Foreign Exchange Risk Management In Multinational Corporations Finance Essay

Foreign Exchange Risk Management In Multinational Corporations Finance Essay Corporations (MNCs) Introduction: Globalisation has had economic, cultural, technological and political effects. Over the last few decades the increase in globalisation has led to rapid growth in several industries around the world and it has also had a strong influence on the flexibility of firms. Hundreds of new MNCs have emerged globally due to the liberalisation of trade and capital markets. MNCs are not limited to the big firms with huge investments like Coca Cola, Nike and Shell, due to advances in technology and liberal markets many small firms operate internationally to maximise their profits. This growth has highlighted the various risks faced by MNCs operating in different countries. One such risk is the financial risk involved with the foreign currency exchange markets. Most of the time MNCs deal in more than one national currency and hence the changes in the foreign exchange rates can have an adverse effect on the firms profits. This paper discusses the various foreign exchange risks faced by multinationa ls around the globe and the necessary steps taken to manage these risks. A study on the Malaysian MNCs has also been covered in the paper. Foreign Exchange Risks: Foreign Exchange risks also known as exposures can be termed as an agreed, projected or contingent cash flow whose scale is not certain at the moment. The magnitude depends on the value of the changes in the foreign exchange rates which in turn depends on various variables such as the interest rate parity, purchasing power parity, speculations and government policies on exchange rates. According to G.Shoup (1998), a company has exposure if there is a currency mismatch in some aspect of the business such that a shift in foreign exchange rates, nominal or real, affect its performance either positively or negatively. These exposures may be classified into three different categories: Translation exposure Transaction exposure Economic exposure Translation Exposure; this is the net asset/liability exposure in the home currency of the MNC. In other words, it is the profit gained or loss incurred in translating foreign currency financial statements of foreign subsidiaries of the MNC into a single currency which it uses in its final reports (Yazid Muda, 2006). In essence, translation risk can be defined as the effect of exchange rates on the figures shown on the parent companys consolidated balance sheet. Although this exposure does not affect the shareholders equity, it does influence the investors due to the changing values of the assets or liabilities. (Shoup, 1998) Transaction Exposure; it is a risk associated with a transaction that has already been contracted. It is as a result of unexpected changes in foreign exchange rates affecting future cash flows which the MNC has already committed itself to. Usually MNCs enter an international contractual obligation, the payment or receipt of which is expected on a future date, hence any change in the foreign exchange rate during that period will expose the MNC to transaction risks. Transaction risks can be easily identified and thus get more attention from the financial managers. (Eiteman, Stonehill, Moffett, 2007) Economic Exposure; this is the most complex risk as it not only involves the known cash flows but also future unknown cash flows, hence also termed as a hidden risk. It is a comprehensive measure of a companys foreign exchange exposure and therefore sometimes termed as a combination of translation and transaction exposure. Identifying economic risks involves measuring the change in the present value of the company resulting from any changes in the future operating cash flows of the firm caused either by adverse or desirable change in the exchange rate. (Eiteman, Stonehill, Moffett, 2007). As Dhanani (2000) noted, economic risk can be viewed as the consequence of long-term exchange rate fluctuations on a firms predicted cash flows and as the cash flows linked to the risk are not certain to materialize, the risk is hard to identify. Economic exposure to a MNC may last for a long duration making it difficult to be quantified and hence limiting the use of possible management techniques. (Shoup, 1998) Foreign Exchange Risk Management Foreign exchange risk management is a process which involves identifying areas in the operations of the MNC which may be subject to foreign exchange exposure, studying and analysing the exposure and finally selecting the most appropriate technique to eliminate the affects of these exposures to the final performance of the company. (Shoup, 1998) Risks involving short term transactions can be dealt with using financial instruments but long term risks often require changes in the operations of the company. As in the case of translation exposure the MNC can have