Case Study: Failure Mode And Effect Analysis

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

2) Minimize the cost associated with the foreign exchange risk management strategy, i.e. the management and hedging costs

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

AIFS wants to offset any change in the exchange rates that may adversely affect their profit margins by using currency forward contracts and currency options. These hedging activities work to offset the three types of risk defined above as bottom-line risk, volume risk, and competitive pricing risk. Since these hedging activities must be put in place two years before the actual year of sales, AIFS must decide the proportion and cost

The starting point of any foreign exchange risk management plan is to identify the exchange exposure faced. In controlling the foreign exchange risk, currency options have attained acceptance as very helpful tools due to their exclusive nature. They are very critical and convey a much wider range of hedging alternatives. Call options provide the right to the buyer to purchase the

AIFS is an American based company that offers travel abroad and exchange study services to both college and high school students. While AIFS’s revenues are denominated in American Dollars (USD), most of their costs are in foreign currencies as Euros (EUR) and British Pounds (GBP). Consequently, foreign exchange hedging has a crucial importance for the company because it provides protection against different types of risk that derive from its activity.

Currency risk will be always present because the product has being imported with a dollar-cost basis and competitors are all manufactured locally. Therefore, we can find room for hedging. If the Material Hospitalar Company is concern about a Real depreciation, they can take a position where if the Real’s value falls, they would make money and offset any increase in the costs incurred because of that depreciation. For example, they can buy a call option on USD or “long the call” which would give them the right to buy USD (International Finance, Sercu. 8.1.1 Call options, p.263) at a spot price indicated in the contract that should be, of course, very similar to the current spot price. This way they are protected against any lose caused by a possible Real depreciation.????????

Nestle Risk Management Centre was created in 2001 to coordinate activities related to risk management in Quality, Security, Treasury, Compliance, Operations, and IT etc. Overall objective of risk management process at Nestle is appropriate management of risks, which could have a material impact on Nestle business. Nestle risk management process covers Enterprise Risk Management, which is designed to identify, communicate, and mitigate risks in order to minimise their potential impact on the Group. Nestlé has adopted a dual approach in identifying and assessing risks. A top-down assessment is performed at Group level once a year to create a good understanding of the company’s mega-risks, to allocate ownership to drive specific actions around

From its definition it can be noticed that hedging is a strategy employed by companies in an effort to safeguard their economic position and to prevent the company from the losses which are associated with the unforeseen risks. Companies can hedge against risks which are associated with losses by taking control of their future purchases. The commodity prices vary in different markets and are caused or influenced by different economic factors. Some commodities are very scarce and with the increased depletion subject to the global demand in different foreign markets, the prices are set to be hiked in response to the established demand which positions the companies that use those particular commodities to have cash flow problems.

Failure mode and effects analysis (FMEA) is a specific safety tool for estimating the effect of potential failure modes of assemblies, subsystems, components and functions. It is basically a reliability safety method to recognize failure modes that would adversely disturb overall system reliability analysis model. Failure mode and effects analysis has the proficiency to include failure rates for each failure mode in order to accomplish a quantitative probabilistic analysis. Furthermore, the FMEA can be extended to assess failure modes that may provide result in an undesired system state and such as a system hazard, and thereby also be used for hazard analysis. Failure mode effect and critical analysis (FMECA) is the detailed version of the Failure mode effect analysis (FMEA). The FMEA method is an ordered bottom-up assessment technique that focuses on the function or design of products and progressions in order to prioritize actions to moderate the risk of product or process failures.

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge