepsiCo became a multinational beverage and snack food company in 1965 when Pepsi-Cola merged with Frito-Lay. Since the 1965 merger PepsiCo has expanded its operations by acquiring Quaker-Oats, Tropicana, and Gatorade brands. With sales of $66.86 billion in 2014 and with products sold in over 200 countries, PepsiCo is one of the leading food and beverage companies in the world (PepsiCo, 2014). 1.2 PepsiCo’s Industry The beverage and snack food industries are both in the mature stage in their life cycles, and companies in these industries largely depend on product innovation, brand recognition, and low prices to remain competitive. Like all companies PepsiCo faces risk of increases in operating expenses and decreases in net income due to market risk. Companies in PepsiCo’s industry have been forced to expand its product offerings into healthy foods and drinks due to an insurgent health and wellness in American culture. 1.3 PepsiCo’s Competitors PepsiCo’s top competitors consist of The Coca-Cola Company, Dr Pepper Snapple Group, and Nestle; additionally, because PepsiCo is a multinational company it must also compete with countless local snack and beverage companies across the globe. Coca-Cola has been viewed as PepsiCo’s main rival for around 100 years, and the competition...
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...Why do companies use derivatives? How can these be beneficial to a company? How can they hurt a company? Derivatives are used by a company to hedge risk. Risk can come in different flavors and so can derivatives. There are three main risks, which are hedged using derivatives. The first is interest rate risk. Many seemingly good investments can suffer at the hands of the fluctuations in interest rates. There are a few ways to hedge interest rate risk, one being a long-term lock on the interest rate by purchasing a treasury future and another is to use an interest rate swap whereby the company literally swaps their payment obligations by “swapping” a variable rate payment for a fixed rate. A second risk is exchange rates. If a company bids on a contract to sell a product for a fixed price, 6 months in the future but be paid in a currency different from their own, they run the risk of the exchange rate between the two currencies changing to their detriment resulting in the company receiving a relatively lower fee in their home currency. To hedge against this risk, companies can buy foreign exchange futures AGAINST the change in the exchange rate, which would positively affect the outcome for them and thereby providing them with insurance against the negative change. The third risk example is that of a commodity risk. Many products have dependent input commodities such as fuel, raw material etc. whose prices are critical in the company’s final profit. A company that signs...
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...industry-wide, cross-sectional study concentrates on recent foreign exchange risk management practices and derivatives product usage by large non-banking Indian-based firms. The study is exploratory in nature and aims at an understanding the risk appetite and FERM (Foreign Exchange Risk Management) practices of Indian corporate enterprises. This study focusses on the activity of end-users of financial derivatives and is confined to 501 non-banking corporate enterprises. A combination of simple random and judgement sampling was used for selecting the corporate enterprises and the major statistical tools used were Correlation and Factor analysis. The study finds wide usage of derivative products for risk management and the prime reason of hedging is reduction in volatility of cash flows. VAR (Value-at-Risk) technique was found to be the preferred method of risk evaluation by maximum number of Indian corporate. Further, in terms of the external techniques for risk hedging, the preference is mostly in favour of forward contracts, followed by swaps and cross-currency options This article throws light on various concerns of Indian firms regarding derivative usage and reasons for non-usage, apart form techniques of risk hedging, risk evaluation methods adopted, risk management policy and types of derivatives used. Key Words: Foreign Exchange, Financial Derivatives, Hedging,...
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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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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...comrlocatereconbase Firms, do you know your currency risk exposure? Survey results Claudio Loderer ) , Karl Pichler a a Institut fur Finanzmanagement, UniÕersitat Bern, Engehaldenstrasse 4, Bern 3012, Switzerland ¨ ¨ Abstract This paper surveys the currency risk management practices of Swiss industrial corporations. We find that industrials are unable to quantify their currency risk exposure and investigate possible reasons. One possibility is that firms do not think that they need to know because they use on-balance-sheet instruments to protect themselves before and after currency rates reach troublesome levels. This is puzzling because performing a rough estimate of at least the exposure of cash flows is not prohibitive and could be valuable. Another puzzling finding is that firms use currency derivatives to hedgerinsure individual short-term transactions, without apparently trying to estimate aggregate transaction exposure. q 2000 Elsevier Science B.V. All rights reserved. JEL classification: G15; G30 Keywords: Currency risk exposure; Swiss industrial corporation; On-balance-sheet instruments 1. Introduction This paper surveys the currency risk management practices of Swiss industrial corporations. Many of them sell most of their output abroad and would therefore seem to be heavily exposed to currency risk. In fact, currency risk can be substantial. Between 1978 and 1996, the Swiss franc experienced dramatic swings in relation to major currencies such as the U.S. dollar, the Italian...
