Essay on Finance Midterm

This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.

I would now like to examine Wal-marts financial data. Wal-Mart’s revenue improved over these three years by $39,736 million which is a gross increase of 9.1%. Additionally the Cost of Sales climbed from

The currency of India has been falling much recently against the dollar, as the risk adverse global investors start getting worried about the deficits, as efforts are being made by the central bank to stem the slide of the currency. According to Fact Set data, the rupee hit 54.44 against the dollar, in December, 2011. According to the analyst, it is expected that the rupee may continue to weaken further, as Eurozone jitters dovetail with the raising worries on the slow growth rate, fiscal deficits and the current account.

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

Ms. Cohen’s argument was irrelevant because not only did she provide any supportive facts, but she is also incorrect because the hedging program did not create any new risks. In fact, it was perfectly implemented since it reduced the firm’s foreign currency fluctuation risk as seen above.

* If we surmise that the company’s specialist’s predictions of 4% on market growth along with renewing current and or adding more customer contracts then the profits should be as follows:

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

Looking into the competitive threat more closely, the auto industry in the United States is rather sensitive to price, with a price elasticity of 2, or a 5% increase in price contributing to a subsequent 10% fall in demand. Thus, based upon the sticker price decreases potentially implemented by Japanese automakers, Japanese companies’ combined market share (roughly 4.1m units in 2000) stands to increase substantially, and could eat into General Motors’ overall market share. To highlight the sensitivity to the USD-JPY spot exchange rate, GM’s VP of Finance, Eric Feldstein, suggests that just a one-yen depreciation increases competitors’ operating profit by $400m. With $900m in net yen receivables, $500m in outstanding yen-denominated bonds, and more

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).

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

Life insurance is meant to provide funds to replace a breadwinner's to protect and support dependents. Chad and Haley are dependents, not income providers. Therefore, the purchase of life insurance is unnecessary and not recommended. The Dumonts should use the money they would spend on policies for the children to increase their own coverage.

But, even though the possibility of winning exists, the company is exposed to a greater risk if it does not hedge. Moreover, the policy of the company is to ensure against the risk, not to speculate on the foreign exchange market.

Current Strategy. The company has been hedging the US dollar long position by estimating its annual US dollar sales and hedging that exposure by purchasing put options on the US dollar (the right to sell US dollars for euros at a specific exchange rate). The company has been purchasing these options in what it refers to as a “three-year rolling hedge” in which it hedges expected US dollar sales three years out

Those expenses act as a natural hedge that decreases the total exposure of Aspen to foreign exchange risk. For its revenues and expenses, after “natural hedging”, the overall exposure of Aspen to foreign exchange risk is $9,484,000, with Belgium

In addition to the causes above, the following events have further deepened Japan’s economic situation during the Lost Decades: