Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.
Moreover, because of the huge worldwide extension of the corporation, which operates in 194 countries, the use of foreign currency derivatives to minimize the earnings volatility would be the subject of later analysis. The report will focus on how Nestlé uses futures and option contracts to hedge its exposure to currency risk, centering our attention in Nestlé Home Currency, the Swiss Franc in relation to the US Dollar (USD/CHF). It will be examined an example of its hedging strategy and the information provided by a contact in the firm.
2. Currency risk: USD/CHF
With the development of multinational companies, financial risk has played an increasingly remarkable role in financial market. In order to overmaster interest risk, currency and price risks, multinational corporates tend to hedge their exposure to financial risk. In practice, Coca-Cola Company has charged its business for a period of one century and made it as one of the principal players in the beverage industry. Coca-Cola Company markets have 500 non-alcoholic beverage brands in more than 200 countries. The essay discuss the pros and cons of hedging and analysis the financial statement of Coca-Cola. Eventually, hedging is a reasonable secession in risk management for multinational companies.
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.
A currency exposure is any business operation whose profitability can be impacted by a currency exchange rate fluctuation.
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).
Management’s assessment of risk associated with interest rates is high. Exposure to market risks results primarily from fluctuations in interest rates. Their objective is to enter into derivative instruments to primarily decrease volatility of net earnings and cash flow associated with fluctuations in interest rates. They have financial instruments that are sensitive to changes in interest rate, as well as several outstanding interest rate swap agreements.
Given the proposal on whether to invest $10,000 CAD in a Canadian Savings Bond, with a 1.5% return of $150 over a 3-year period, or an investment of $10,000 CAD in the shares of Kraft Heinz Co. at $88.95 USD or $119.46 in CAD per share, further analysis on KHC must be conducted to determine which investment will have the highest rate of return. Factors including net profits or losses, the share and dividend price, and the debt to equity ratio will be analyzed to understand current and projected trends. Further investigations will be conducted using the SWOT analysis and Porter’s Five Forces. For ease of the analysis, the investment amount and return, and analyzed variables will all be converted into USD using an exchange rate of $1.34CAD/USD. The initial amount available for investment is $7445.93 USD, which can be used towards the purchase of 83 of KHC’s shares, or in a Canadian Savings Bond with a return of $111.70 USD. This is subject to fluctuations of currency in the 3-year projection.
Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.
Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk
This report is created with a discussion over several important international finance topics for instance, interest-rate parity, currency risk management, regarding description on Carrefour S.A. financing policies as well as hedging strategy. Additionally, we also discussed on which currency Carrefour should issue its 10-year, 750 million euro, annual coupon bond, its foreign currency risk exposure and a possible hedging decision in dealing with any or all of the identified risks.
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
Rob Carpenter senior manager at a prestigious accounting firm, recently transferred to the international division of acquisition and mergers. Mr. Carpenter was recently asked to make a recommendation regarding Nestle. Mr. Carpenter unfamiliar with the accounting in Switzerland has realized substantial differences between Swiss and U.S. accounting standards. Surprisingly, there are many “unnecessary” details in
Derivatives are products of financial innovation, the function of which is taking place in the Liberal Economies of the developed and developing world. Especially nowadays, the use of those financial instruments tends to be excessive, as their multifarious functionality can serve institutional investor?s different financial needs.
Derivatives are products of financial innovation, whose function is take place in the Liberal Economies of the developed and developing world. Especially nowadays, the use of those financial instruments tends to be excessive, as their multifarious functionality can serve institutional investor?s different financial needs.
Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one