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Company LOGO IFC Manufacturing Finance 570 – Summer ‘09 Dr. Joe Greco California State...
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Transcript of Company LOGO IFC Manufacturing Finance 570 – Summer ‘09 Dr. Joe Greco California State...
Company
LOGO
IFC ManufacturingFinance 570 – Summer ‘09
Dr. Joe GrecoCalifornia State University, Fullerton
Presented by Sue ShenNhan HoPhuong Nguyen
SynopsisSynopsis
1. Decision criteria
2. Alternatives
3. Evaluation
4. Implementation
1. Decision criteria
2. Alternatives
3. Evaluation
4. Implementation
1. Cause and effect
2. Economic exposure
3. Hedging policy
1. Cause and effect
2. Economic exposure
3. Hedging policy
1.Industry
2. Company
3. Expansion 4. Issues
1.Industry
2. Company
3. Expansion 4. Issues
IntroductionIntroduction AnalysisAnalysis RecommendationRecommendation
Industry BackgroundIndustry Background
• Category : Auto Parts
• Sector: Consumer Goods
• Market Capitalization: 35 Billion (Current)
• Performance dependent on Auto Sales
About usAbout us
• Headquarter at Toronto
• Specialized in auto parts production
in North America with focus on safety
Seating systems
Bumper
Safety belts
• Supplier for GM, Ford and Chrysler;
Toyota and Honda (Ontario)
• D/E=77.21%
Major competitorMajor competitor
Magna International Inc.• The biggest Canada auto parts supplier• Capabilities
• D/E=69.05%
Expansion to MexicoExpansion to Mexico
• Construct production facility in Mexico
• Contagion effect of the Asian market crisis in 1997• Marketplace volatility in underdeveloped countries• Weaken Mexican peso position against Canadian
Dollars.
• Fund requirement of 826,000,000 Mexican pesos• Seek fund from The Manufactures Bank of NY
Key PeopleKey People
• Herve Villa– IFC’s founder and CEO– Mexican-Canadian entrepreneur– Ph.D in mechanical engineering– Worked for Ford Motor Company for 6 years– Management style: give full power to his
subordinates.
Key PeopleKey People
• John Trudel– Former treasurer and CFO– An astute user of financial derivatives– Manage IFC’s portfolio on his own– Left IFC in 1997
Key PeopleKey People
• Bob Young– Present treasury and CFO– Joined IFC in November 1997– Has 15 years experience in management
accounting– Has no experience in the treasury aspect
Time lineTime line
Basic IssuesBasic Issues
Low
Low
High
High
Importance
Urgency
Immediate IssuesImmediate Issues
Low
Low
High
High
Importance
Urgency
Cause and Effect diagramCause and Effect diagram
Difficult in Getting the loan
Financial Risk Hedging Portfolio
Lack of Tools Operational Practice
Mexico’s Political riskMexico’s Political risk
• Macro-level: Eurasia Group• Micro-level: MIGA and OPIC
• Source: Journal of International Money and Finance 25 (2006) 308e329
Solutions:• Local connection• Insurance
Exposures Exposures
Operating exposure
Transaction exposure
Translation exposure
Economic Exposure
Accounting Exposure
Translation exposureTranslation exposure
• 8.5% interest rate• More Canadian dollar Forward and call options
US Debt 78,060,863
73,724,528
64,171,000
215,956,391
US Asset 62,877,000
Net translation exposure 153,079,391
Hedging 200,000,000Overhedging rate 31%
Transaction exposureTransaction exposure
• Net U.S. Dollar Exposure from Transactions (in US$000s)
• U.S. Dollar Payables (in US$000s)
• U.S. Dollar Receipts (in US$000s)
Operating exposureOperating exposure
• IFC’s revenues and expenses are affected by currency fluctuations.