an equal amount of exposed foreign currency assets and liabilities. By doing so the company will be able to offset any gain or loss it may have due to changes in the exchange rates of that currency, also known as balance sheet hedging. (Eiteman, Stonehill, Moffett, 2007) In dealing with economic exposures efficiently, a MNC may have to diversify either its finance or its operations. It can diversify its operations by either moving to locations where the cost of production is low, or having a flexible supplier policy, or changing the target market for its products and the types of products it deals in. As it can be illustrated from the 1994 example of Toyota, when a strong Yen made Japanese exports to US more expensive, it decided to shift its production from Japan to US, where it achieved comparatively lower costs of production, enabling it to compete in the US car market. (Eun Resnick, 2007) The management of transaction exposures may either involve hedging using special techniques or applying pro-active policies. The pro-active policies commonly used include (Eiteman, Stonehill, Moffett, 2007): Matching currency cash flow Risk sharing agreements Back to back loans Currency swaps Lead and Lag payments Use of re-invoicing centres Hedging is the act of protecting a pre-existing position in the spot market by trading in derivative securities; that is guarding of existing assets from future losses. According to Eiteman et al (2007), hedging is the taking of a position, acquiring a cash flow, an asset or a contract that will rise or fall in value and hence offset a fall or rise in value of an existing position. Several studies on this issue have emphasized that MNCs have a higher probability of facing exchange rate volatility in their operations as they expand their involvement throughout the world. Therefore, the extensive use of various hedging techniques by most companies has been widely recognized to ensure the companys overall interests, cash flows and equity are safeguarded. Some of the most commonly used hedging techniques include: Forward market hedge Money market hedge Options market hedge Forward market hedge; this is the case where the MNC in the forward contract has a legal obligation to buy or sell a given amount of foreign currency at a specific future date which is known as the contract maturity date at a price agreed upon at present. (Nitzche Cuthbertson, 2001) Money market hedge; under this hedging technique, the transaction exposure can be hedged by lending and borrowing in the local and foreign markets. For instance a MNC may borrow in a foreign currency to hedge the amount it expects to receive in that currency at a later date and similarly it could lend to hedge payables in a foreign currency. By doing so, the MNC will be matching its assets and liabilities in the same currency. (Eun Resnick, 2007) Options market hedge; this is a technique used by a MNC which gives it the right but not the obligation to buy or sell a specific amount of foreign currency at a specific price, by or on a specific date. Although not a widely used tool, it can be useful when a MNC is uncertain about the future receipt or payments of foreign currency. (Nitzche Cuthbertson, 2001) Hedging helps in reducing the risks involved in international transactions and also improves planning capability. By hedging a MNC can ensure its cash flow does not fall below a necessary minimum, particularly in cases where there is a tendency of a company to run out of cash for necessary investments (Eiteman, Stonehill, Moffett, 2007). A very good example would be that of Merck, a pharmaceutical company. Kearney and Lewent (1993) identified that Merck was one of the pioneers to have used hedging to ensure that its key investment plans could always be financed, which in their case was the research and development aspect of their business. Mathur (1982) came to the conclusion that, to decrease the negative outcomes caused by fluctuations of foreign exchange rate on earnings and cash flows, most companies employ a hedging program. He also noted that a formal foreign exchange management policy is more common among larger firms. According to Bartov et al (1996), if MNCs do not institut e a hedging program, they are more likely to be exposed to risks which may result in substantial losses. Despite its advantages, hedging does not increase the companys expected cash flows, on the other hand it uses up the company resources in the process (Eiteman, Stonehill, Moffett, 2007). According to G.Shoup (1998), unless there are clear defined objectives, safeguards in place and clear communication at every level of management, a hedging program may turn into a disaster. As the chairman of Zenith Electronic Corporations, Jerry K Pearlman once said, It is a, damned if you do and damned if you dont situation. (Shoup, 1998, p15.) In 1984, Lufthansa a German airline company placed a major purchase order for