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...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: gregwbrown@unc.edu. A more recent version of this document may be available from my web page: http://itr.bschool...
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...INDIAN DERIVATIVES MARKETS 1 Asani Sarkar 1 I gratefully acknowledge the assistance of Arkadev Chatterjea, Neel Krishnan, Golaka C. Nath and V. Soundararajan in the preparation of this article. The views expressed in this article are mine alone, and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System. Derivatives OUP 1 1. Rise of Derivatives The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates. The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations make it hard for businesses to estimate their future production costs and revenues. 2 Derivative securities provide them a valuable set of tools for managing this risk. This article describes the evolution of Indian derivatives markets, the popular derivatives instruments, and the main users of derivatives in India. I conclude by assessing the outlook for Indian derivatives markets in the near and medium term. 2. Definition and Uses of Derivatives A derivative security...
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...TABLE OF CONTENTS DECLARATION ii LIST OF ABBREVIATIONS iii CHAPTER ONE: INTRODUCTION 1 1.1 Background 1 1.1.1 Derivatives 2 1.1.2 Foreign Currency Exposure of a Commercial Bank 3 1.1.3 Effect of derivatives on foreign exchange exposure 5 1.1.4 Commercial Banks in Kenya 6 1.2 Research Problem 7 1.3 Objectives of the Study 8 1.4 Value of the Study 9 CHAPTER TWO: LITERATURE REVIEW 10 2.1 Introduction 10 2.2 Theoretical review 10 2.3 Foreign Exchange Risk Management 13 2.6 Empirical Review 18 2.6 Summary of Literature review 19 CHAPTER THREE: RESEARCH METHODOLOGY 20 3.1 Introduction 20 3.2 Research Design 20 3.3 Study Population 20 3.4 Data Collection Procedures 20 3.5 Data Analysis and Presentation 20 REFERENCES 22 APPENDICES 26 LIST OF ABBREVIATIONS CBK – Central Bank of Kenya ERV - Exchange rate volatility FOREX – Foreign Exchange FX – Foreign Exchange IFE – International Fisher Effect IFX - Income from foreign currencies as a percentage of total income IRP – Interest Rate Parity MST – Market Segmentation Theory NA - Net Assets NFXNA - Net Foreign Currency Exposure Relative to Net Assets NFX - Net Foreign Currency Exposure NSE – Nairobi Securities Exchange OS - Ownership Status or Nature of Ownership PPP – Purchasing Power Parity CHAPTER ONE: INTRODUCTION 1.1 Background The traditional role for commercial banks has been perceived...
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...(a) Introduction Financial derivatives are a financial instrument that value is depend upon or derived from price of underlying items such as commodity, indicator or index. Financial derivatives enable participants involved to trade specific financial risks for example, interest rate risk, foreign exchange risk, equity and commodity price risk and credit risk to other entities who are more willing or better suited to take or manage these risks (International Monetary Fund, n.d.). Even though there are some speculators are aim to earn profit by using the financial derivatives. The main categories of derivatives are forward and futures contracts, options and swaps. They are financial instruments that are mainly used to protect against and manage...
