MODULE 3:
Exchange Rates Risk
Management
Presentor: Mary Angelie D. Favila
Case
Jim Logan, owner of the Sports Exports Company,
remains concerned about his exposure to exchange
rate risk. Even if Jim hedges his transactions from one
month to another, he recognizes that a long-term trend
of depreciation in the British pound could have a
severe impact on his fi rm. He believes that he must
continue to focus on the British market for selling his
footballs. However, he plans to consider various ways
in which he can reduce his economic exposure. At the
current time, he obtains material from a local
manufacturer and uses a machine to produce the
footballs, which are then exported. He still uses his
garage as a place of production and would like to
continue using his garage to maintain low operating
expenses.
Question #1
HOW COULD JIM ADJUST HIS OPERATIONS TO REDUCE HIS
ECONOMIC EXPOSURE? WHAT IS A POSSIBLE
DISADVANTAGE OF SUCH AN ADJUSTMENT?
Jim altered his material imports by patronizing a local manufacturer; the
material is related to the British company's manufacturing system.
Imported commodities denominated in foreign currency, on the other
hand, will be cheaper if the local currency appreciates. Furthermore, any
interest due on foreign currency funding will be lowered (in terms of the
local currency) if the local currency strengthens, since the stronger local
currency will be swapped for the foreign currency to meet the interest
payments.
Jim altered his material imports by patronizing a local manufacturer; the
material is related to the British company's manufacturing system.
Imported commodities denominated in foreign currency, on the other
hand, will be cheaper if the local currency appreciates. Furthermore, any
interest due on foreign currency funding will be lowered (in terms of the
local currency) if the local currency strengthens, since the stronger local
currency will be swapped for the foreign currency to meet the interest
payments.
QUESTION #2
2. Offer another solution to hedging
the economic exposure in the long
run as Jim’s business grows.
What are the disadvantages of this
solution?
Mr. Jim Logan can use a strategy which a company can
diversify its products and services and sell them to clients
from around the world. It is called
Diversifying Production Facilities and Markets for Products.
The practice of expanding a product's original market is
known as product diversification. This method is used to
boost sales of an existing product line, which is especially
beneficial for a company that has seen sales stagnate or
decline in the past. Diversifying into a number of industries
or product line can help create a balance for the entity
during these ups and downs.
DISADVANTAGES:
The disadvantages of this strategy is the Profit maximization will be enjoyed by entities that are
totally involved in profit-making areas. A diverse firm, on the other hand, will lose out due to its
limited investment in the single segment. As a result, an entity's expansion options are limited.
Diversifying into a new market segment will necessitate the acquisition of new skills. The entity's
lack of knowledge in the new field could be a hindrance.
A company's expansion into too many new directions at the same time might be caused by
mismanaged diversification or excessive ambition. In this circumstance, due to a lack of resources
and attention, the entity's old and new sectors might suffer.
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THANK YOU SO MUCH!
Bijou Solutions, Inc. | 2020