airlines from an American firm. The financial managers at Lufthansa had forecasted a stronger dollar in the days to come and therefore locked up the German Duetsche mark against the American dollar. Due to an unfavourable effect, a weak dollar, in one year Lufthansa lost around US$150 million and half of the financial managers team lost their jobs (Shoup, 1998). In another instance, two years later in 1986, the chairman of Porche found himself unemployed as he had engineered the company into a dependence on the US market for 61% of its revenue without hedging against a downturn in US$, as a result forcing Porche to suffer major financial losses. (Shoup, 1998) According to a study by Marshall (2000), the trend in the objectives of managing foreign exchange risks was quite similar between the UK and US multinationals who gave significant importance to certainty of cash flow as well as minimising fluctuations in earnings. On the other hand, a higher number of Asian multinationals managed these risks to minimise fluctuations in their earnings. The trend observed is summarised in Figure 1 below. Figure 1: Foreign exchange risk management in UK, USA and Asia Pacific multinational companies by Andrew P Marshall, Journal of Multinational Financial Management, 2000. Belk and Glaum (1990) undertook a study which involved investigating several UK MNCs. The study revealed that although majority of the companies considered translation exposure to be important, not all were prepared to hedge this risk actively. On the other hand transaction exposure was given most importance in the management of foreign exchange risks. The level of hedging the transaction exposure varied between the companies investigated, some hedged totally while others did so partially. The study also seemed to show that the size if the MNC influenced its involvement in foreign exchange risk management, the larger the company the higher the propensity. In another study carried out by Makar and Huffmann (1997), it was found that there is a linear relationship between the amount of foreign exchange derivatives employed and the degree of foreign currency exposure in US MNCs. Foreign Exchange Risk Management in Malaysian Multinational Corporations (MNCs) During the financial crisis of 1997, most Malaysian MNCs suffered foreign exchange losses due to currency fluctuations, thus leading to the increased involvement of Malaysian MNCs in foreign exchange risk management (Yazid Muda, 2006). It can be seen that before the financial crisis fewer MNCs considered hedging their foreign exchange risks to be vital, as the General Manager of the Malaysian Monetary Exchange Bhd indicated that local MNCs were very passive and reactive in managing their financial risks (New Strait Times, 30 May 1998: 11). A similar statement was given by the then Minister for International Trade and Industry, Rafidah Aziz, which implied that MNCs should manage their foreign exchange risks well (New Strait Times, 3 July 1998). A very good example of the losses suffered would be that by Malaysian Airline System (MAS), MAS lost around M$400 million in the first half of 1998 because of its foreign debt of about M$3.16 billion. Yazid and Muda (2006) studied 90 out of th e then 113 MNCs listed under the Bursa Malaysia. The main objectives cited by MNCs in this study relating to the foreign exchange risk management were to minimise the following; Losses on operational cash flow Cash flow fluctuations Losses on consolidated balance sheet Losses on shareholders equity Business uncertainty Foreign exchange risk to a comfortable level According to Yazid and Muda (2006), Malaysian MNCs became very proactive in managing their foreign exchange risks during the financial crisis and once the crisis was over, the priority attributed to foreign exchange risk management decreased slightly but not to the point it was before the crisis. This has been illustrated as a summarised result of the survey shown in table 1. Objectives Before During Current Minimise Losses on operational cash flow 3.59 4.62 4.09 Minimise Cash flow fluctuations 3.29 4.41 3.88 Minimise Losses on consolidated balance sheet 3.26 3.91 3.82 Minimise Losses on shareholders equity 3.24 3.56 3.50 Minimise Business uncertainty 3.21 3.50 3.41 Minimise Foreign exchange risk to a comfortable level 2.91 3.53 3.29 Table 1 (Yazid and Muda, 2006) Note: The results are based on five-point progressive Likert scale (1 is the least important; 5 is the most important) Large MNCs in Malaysia are more likely to get involved in foreign exchange risk management compared to smaller firms or firms with relatively lesser operations outside Malaysia. This trend seems to be consistent with other MNCs around the globe (Yazid et al, 2008). Majority of the Malaysian MNCs centralise their foreign exchange risk management and it can be said that foreign exchange risk management in Malaysia is still at its infant stage in