Transcript Exacta, s.a. case study
MGMT 575 Group B Case Study 2 September 16, 2012 Samantha Allison Leah Bond Lisa Cochran Louis Latimer
Overview
Company Background Statement of Problem Courses of Action Financial Information Analysis Recommendations Conclusion References
Company Background
Exacta, s.a. is major French machine tool manufacturer.
Currently sells within Europe and the United States.
Only 1/6 th of annual U.S. exports are subject to currency risk.
Interested in opening a new plant in N. Carolina, opening the door to potential new sales to Canada and Mexico.
N.C. plant will be a $380 million investment with expected annual revenues of $420 million and expected annual net profits of $52 million.
Statement of Problem
CEO and Finance Director are concerned with currency risks between Euro and Dollar.
Considering offsetting $380 million U.S. plant investment by issuing dollar bonds.
What would Exacta’s exposure be from new U.S. plant?
How would it change from the current exposure?
What is the most effective and inexpensive approach to hedging for that exposure?
Courses of Action
Option 1 – Finance the new plant by a $380 million bond issue in dollars.
Option 2 – Sell forward at the beginning of each year the expected revenues of the plant.
Financial Information
Two thirds output exported, mostly within the European Union.
Net-60 invoice produces one sixth current exposure to U.S. currency risk.
New plant in US expected cost $380 million.
Projected revenues of $420 million and net profit of $52 million annually.
Financial Information
What would Exacta’s exposure be from new U.S. plant?
How would it change from the current exposure?
What is the most effective and inexpensive approach to hedging for that exposure?
Analysis
Current Exchange Rates Forward Exchange Rates Spot Rates
Current Exchange Rates
Current Exchange Rates
EUR/USD AUD/USD GBP/USD USD/JPY EUR/JPY EUR/GBP USD/CAD USD/CHF
Price Change %Change
1.3128
1.0557
1.6214
78.4000
+0.0141
+0.0011
+0.0062
+0.9150
102.9243
+2.2621
0.8097
0.9711
0.9268
+0.0056
+0.0022
-0.0084
+1.0865% +0.1052% +0.3808% +1.1809% +2.2472% +0.6906% +0.2229% -0.8961%
Day Range 52 Week Range
1.2985 1.3169
1.0537 1.0624
1.5808 1.6254
77.5050 78.3850
100.7555 103.0273
0.8037 0.8116
0.9634 0.9722
0.9240 0.9354
1.2090 1.4155
0.9388 1.0856
1.5234 1.6302
75.8265 83.7100
94.1172 111.5114
0.7790 0.8788
0.9634 1.0536
0.8598 0.9957
Current Spot Rate Exchange
Quote Day Week Month Year 14-Sep-12 13-Sep-12 7-Sep-12 15-Aug-12 15-Sep 11 Quote % Chg Quote Forex Spot Rates - 9 Majors % Chg
EUR/CH F EUR/JP Y EUR/US D GBP/EU R GBP/US D USD/AU D USD/CA D USD/CH F USD/JP Y 1.2104
100.3583
1.2921
1.2481
1.6129
0.9544
0.9755
0.9368
77.6578
0.1% 1.2094
0.0% 0.3% 1.2884
0.0% 1.2478
0.3% 1.6077
-0.2% 0.9564
0.1% 0.9741
-0.2% 0.9387
-0.3% 100.40
07 77.924
1
Quote % Chg
0.4% 1.205
0 1.2% 99.23
02 2.2% 1.261
3 -1.0% 1.260
7 1.1% 1.590
1 -2.1% 0.976
7 -1.4% 0.988
2 -1.8% 0.955
4 -1.0% 78.67
36
Quote % Chg Quote
0.3% 1.201
4 2.3% 97.02
93 2.1% 1.234
9 -0.8% 1.270
4 1.4% 1.568
8 2.6% 0.951
6 -0.4% 0.992
3 -1.8% 0.972
9 0.1% 78.57
27 -0.4% 1.2066
-8.8% -10.8% 1.3846
11.3% 1.1410
-0.7% 1.5804
-1.9% 0.9699
0.8% 0.9846
11.6% 0.8714
2.3% 106.35
26 76.770
0
Currency Conversion
Current Currency Table
Currency Last Day High Day Low % Change Bid EUR/USD 1.3111
1.3128
GBP/USD 1.6220 1.6238
USD/JPY 78.320 78.420
1.3111
1.6217
78.320
0.11% +0.04% 0.08% USD/CHF 0.92600 0.92730
0.92620
0.08% 1.3111
1.6220
78.320
Ask 1.3116
1.6227
78.370
0.92600
0.92690
USD/CAD 0.97160 0.97180
0.97030
+0.05% AUD/USD 1.0533 1.0560
1.0535
0.14% 0.97160
0.97220
1.0533
1.0538
Recommendations
Exacta should choose Option 2: Sell forward at the beginning of each year the expected revenues of the plant Stability for Exacta and customer Exacta should NOT choose Option 1: Must comply with U.S. regs for traded bonds Must register with SEC Very long process U.S. debt-rating agencies would determine credit worthiness
Conclusion
Exacta concerned with currency risks between Euro and Dollar.
Exacta should sell forward at beginning of each year expected revenues of the plant.
References
Brealey, R., Myer, S., & Allen, F. (2011). Principles of corporate finance. (10th ed.). New York, NY: McGraw Hill Irwin Currency Center. (2012).
Retrieved September 15, 2012 from http://finance.yahoo.com/currency-investing
Currency hedging
. (2011) Retrieved September 13, 2012 from http://www.theglobeandmail.com/partners/a dvedc1111/currency-hedging-essential-to profiting-from-international trade/article1355447/?page=all
Derivatives to Hedge Risk. (
2010). Retrieved September 13, 2012 from http://www.investopedia.com/articles/stocks/04/12220 4.asp#axzz26PIszfXh
References
Foreign currency hedging
. (2010). Retrieved September 13, 2012 from http://www.buzzle.com/articles/foreign currency-hedging.html
Spot Exchange Rates. (2012).
Retrieved September 15, 2012 from http://www.foreign-trade.com/currency outlook.htm
Yankee Bond
. (2011). Retrieved September 13, 2012 from http://www.investopedia.com/terms/y/yankeebond.asp
#axzz26PIszfXh