• Long-term cost and price competitiveness
• Cdn depreciates against USD
IFC foreign exchange portfolio IFC foreign exchange portfolio
Forward
Vanilla optionSingle barrier
Double barrier
Average rate
HedgingHedging
Mitigate financial risk
ForwardForward
Forward EvaluationForward Evaluation
1998 Outright Forward Rate Forecast Exchange Rate Millions of U.S. Dollars Forcasted Gain/Loss Acutual Gain Loss
Jan 1.37 1.3965 1.4562 -45 -1.1907375 -3.879
Feb 1.3602 1.3982 1.4236 -15 -0.57053 -0.951
Mar 1.38 1.4000 1.418 -10 -0.200098333 -0.38
Apr 1.3915 1.4018 1.4302 -10 -0.102843333 -0.387
May 1.4008 1.4036 1.4571 -5 -0.013794167 -0.2815
June 1.4053 1.4717 0 0
July 1.4071 1.5112 0 0
Aug 1.3663 1.4089 1.5745 -10 -0.425823333 -2.082
Sept 1.3588 1.4107 1.5262 -15 -0.7778525 -2.511
Oct 1.3513 1.4124 1.5432 -25 -1.528283333 -4.7975
Nov 1.3471 1.4142 1.5235 -25 -1.677645833 -4.41
Dec 1.2907 1.4160 1.5375 -5 -0.626401667 -1.234
Total -7.11401 -20.913
Vanilla OptionsVanilla Options
1998 MillionsCanadian
CallsCost
Mark-to-Market Value
Forcasted Rate
Actual Rate
Forcasted Gain/Loss
Actual Gain/Loss
Jan
Feb
Mar Apr
May
June
July
Aug 5 1.40 -0.05 0.04 1.49 1.57 -0.45 -0.8725
Sept 5 1.40 -0.07 0.05 1.41 1.53 -0.05 -0.631
Oct
Nov
Dec 15 1.40 -0.30 0.24 1.42 1.54 -0.24 -2.0625Total -0.42 0.33 -0.74 -3.57
Loss 0.42 -0.74 -3.57
Double Barrier-Range Binary OptionDouble Barrier-Range Binary Option
TMillions of
PayoutCost
Mark-to-market Value
Forecasted Rate Actual Rate
In the Money Rates
Jan 1.3965 1.4562 1.3750 - 1.4750
Feb 1.3982 1.4236 1.3750 - 1.4750
Mar 10 1.47 2.91 1.4000 1.418 1.3750 - 1.4750
Apr May June July Aug Sept Oct Nov Dec
Total 10 1.47 2.91
Single Barrier-Swing ForwardSingle Barrier-Swing Forward
1998Swing
Forward Cost Mark-to-Market Value Forecast Real Forecasted
Gain/LossActual
Gain/LossJan Feb Mar Apr May June July Aug Sept Oct Nov
Dec -10 0 0.072 1.4160 1.5375 0 1.375
1.4Cdn Put
1.475Cdn Call
Evaluation of IFC’s Hedging InstrumentsEvaluation of IFC’s Hedging Instruments
• Gains/Losses (in Million USD)
ForwardVanilla Option
Rang Binary
Swing Forward
Total
Forecasted Gain/Loss
-7.11 -0.74 8.53 0 0.68
Actual Gain/Loss
-20.91 -3.57 8.53 1.38 -14.57
Mark-to-Market Value
0.33 2.91 0.072 3.312
Book Gain/Loss
-17.882
Decision CriteriaDecision Criteria
Hedging AlternativesHedging Alternatives
Forward Options Futures
Alternative 1Alternative 1
Spot Rate 1.4217 Sensitivity Scenario
Outright Forward Rate Forecast XRs Real XRs
1 month -21.2 1.4196 1.3965 1.4562
2 months -39 1.4178 1.3982 1.4236
3 months -62.25 1.4155 1.4000 1.4180
6 months -119 1.4098 1.4053 1.4717
1 year -245 1.3972 1.4160 1.5375
Alternative 1 continuedAlternative 1 continued
• Preferred
• Cdn Put
Forecast Gain/LossReal Gain/Loss
Forward Forecasted Real 68,000,000 -14,570,000
1 year 882,107 6,582,961 68,882,107 -7,987,039
Alternative 2,3Alternative 2,3
• Alternative 2: Vanilla Options
1.40 Canada Put
1.40 USD Call
• Alternative 3: Future Contract
-Cheapest way to hedge
Extra AlternativeExtra Alternative
• Peso 1998
Action& Implementation PlanAction& Implementation PlanAction& Implementation PlanAction& Implementation Plan
Obtain Bank Loans
Manage Hedging Instruments
Make adjustment if needed
Mexican Mexican DreamDream
RecommendationRecommendation
Internal ControlG30 Guide
Strategic Integration
Risk Management
Bank Relations
Accounting Treatment
Success
Company
LOGOIFC Manufacturing