comparison to other MNCs in the west. Their management practices are very informal and no proper documented policies can be found in regard to foreign exchange risks. Although the use of hedging tools is on a steady rise amongst the Malaysian MNCs, the objectives behind their involvement remain uncertain (Yazid and Muda, 2006). The past decade has seen rapid growth of a new segment in the global finance industry, the Islamic finance sector. To qualify for Islamic foreign exchange hedging, transactions must involve tangible assets. Malaysia, which is pre-dominantly an islamic country has highlighted the need of hedging tools which are compliant with Islam. Hence CIMB, a leading Malaysian bank among others, have introduced an Islamic foreign exchange hedging instrument, which would assist their clients to manage their risks. (Reuters, 2008) Astro, which is a leading services provider in the Asian entertainment indutry is based in Malaysia. Being a MNC, foreign transactions are dealt in different foreign currencies other than the Malaysian Ringgit. Consequently, there is an exposure to foreign currency exchange risk. Astro uses foreign currency derivatives such as forward contracts and interest rate swap contracts to hedge currency exchange risks. Forward contracts are commonly used to limit exposure to currency fluctuations on foreign currency receivables and payables as well as on cash flows generated from anticipated transactions denominated in foreign currencies. In 2007 Astro made a loss of RM 137,000 due to foreign exchange fluctuations and henceforth decided to emphasize the use of hedging techniques. This can be proven by Astros estimated principal amounts of outstanding forward contracts which as at 31st January 2009 was RM188,083,636, whereas at the same time a year before it was at RM 5,109,000. The emphasis o n risk management resulted in a substantial gain of RM 7,680,000 for Astro in the year ended 2008. In addition, as Ringgit Malaysia is Astros functional currency; all the financial statements have to be consolidated into this currency. Hence Astro is exposed to translation risk due to the fluctuating exchange rates. According to Table 2.0, the significance of the foreign currency risk management is noticeable as Astro experienced a huge gain in 2008 relative to the loss they suffered in 2007. Table 2.0: ASTRO; Result of Foreign Exchange Risk Management Cash Flow due to Operating Activities 2008 RM000 2007 RM 000 Net Effect of Currency Translation on Cash and Cash Equivalents 4854 (1529) Gain on Realisation of Foreign Forward Contracts 7680 (137) However, hedging of foreign exchange does not always yield a positive result, as illustrated in the case of AirAsia, one of the leading budget airlines in Asia. AirAsia like many international airlines used a technique refered to as fuel hedging, this allows the airline to purchase fuel at a price fixed at an earlier date despite an increase in the fuel price. During the fuel crisis of 2007-2008 when prices rose to over US$150/barrel, AirAsia made a significant loss as it had hedged for fuel prices not to exceed US$90/barrel and as a result AirAsia recorded its first ever full year loss of RM471.7 million for the year ended 31st December 2008, despite achieving a growth of 36.6% in revenue. This led to the removal of all hedges on fuel prices and AirAisa declared itself as completely unghedged. Although AirAsia intends to re-introduce fuel hedging in 2011, for now it deals in spot prices for its fuel. (Leong, 2009) (Ooi, 2008) Conclusion Multinationals are exposed to various kinds of risks, which includes the foreign exchange risk. This risk which is as a result of exchange rate volatility is said to have a pervasive impact on the profitability and certainty of a MNC. Globally, multinationals face translation, transaction and economic risks due to the frenzied system of floating exchange rates. To avoid the adverse effects of these risks, multinationals often take measures which although do not entirely eliminate the losses; they do enable the firms to minimize the losses. Hedging is very common risk management tool used by multinationals and has often resulted in positive results when used after a correct analysis of the exposure is made. Despite its advantages, not all multinationals around the globe decide to manage their risks in this way. The objectives behind foreign exchange risk management and the techniques used to manage are seen to differ across regions. In the case of Malaysian multinationals, foreign exchange risk management is deemed to be at a lower level relative to their counterparts globally. Until recently, majority of the Malaysian multinationals were not actively managing these risks. The Asian financial crisis in the late 1990s had a significant effect on their stance and the level of foreign exchange risk management amongst Malaysian multinationals has since increased considerably.