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...Audio Video, Pacific Sales, and, in Canada operates under both the Best Buy and Future Shop label. Together these operate more than 1,150 stores 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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...INTRODUCTION Definitions Each country has its own currency through which both national and international transactions are performed. All the international business transactions involve an exchange of one currency for another Scope of the study * The study can help in analyzing Growth in currency derivatives. * Companies are looking to get a competitive edge * Quick returns are possible for short term profits in currency derivatives * Future growth of currency derivatives OBJECTIVES OF STUDY * OBJECTIVES OF THE STUDY The basic idea behind undertaking Currency Derivatives project to gain knowledge about currency future market. * To study the basic concept of Currency future * To study the exchange traded currency future * To understand the practical considerations and ways of considering currency future price. * To analyze different currency derivatives products. Limitations of the Study Every study is bound by limitations and as such this is no exceptions. 1. The analysis was purely based on the secondary data. So, any error in the secondary data might also affect the study undertaken. 2. The currency future is new concept and topic related book was not available in library and market. 3. Confidential matters were not disclosed by the company. 4. There were time constraints. Existing & proposed product Produts and services 1.Equity Trading The best way...
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...J. of Multi. Fin. Manag. 13 (2003) 123 Á/139 www.elsevier.com/locate/econbase Foreign-denominated debt and foreign currency derivatives: complements or substitutes in hedging foreign currency risk? William B. Elliott a,*, Stephen P. Huffman b, Stephen D. Makar b a Department of Finance, Oklahoma State University, 224 Business, Stillwater, OK 74078, USA b University of Wisconsin Oshkosh, Oshkosh, WI, USA Received 30 June 2001; accepted 20 April 2002 Abstract Using a unique dataset, this study examines the relationship between foreign-denominated debt (FDD), foreign currency exposure and foreign currency derivative (FCD) use, for a sample of US multinational corporations. We find a positive relationship between the exposure to foreign currency risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover, FDD is negatively related to the use of FCD. We interpret this as further evidence that FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk. # 2002 Elsevier Science B.V. All rights reserved. Keywords: F23 Keywords: Hedging; Foreign debt; Currency derivatives 1. Introduction US multinational corporations (MNCs) employ a variety of financial and nonfinancial techniques to reduce or hedge their exposure to changing exchange rates (e.g. Bodnar et al., 1998; Marshall, 2000). Financial techniques include foreign- * Corresponding author. Tel.: '/1-405-744-8639; fax: '/1-405-744-5180 E-mail address: elliowb@okstate...
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...FIN30014 Financial Risk Management Topic Outline, Reading and Tutorial Questions Semester 2, 2015 ------------------------------------------------- Topic 1: Introduction to Derivatives and Financial Risk Management ------------------------------------------------- Mechanics of Futures Markets Topic Outline * Financial risk management – an overview * The nature of derivatives and their uses for financial risk management * Futures exchanges and futures contracts * Over-the-counter markets and forward contracts * Uses of derivative contracts markets: Hedging, Speculation and Arbitrage * The mechanics of futures markets * opening and closing futures positions * the operation of margins on futures contracts * the role of the “Clearing House” * Futures contracts compared with forward contracts Essential Reading: Hull (2014) Chs. 1 & 2 Additional Reading: Viney, Ch 18, pp. 604 – 613; Ch 19, pp 636-648 Web Resources (Refer to the “External Links” tab on Blackboard) * Financial Pipeline: Derivatives Self-test Quiz Questions Hull Ch. 1: 1.2, 1.4, 1.7 Hull Ch. 2: 2.3, 2.4 (ignore tax questions), 2.5 Tutorial Questions Hull Ch. 1: 1.10, 1.11, 1.12, 1.18, 1.20, 1.21, 1.33 Hull Ch. 2: 2.10, 2.14, 2.16, 2.18, 2.25, 2.26, 2.28 Additional Questions 1. Suppose that on Jan. 4, 2011, an investor...
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...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 by Futures exchange. The date and place of the transaction have been provided. There are some features of futures contracts. Quantity, commodity and quality have been limited, excepting the price. Also, it cannot be done over-the-counter. Options is a financial tool, which based on futures. If purchaser hold the options, he/she will has a right, not the obligation, to buy from or sell to the seller of the provided commodity in the future as the same price as the price agreed now. The last financial hedging technique, forwards contracts, is a non-standardization contact between two parties to sell or buy in the future. Curb-exchange and cash transaction are the feathers of forward contact. This essay will focus on two operational hedging techniques...
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