Explain the most effective and inexpensive approach

Assignment Help Business Management
Reference no: EM13217688

Exacta, s.a., is a major French producer, based in Lyon, of precision machine tools. About two-thirds of its output is exported. The majority of these sales are within the European Union. However, the company also has a thriving business in the United States, despite strong competition from several U.S. firms. Exacta usually receives payment for exported goods within two months of the invoice date, so that at any point in time only about one-sixth of annual exports to the United States are exposed to US Dollar currency risk.
The company believes that its North American business is now large enough to justify a local manufacturing operation, and it has recently decided to establish a plant in South Carolina. Most of the output from this plant will be sold in the United States, but the company believes that there should also be opportunities for future sales in Canada and Mexico.

The South Carolina plant will involve a total investment of $380 million and is expected to be in operation by the year 2015. Annual revenues from the plant are expected to be about $420 million and the company forecasts net profits of $52 million a year. Once the plant is up and running, it should be able to operate for several years without substantial additional investment.

Although there is widespread enthusiasm for the project, several members of the management team have expressed anxiety about possible currency risk. M. Pangloss, the finance director, reassured them that the company was not a stranger to currency risk; after all, the company is already exporting about $320 million of machine tools each year to the United States and has managed to exchange its dollar revenue for euros without any major losses. But not everybody was convinced by this argument. For example, the CEO, M. B. Bardot, pointed out that the $380 million to be invested would substantially increase the amount of money at risk if the dollar fell relative to the euro. M. Bardot was notoriously risk-averse on financial matters and would push for complete hedging if practical.
M. Pangloss attempted to reassure the CEO. At the same time, he secretly shared some of the anxieties about exchange rate risk. Nearly all the revenues from the South Carolina plant would be in U.S. dollars and the bulk of the $380 million investment would likewise be incurred in the United States. About two-thirds of the operating costs would be in dollars, but the remaining one-third would represent payment for components brought in from Lyon plus the charge by the head office for management services and use of patents. The company has yet to decide whether to invoice its U.S. operation in dollars or euros for these purchases from the parent company.

M. Pangloss is optimistic that the company can hedge itself against currency risk. His favoured solution is for Exacta to finance the plant by a $380 million issue of dollar bonds. That way the dollar investment would be offset by a matching dollar liability. An alternative is for the company to sell forward at the beginning of each year the expected revenues from the U.S. plant. But he realizes from experience that these simple solutions might carry hidden dangers. He decides to slow down and think more systematically about the additional exchange risk from the U.S. operation.

Questions

a. What would Exacta's true exposure be from its new U.S. operations, and how would it change from the company's current exposure?

b. Given that exposure, what would be the most effective and inexpensive approach to hedging?

Reference no: EM13217688

Questions Cloud

Write an informative paper about opening a free clinic : Your boss has asked you (a communication specialist) to write an informative paper about opening a free clinic in your neighborhood for those without medical insurance. The content will be turned into an informative handout for the public.
Law enforcement paper : describe the historical development of police agencies and their jurisdiction. Be sure to describe local, state, and federal law enforcement agencies under the jurisdiction of the Department of Homeland Security and their responsibilities with regard..
Different spanish=speaking culture in western hemishere : the term hispanic and latino are umbrella term for people from different spanish=speaking culture in western hemishere.
What makes an ad succeed or flop : Think about specific print or television advertisements that have either stuck with you or made you turn your eyes, and explain what works or what doesn't. In your response, be sure to consider the impact the rhetorical appeals of reasoning, credi..
Explain the most effective and inexpensive approach : What would Exacta's true exposure be from its new U.S. operations, and how would it change from the company's current exposure? Given that exposure, what would be the most effective and inexpensive approach to hedging?
Real-life crime scene investigations : How do television dramas differ from real-life crime scene investigations? What do you think is the most misleading difference between the two? Why does it matter?
What are some of the reasons that the student gives : What is the student's issue question in this paper What is the student's claim What are some of the reasons that the student gives Describe some of the support (evidence) offered to back up these reasons.Describe the most important conclusions that t..
Determine the mass of the shade : the aluminum shade for the small high intensity lamp has a uniform thickness of 1mm. Knowing that the density of aluminum is 2800 kg/m^3, determine the mass of the shade.
Determine the largest load p : A knowing that the normal stress magnitude in each link is not to exceed 24 ksi, the shearing stress in pin F is not to exceed 15 ksi, and the deflection of point A is not to exceed .08 in.

Reviews

Write a Review

 

Business Management Questions & Answers

  Explain during orientation mci conducted an intensive

Explain During orientation, MCI conducted an intensive training session that detailed MCI's procedures for measuring and hanging kitchen cabinets.

  Managing conflict in drug testing situations

Managing conflict in drug testing situations - How will you try to resolve it? Explain the pros and cons of your recommendations.

  Estimates the change in productivity

The number of defective items produced has dropped from 10 pieces per day to 1 per day. The production facility operates strictly eight hours per day. Estimates the change in productivity for Aztec using the new assembly process.

  Explain how would the value of the headquarters unit change

Explain how would the value of the headquarters unit change if the dividends paid on equity became similar to the treatment of interest on debt?

  Utilize a word processor to write your response

Utilize a word processor to write your response to the subsequent questions in the form of an essay containing 500 words, not to exceed 1000 words

  Explain specifically where and how your product

Explain specifically where and how your product would be sold and Describe the reasons for your strategy

  Explain and discuss performance appraisals

Explain and discuss performance appraisals and the process of developing performance appraisals and Describe and explain the role of performance appraisal in administrative decision making

  Facing risks and challenges when developing new products

In your opinion what risks and challenges does an organization face when developing new products, and how can it mitigate them?

  Describe cost-volume-profit analysis

Describe cost-volume-profit analysis with profit-volume analysis and How do they differ

  Concession stand at a stadium

The local university is accepting bids for hot dog and cold drink concession at new stadium. The agreement is for a five year period. You believe that a bid of $40,000 will win contract.

  How do you evaluate this performance and delivery

which in financial terms means that the supplier has falsified financial reports for whatever financial gain they are seeking.

  Illustrate what do they need to know about making

Develop a "Welcome Letter" for the visiting students. Keep in mind that the students have not lived in the United States nor attended a U.S. college before. Illustrate what do they need to know about making and keeping friends here in the U.S.?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd