If the whole world was existed under one political jurisdiction, to use single
currency and there was no any trade restrictions, that “market portfolio” would be
consider all securities around the world, taken in shares corresponding to their market
value. Then more companies might survive in crisis and not thinking about eliminating
currency risk in order not to lose huge amount of money to converting currency rate.
Unfortunately, there are political boundaries, different currencies, trade
restrictions and currency exchange. These factors reduce, but not completely destroy
the benefits to be derived from international investment. There are disadvantages and
advantages corresponding with currency risk, but the point is how to manage with
currency rate, and how to eliminate risk to make profit not cost.
In the modern world of globalization and international business, companies
would be carry out different types of international activities which ought include
exports, imports, purchasing raw materials from abroad, raising funds abroad or
investing in international market, and all this activities considering one necessity to
deal with many currencies, domestic exchange rate and market foreign exchange rate.
This activity is one of the main impacts to Cash Flow of company. As we know Cash
Flow plays operating, financing and investing roles and presents the liquidity of
company. This problem statement also considers our case study with Swedish
Engineering Corporation. Company activity connected with design and constriction of
industrial machines tools. Last year they made contract with car Manufacturing
Corporation in USA. The contract is worth 18 million USA dollars. To analysing the
Income Statement we can see Sales was 460,16 million crown, Cost of Sales 322,11
million crown which can be the cost of raw materials, P&PE. Cost of sales is worth
close 70% of Sale, which also in impact of currency exposure, where we can see in the
diagram, that the value of Swedish Crown measured against the USD dollar. Swedish
Co disappointed about expected profit. Because net profit was 4,49 million crowns,
just 0,98% of all Sales, which is close to break even.
But, they had another opportunity with another contract with German, which is
worth 3 million Euros.
My task is eliminate risk, hedge CF, consider some financial
securities strategies and give recommendation to Swedish Co.