Honduras Economic - Foreign Exchange Risk Management

Assignment 2

For assignment 2, you will need to address the following items:

1) Foreign exchange risk management: For the multinational corporations that you selected for assignment 1, what is the answer to the following:

a) Do the financials address foreign exchange risk management? (Tip: access your company’s latest 10 – K report and search for related comments in the Notes, the Risk area and Management’s discussion sections). Your answer should say something like this: the company’s most recent financials for the fiscal year that ended …………………. address foreign exchange risk management in the following sections. You should clearly state the specific sections and pages in the latest 10 – K report.

Walmart: Walmart’s most recent financial 10-K from 2015 addresses their foreign exchange risk in item 1.A Risk Factors and foreign exchange risk is recorded in accumulated other comprehensive income (loss) and reclassified into earnings in the period that the hedged forecasted transaction affects earnings. This can be found in the Cash Flow Instruments section.

Siemens: According to the 10-K report, Siemens most recent financials for the fiscal year that ended 2014 address foreign exchange risk management in the following sections D6 Note 30-31. Siemens’ international operations expose the Company to foreign currency exchange rate risks, particularly regarding fluctuations between the U.S. dollar and the euro, in the ordinary course of business. The Company employs various strategies involving the use of derivative financial instruments to mitigate or eliminate certain of those exposures.

Nestle: In section 13.2 of the company's 2014 financial statement “Financial Risks” it is mentioned that financial risk management is a key part of the way the group is managed. The Board of directors decide and determine the financial control principles and the principles of financial planning. The CEO organizes, manages, and monitors every financial risk that may come about, including asset and liability matters.

In Section 13.2C titled “Market risk,” Nestle is vulnerable to risk movements in foreign currency exchange rates, interest rates and market prices that affect its assets, liabilities, and anticipated future transactions. Transactional exposure comes about from transactions in foreign currency. These items are managed within a prudent and systematic hedging policy in accordance with Nestles specific business needs through the use of currency forwards, futures, swaps, and options. Exchange differences recorded in the income statement represented a loss of CHF 47 million in 2014 (2013: loss of CHF173million). They are allocated to the appropriate headings of expenses by function. Translation exposure arises from the consolidation of the financial statements of foreign operations in Swiss francs, which is, in principle, not hedged.

Coca-Cola: Coca-cola’s most recent financials for the fiscal year that ended in 2014 10- K report address foreign exchange risk management in Note 5: Hedging Transactions and Derivative Financial Instruments: The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as “market risks.” Coca-Cola, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by the Company through the use of derivative instruments are foreign currency exchange rate risk, commodity price risk and interest rate risk.

b) Visit your company’s website and look for any additional resources that discuss exchange risk management such as recent press releases and announcements, videos, etc. Briefly describe your findings.

Walmart: There seems to be no recent news, reports, or videos on Walmart’s websites that discuss anything about exchange risk management.

Siemens: I did not find any press release nor videos, etc. But, through the company’s website, there is a chart that explains the risk management organization and responsibilities. The operational and organizational structure of the Enterprise Risk Management (ERM) process is as of September 30, 2014. It breaks down what each sector will be conducting. For example, the Managing Board is in charge of the overall responsibility for the Risk and Internal Control System. Defines risk policy and ERM strategy. The Audit Committee oversees the effectiveness of the risk management and internal control system. The Corporate Risk & Internal Control Committee (CRIC) reports to and supports the Managing Board in matters relating to the implementation, operation and oversight of an effective Risk and Internal Control System. Chief Risk & Internal Control Officer is the Chairman of the CRIC. It defines and monitors application of ERM strategy, policy and methodology. Consolidates Siemens wide risk and opportunity profile for CRIC. Both the Sector and Lead Country Risk & Internal Control Committees oversee the risk and internal control activities for their area of responsibility and provide the Management with information necessary to report to the CRIC. Lastly, the Sector Management, lead Country Management and Heads of Corporate Units implement ERM system and ensure management and monitoring of risks and opportunities in their respective organization.

Coca-Cola: There seems to no recent news, reports, or videos on Coca-Cola websites that discuss anything about exchange risk management. The website just has an overall risk management policy that discusses the risk management programme that focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. They regularly use derivative products like forwards, options, caps and collars but these are solely used for the purpose of hedging underlying exposures to foreign currency exchange rate risk and interest rate risk.

c) Based on your research above what is your company’s approach to foreign exchange risk management? Does your company hedge?

Walmart: According to the most recent article about hedging in 2013, Walmart took a $680 million hit to sales due to not hedging. Walmart does not hedge at all and due to this they were receiving hits to their sales since the U.S dollar was getting stronger in the 2013 and Walmart previously was enjoying