Exchange Rate Risk Management Case Study Assignment Help

Introduction The exchange rate risk is one of the major risk that a firm faces in operating the business worldwide. If Dorchester, Inc acquires a company from Japan, Germany or Canada, then it will also face the exchange rate risk. The management of exchange rate risk is quite essential for a firm to maintain its profitability as exchange rate fluctuations can cause an increase in the cost of acquisition for the firm (Alexander, 2008).

The currency mismatch between two countries creates currency risk exposure. Dorchester, Inc is proposed to acquire Braun, a German company engaged in electronic industry. Earlier, this company was engaged to manufacture radios, slide projectors, and other accessories, but now it is mainly focused over the production of its core categories such as shaving & grooming, hair care products etc (Braun, 2012). This exchange rate risk management case study assignment help paper will discuss the exchange rate risk management program for Dorchester to operate its business in Germany with the acquisition of Braun. A 5-step program will be used to manage exchange rate risk.

Program for Managing Exchange Risk for Proposed Acquisition: The exchange rate risk affects the profitability of a business and to operate a business, it is essential for a firm to minimize the risk by shifting the cost on other currencies.

Exchange Forecasting: Exchange forecasting is an effective means to manage exchange risk that would appear as a result of Braun’s takeover. In order to deal with adverse exchange movements, exchange forecasting would be much effective. The long-term analysis of exchange rate fluctuations will be carried out as a part of managing foreign exchange risk. Forecasting of exchange rate will make organization prepared for the fluctuations in the exchange rate (Ullrich, 2009). As there are wide number of factors influencing the exchange rate, these factors would be subsequently considered under exchange risk forecasting. Historical price pattern will be followed to forecast exchange rate between dollar and euro. At the same time our case study experts say that variables like interest rate, country risk will also be considered as a part of exchange forecasting to manage exchange risk. Use of purchasing power parity would also be effective to forecast the exchange rate. As the rate of inflation in both the countries relatively goes high, there would be maximum chances for depreciation in the value of currency (Madura, 2008). Exchange forecasting would provide organization to successfully deal with the exchange risk that would arise as a result of acquiring Braun.

Assessing Strategic Plan Impact: Assessment of impact of strategic plan is also equally important for managing exchange risk. Once the exchange rate, cash flow and earnings are forecasted, a strategic plan is formulated. Assessment will be made for long-term that is for period of four to five years. As a part of this assessment, magnitude of exchange exposure will also be determined to manage exchange risk effectively (Lau, 2005). As the business is being acquired for full time, long-term assessment would be better to manage exchange risk effectively. Apart from this, assessment of impact of strategic plan provides information with the capability of \tools used to manage risk. It would help organization to successfully deal with the consequences that would arise as a result of managing exchange risk.

Decide on Use of Hedging: The main objective of a takeover by Dorchester, Inc is to increase the organizational revenue and market share by expanding the business internationally. The organization is facing huge competition as its competitors are going internationally, which is affecting its competency in the industry (Alexander, 2008). The ultimate objective of the firm is to maximize the wealth of its shareholders. Although currently a large portion of revenue for the company is in domestic market only, but it also has a significant portion of revenue overseas. The cost of labor is also very high in Germany, which may affect the profitability of business as import of goods from there will cause an increase in overall cost of the firm. So, it is essential to manage the exchange rate risk effectively (Homaifar, 2004).

It is because the cost of manufacturing will occur in dollar, while earnings will be generated in Euro. At the same time, competition in Germany is high due to restrictions by European Union directive to protect the domestic businesses and to reduce the ability of foreign businesses to explore the country resources. This situation may cause the volatile cash flows for Dorchester in its Germany, which would also affect its planning and business decision-making process such as capital investment, investment in marketing strategies etc (Homaifar, 2004). At the same time, for the success in Germany for long-run due to higher competition, company also require high level of research funding as requirements and needs of the customers in USA and Germany are quite different. And the volatile exchange rates may cause cash flow uncertainty, so it is essential for the firm to hedge the exchange rate risk in order to reduce the impact of exchange rate volatility on future cash flows of the business (Alexander, 2008).

Selection of Hedge Instrument: The main objective of this step is to select the most appropriate and cost-effective hedging tool to eliminate the currency rate exposure. There are various hedging tools such as foreign exchange swap, currency options, average rate forward, forward rate, currency ETFs, which could be used to hedge the currency risk exposure (Coyle, 2000). Among these tools, Dorchester should use currency ETFs as exchange risk hedging tool as it is a cost-effective alternative. It would be beneficial for Dorchester to reduce the cost of operations and hedging in Germany.

It is because if the dollar value depreciated then firm can use ETFs that will reflect the price of German Euro in US dollars. The strengthening in the Euro value will cause an increase in value of ETFs that will reduce the loss of profit for the firm. Currency ETFs are margin eligible that reduces the overall cost for the firm to hedge the potential foreign exchange risks (Ferri, 2011). The margin eligibility will protect the ability of firm to implement its strategic decisions without affecting from any uncertainty in cash flows.

Constructing a Hedging Program: Hedging program is a sophisticated strategy having straightforward approach to capture and lock-in capital gain with the fluctuations in the exchange rates. The program would contain the general terms of hedging, a strike price of currency options and the percentage of income to be covered. Currencies ETFs will be used as hedging strategy against exchange rate risk (Fabozzi & Mann, 2003). Various exchange rate scenarios are considered under this program to manage exchange risk effectively. Huge amount of cost could also be saved with the help of this program. At the same time, long-term option contracts will be followed as a part of this hedging program to protect firm’s cash flow. In addition to this business case study assignment help, the hedging program would also be effective to protect operating margin for the company. As a part of this hedging program, the option values would be calculated. After that an internal policy system, procedure and control will be used for smooth functioning of the program (Ullrich, 2009). The hedging program would also include the authorized person to enter into hedge for approving trades and receiving trade confirmation. It would bring more transparency into the process of hedging that will be effective in management of exchange risk.

Conclusion: On the basis of above discussion by business assignment help experts, it could be said that above-discussed program is quite effective to manage exchange risk. Exchange forecasting would provide better means of information regarding the fluctuations in currency rate to minimize risk effectively. On the other hand, currency ETFs should be used to minimize the cost associated with hedging of exchange rate.

References: Alexander, C. (2008). Market Risk Analysis, Pricing, Hedging and Trading Financial Instruments. USA: John Wiley & Sons. Braun. (2012). Retrieved from: Coyle, B. (2000). Hedging Currency Exposures: Currency Risk Management. UK:Global Professional Publishing. Fabozzi, F. & Mann, S. (2003). Measuring and Controlling Interest Rate and Credit Risk. USA: John Wiley & Sons. Ferri, R.A. (2011). The ETF Book: All You Need to Know About Exchange-Traded Funds. USA: John Wiley & Sons. Homaifar, G.A. (2004). Managing Global Financial and Foreign Exchange Rate Risk. USA: John Wiley & Sons. Lau, J. A. (2005). Hedging Foreign Exchange Risk in Chile: Markets and Instruments. USA: International Monetary Fund. Madura, J. (2008). International Financial Management. Canada: Cengage Learning. Ullrich, C. (2009). Forecasting and Hedging in the Foreign Exchange Markets. Germany: Springer.  

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