FIN 336 Final Project Adam Church Southern New Hampshire University I. Company Overview Apple Inc. specializes in the design, manufacturing, and marketing of smartphones, personal computers, tablets, wearables and accessories, and sells a variety of related services (Apple Inc., 2022). Though founded and currently headquartered in California, Apple has grown its sphere of influence across all corners of the globe. This scope is truly seen when examining the availability of Apple’s flagship digital services. The Apple App Store is available in 175 countries and regions, Apple Music is available in 167, and Apple Podcasts features over 1 million shows in more than 100 languages, with availability in 175 countries and regions (Apple, 2020). The company’s sales revenues further show the importance of the international marketplace. Q1 of 2013 showed 54% of revenue coming from non-domestic markets, while Q1 of 2023 saw that figure rise to 58% (Laricchia, 2023). II. Economic Environments and Market Conditions Apple is currently listed on 13 different stock exchanges, eight of which are outside of the United States. This reflects the truly global economic scale Apple operates on, with example exchanges being the NASDAQ, Berlin Stock Exchange, Xetra, Frankfurt Stock Exchange, and more. (Reuters Editorial, n.d.). Alongside the typical stock, the company also offers bonds and money market funds. With a current market cap approaching $3 trillion, it is impossible to ignore the recognition and loyalty that surrounds the brand. Apple’s brand strength and devotion to innovation are two of the main reasons why the company was virtually unaffected by the global credit crisis. In 2009, Apple’s Q4 earnings increased by more than 47% compared to the previous year’s Q4. This resulted in Apple share price rising over 6% during after-hours trading (Caulfield, 2009). International expansion can expose businesses to many risks they typically would not face in their domestic markets, such as foreign exchange risk or political risk. Fortunately, international financial markets and institutions provide companies with a variety of tools to help mitigate some of these risks. Apple takes advantage of many of these tools, such as selling shares on foreign exchanges to raise capital. The company also takes advantage of financial derivative markets by trading forwards, options, and swaps to hedge its exposure to interest rate and foreign exchange risks (Apple Investor Relations, 2020). Over 67% of Apple’s revenue is generated outside the United States (Statista, 2021). This large international presence means that fluctuations in foreign and domestic currency can have a major impact on the company’s overall revenue. For example, when the US dollar rises in value compared to a foreign currency, the company’s revenues earned in that foreign currency will decrease in value once exchanged to the domestic currency. To provide an assessment of the company’s foreign exchange risk, Apple conducts a sensitivity analysis using a value-at-risk model to assess the potential impact of exchange rate volatility (Apple Investor Relations, 2020). “The model’s results concluded, with 95% confidence, a maximum one-day loss in fair value of $551 million as of September 26, 2020, compared to a Final Project 4 maximum one-day loss in fair value of $452 million as of September 28, 2019” (Apple Investor Relations, 2020). Multinational companies are often susceptible to all three types of foreign exchange risks: transaction, economy, and translation. This was especially true during the global financial crisis of 2008. Due to various factors such as over-hedging, increased demand as a “safe haven” currency, and a shortage of supply, the USD’s exchange rate began to soar. By late 2008, the US dollar had grown by 22% against the Euro (WesternUnion, n.d.). As the difference between foreign currencies and the US dollar increased, the revenues of many multinational companies began to plummet. However, unlike many other multinational companies, Apple was able to successfully hedge against the currency fluctuations by purchasing $2,782 million in forward contracts, $3,120 million in call options, and $2,668 million in put options (Apple Investor Relations, 2008). The company’s hedging strategies combined with releasing new products such as the iPhone led to Apple increasing its revenue by over 38% (Apple Investor Relations, 2008). III. Risk Mitigation Apple is no stranger when it comes to hedging against foreign exchange exposure. The company has continuously used marketable securities, such as forwards, options, swaps, and money markets, to save billions of dollars against currency fluctuations. Global exchange rates and interest rates can have a significant effect on any company. Although Apple has exposure to various global interest rates, its interest income and expenses are most sensitive to fluctuations in US interest rates. “Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents, and marketable securities and the fair value of those securities, as well as costs associated with hedging and interest paid on the Company’s debt” (Apple Investor Relations, 2020). Rises in the US dollar tend to have a negative effect on Apple’s net sales and gross margins. Apple regularly evaluates foreign exchange forwards, options positions, and interest rate swaps to mitigate the risks associated with exchange rates and interest rates. One tactic Apple uses in its risk mitigation strategy is diversification. With