Social Media: Is It Good or Bad?

Social Media: Is it Good or Bad? It is incredible that only fifteen years ago, people were still using the postal services as their primary source for communication. Although the United Postal Service has not gone out of business, people are switching over from the old fashion stamp and letter to e-mails, social media sites, and instant messaging as a more convenient way of exchanging information. In just a few years, the usage of social media sites, like Facebook and Twitter, has been increasing exponentially, and is becoming more and more active (Zuckerberg).However, despite the conveniences, the popularity of social media has also gained averse viewpoints from a more traditionally conservative audience. Nevertheless, social media has beneficially changed society because of its educational benefits, public relation tools, and communicational conveniences. As the popularity of social media increases, so do the amount of educational benefits. Education is an important aspect in any s ort of society because it mentally prepares a generation to lead future businesses, industries, and governments in the future.In some areas of the world, the availability of schools and teachers are scarce. Even in the United States, certain students are deprived of higher leveled learning because educators are not found in those specific areas. But with the resources we have through the internet, we can provide education to people all around the world, as long as they can access it. â€Å"84 percent of teenagers today† are currently using methods, such as instant messaging, as a means of educational communication (Blake 5).There are benefits that can be derived from learning in a virtual classroom, such as confidentiality; with the idea of being anonymous behind a computer screen, students are also less intimidated to engage in class discussions and ask questions (Blake 5). These new innovative techniques of learning can stimulate more advance levels of thinking. As technolo gy and social media continue to grow, so will the availability of these online education programs. While the education receives benefits through social media, another area of society takes full advantage of the tools provided by online networking as well.In recent years, social media has become a very valued method of spreading information to a mass audience. Since many people use social media sites, groups like industries, businesses, and organizations utilize Facebook pages and twitter to post updates and information. Social media provides â€Å"communities of interest† for marketers to target specific audiences (Martin 220). It is much easier to track groups of people who are interested in a specific product by searching their ‘likes' on Facebook or their comments on Youtube.This technique becomes much more efficient than sending advertisements in the mail to every house in a neighborhood after doing surveys. Even Barrack Obama was able to gain publicity through the power of social media; his â€Å"name [gained national] recognition in 2004† which eventually led to the title of the United States president (Martin 220). As long as his public relations officers were able to locate communities of interest, they were able to win over support through networks on social media sites.Even if you already have a stable access to education, and you do not seek any tools for public relations, social media can still serve as a valuable resource. Communication is the obvious reason for why we all use social media; beside using to advertising and education, we use social media to chat with our friends and communicate with our family. When families live very far away, people are able to reconnect with them through a network of social media. Even in jobs, people often use Facebook groups to create an online virtual community to build stronger bonds among the workers (Melwood).This is the same for people who use instant messaging to communicate with frien ds at school. Social media provides many benefits because it is just one of the many things that has been invented to make our lives easier. Social media has not always been this convenient but it has definitely come a long way; even up to this day, it is evolving and becoming even more convenient for the usage of others. The more people get involved in the virtual world of social media, the more benefits become available. Works Cited Blake, Robert J. Brave New Digital Classroom: Technology and Foreign Language Learning. Washington, D.C. : Georgetown UP, 2008. Print. Page 5 Martin, Dick. Secrets of the Marketing Masters: What the Best Marketers Do–and Why It Works. New York: American Management Association, 2009. Print. Melwood, Ronnelle. â€Å"3 Benefits of Creating a Facebook Group. †Ã‚  Benefits of a Facebook Group. SetUFreeVA, 13 June 2011. Web. 15 Oct. 2012. . Zuckerberg, Mark. â€Å"One Billion People on Facebook. †Ã‚  One Billion People on Facebook. Faceb ook, 4 Oct. 2012. Web. 11 Oct. 2012. .

