In responding to your classmates, share your opinion about the companyâ??s hedging strategy. Offer them suggestions based on what other types of hedging the company might use to fit its product/industry to its risk. I upload the response and you just need to give comment about it. The word should be around 50-100.
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The company I selected for my final project is Ford motor company, it is an
American automotive corporation that designs, manufactures, markets, finance, and
services a full line of Ford cars, trucks, SUVs, and electrified vehicles. The
company has a total of sixty-seven manufacturing plants worldwide and operates in
North America, South America, Europe, Asia Pacific region, Middle East and Africa
(Ford 10-K, 2017). My project is focused on Ford expanding into the Chinese
market to launch a new line of electric vehicles and set up a manufacturing plant for
electric cars since China is the worldâ??s largest auto market.
The three main types of currency exposure risk Ford might face includes, the
transaction exposure risk, which occurs when outstanding accounts receivable or
payable are denominated in foreign currency, that means purchasing or selling on
open account is in foreign currency and when borrowing and lending funds in
foreign currency (Cavusgil, et al., 2017).
Economic exposure risk, this is as a result of exchange rate fluctuation
affecting the pricing of cost, the cost of input and the value of foreign investment.
Translation exposure risks arises from consolidation. An example is, Ford is
prone to risk when combining the financial statements of foreign subsidiaries into
the parentâ??s financial statement, it arises from translating financial statements of
foreign subsidiaries that are denominated in a currency different from the home
country. There is the risk of value alteration in terms of the balance sheet of the
company caused by changes in foreign exchange rates.
Hedging for Ford is a way to minimize the variability in cash flow and in
accounting earnings that arises from their operations activities. Two major foreign
currency derivatives used by Ford includes, the forward contracts and foreign
currency options, others include futures contract and currency swap.
Forward contract: this requires the purchase or sale of currency units at a
future date at a contracted exchange rate. For example, Ford can protect profit by
securing a forward contract when they expect a weakening of a foreign currency that
contributes in sales and revenue.
Currency option are used as an insurance policy against harmful currency
movements. Currency option establishes a price for which the currency can be sold
but is not required to be sold at maturity. There are two types of options, the call
option and the put option. The call option is the right, but not the obligation to buy a
currency at a specified price within a specified period or on a specific date. The put
option is the right to sell the currency at a specified price. (Cavusgil, et al., 2017).
Futures contract: Ford offset their price risk by obtaining a futures contract
on a future exchange. this secures Ford of a pre-determined price of their products.
Currency swap, a swap is a simultaneous spot of forward transaction. Two
parties agree to exchange a given amount of currency for another and, after a
specified period of time the original amounts is given back.
Ford is doing enough to hedge its risk, Fords revenue over the last five years
has being relatively stable. The first quarter of 2018, Ford was above Company
average. Revenue improvement of 7.19% year on year, to $ 41,959.00
million. Ford Motor net cash provided by operating activities increased from 2015
to 2016 but then slightly declined from 2016 to 2017. Ford reported a positive
operating cash flow of $18.1B for 2017. Ford can also work on their pricing policy
for the electric cars by adjusting the price denominated in foreign currency, so that it
includes expected future fluctuation.
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