Apple products and services already available in 175 countries and regions, the company has begun acquiring smaller companies outside of their industry. In a 2019 interview with CNBC, CEO Tim Cook said that Apple buys a company every two to three weeks on average (Feiner, 2019). Apple’s expansions include various sectors such as payments, augmented reality and virtual reality, healthcare, video streaming, and mobile device management (Karam, 2020). The company has also been hiring doctors, health coaches, and engineers to help develop its healthoriented software. Since before the 07/08 crisis, Apple’s strategy for mitigating risks has remained essentially unchanged. The company has used expansion into global exchanges to raise capital, financial derivatives to hedge exchange and interest rate risks, and maintained stockpiles of cash for uncertain times. Despite criticisms for keeping extreme amounts of cash on hand, Apple was virtually unaffected by either the 2007-2008 crisis or the Covid-19 pandemic, two of the most trying periods for businesses in the 21st century. IV. Ethical and Legal Considerations Corporate culture and ethics were one of the paramount issues Steve Jobs took on with his 1997 return to the company he had co-founded over twenty years prior. The stated claim for the success of the company is by creating innovative, high-quality products and services and on demonstrating integrity in every business interaction (Auburn, n.d.). Apple defines integrity by breaking it into four principles: honesty, respect, confidentiality, and compliance. For enforcement, the company has a code of business conduct that applies to all operations, domestic and international. Depending on the values of stakeholders and shareholders, corporate social responsibility actions could be seen as detrimental to profits. Apple has been leading the cause of sustainable energy sources and improving the quality of life for overseas labor. Apple makes each overseas supplier sign a code of conduct that ensures compliance with full factory audits (Auburn, n.d.). While this filters out unsavory businesses from Apple’s supply chain, it may come at a higher monetary cost and more difficulty in sourcing raw materials. If a company such as Apple ignored working issues with labor and did not adopt such policies, foreign governments could increase regulations, further decreasing competition among suppliers or could lead to customers switching to a company with more favorable ethical behaviors. As such, the ethics and values that the company continues to showcase are no doubt a driving factor in Apple’s continued success. V. Future Risks and Challenges Apple’s financial statements throughout the years have shown consistent growth and resilience that has allowed the company to survive not just one, but two economic disasters of recent history. During the 2008 crisis and the Covid-19 pandemic, the company’s strategies were more successful in mitigating foreign exchange exposure than other companies. However, Apple still has many challenges that it will have to overcome in the future. Two ominous challenges on the horizon for the company are the current global microchip shortage and more rigid antitrust regulations. The global microchip shortage has been a standing challenge for nearly all in the automotive and consumer technology industries over the past few years. Apple recently announced to investors that the chip shortage costs them an estimated $3 billion to $4 billion dollars in revenue a fiscal quarter (Lovejoy, 2021). As the worldwide demand for these parts rise, so do their prices. Apple could mitigate the risk of decreased revenues due to increased microchip prices by entering forward or future contracts with microchip suppliers. New concerns around the App Store have brought Apple under scrutiny from both European governments and the United States. The company is currently under investigation for violating antitrust regulations stemming from the anti-competitive behaviors exhibited in their App Store. Although numerous smartphone alternatives to the iPhone exist, some regulators consider Apple’s position on the sales and distribution of iOS apps monopolistic. The European Union has argued that Apple broke its competition laws since “any app downloaded to an iPhone or iPad must comply with the company’s rules and guidelines, including using Apple’s payment system and sharing up to 30% on any sales” (Satariano, 2021). Many companies are considering these rules and guidelines to be unethical because if they do not comply, they risk losing access to millions of Apple customers. Apple argues that “tight oversight of the App Store ensures customers download high-quality apps, protecting users from viruses, fraud and buddy software” (Satariano, 2021). If the investigations are determined to not be in favor of Apple, the company will face not only a decrease in revenue but also an influx in competition. To mitigate the risk of increased competition, Apple should add additional funds to research and development and continue diversifying its acquisitions. Creating new innovative products will be Apple’s best defense against an increase in competition. References Apple. (2020, April 21). Apple Services now available in more countries around the world. Apple Newsroom. https://www.apple.com/newsroom/2020/04/apple-services-nowavailable-in-more-countries-around-the-world/ Apple Inc. (2022). APPLE INC. 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