The Difference Between Parenting Styles and Strategies

Parenting styles, such as authoritative, authoritarian, permissive, and neglectful, tend to be almost inherent to the individual, something that is unlikely to change. A parenting strategy is something an individual chooses. It may be based upon their parenting style, but it can also change in response to needs and behaviours. Parenting strategies tend to be in regards to disciplinary measures. Strategies are usually needed to attend to problem behaviours, which tend to arise because of ineffective discipline, as in the case of intermittent discipline, or coercive discipline, such as spanking or yelling. While any parent may have moments of ineffective parenting strategies, especially in the face of various life stressors, ineffective†¦show more content†¦Results showed that parenting practises, such as parenting strategies, and child functioning is not affected by the ethnicity of the family, family structure, family income, or gender, but that harsh punishment was more lik ely to occur from mothers, especially from mother to son (2002). A study was done in Hong Kong with mothers of 183 children between the ages of six and eight (Chan, 2010). Mothers completed a group interview, and a questionnaire was read to the group on children’s coping strategies, the mother’s level of authoritativeness, and on the mother’s response to their child’s emotions. The mothers then recorded their answers to each question individually on a rating scale. Each child’s teacher then rated that child upon their level of prosocial behaviour and on their acceptance by their peers. Results of Chan’s study showed that while the mother’s level of authoritative parenting style affected the way the mother supported their child’s emotions (2010). What is interesting is that only the supportive responses, not the actual fact that the mother adopted an authoritative parenting style, had a significant effect on the way their child utilized positive coping strategies (Chan, 2010). In essence, the parenting strategy of being supportive allows the child to develop and utilize positive coping strategies. Instead of studying adjustment and coping strategies, AislingShow MoreRelatedEssay on An Effective Parenting Style993 Words   |  4 Pageswrong. 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Geoffrey Chaucer s Bath - 1767 Words

The Bible includes over sixty-nine references to God smiting down a man or performing genocide or inducing a war or famine in the Bible; even one count of a blasphemer being stoned to death. If The Cantebury Tales had been based on real events instead of just being the satirical work of Geoffrey Chaucer, at least one more count of death would have be added because the Wife of Bath commits the crime of blasphemy on multiple occasions. She turns the sacred words of God into a defense of her indecency. She uses his words to justify her twisted beliefs and actions. She speaks of lust and greed and power. But the most tragic part of all is what she is saying is necessary. She may not be representing women in the fairest light, but that is not†¦show more content†¦As she continues on, the Wife of Bath manipulates the biblical scripture to â€Å"make her case that God intended women to use their bodies carnally† (Retractions). She does this by saying that â€Å"God bad us for to wexe, without lye,/ That gentil text kan I wel understonde† (lines 28-29). She believes that she needs to marry as much as possible because it is what God intended for her to do. Although it is more commonly believed that God was referring to procreation within the limitations of marriage, she deserves credit for creativity. She uses the story of Solomon as a reference to multiple spouses by saying that â€Å"he hadd wyves mo than oon† but the interpretation of the Bible at the time was at the mercy of the Roman Catholic Church (line 36). The Church believed that women were the cause of â€Å"the original sin or the Fall of Man† based on the actions of Eve (Women History). Women were looked upon as â€Å"instruments of temptation and sin†, they were believed to drag â€Å"men down by the lure of their physicality†, and were the â€Å"instruments of man’s damnation† (Retractions). Though this is not the case, because women are pe rfect, these negative connotations caused women to lead â€Å"extremely subservient lives† (Struggle of female equality). The Wife of Bathes may have been a satirical representation of women being greedy and lustful but her purpose was to contradict â€Å"oppressive customs and assert her own overbearing assessment of the