Global Innovation Industries
Global Innovation Industries (Gi) is a listed limited liability company domiciled in (country A) Indonesia. The firm is a focused manufacturing multinational corporation (MNC). The company sources its raw materials from (Country B*) Malaysia. Gigi specialises in the (Market segment*) Bicycles and tends to market into (Region*) Israel where they trade in the local currency.
The company has a planned turnover of [Country A currency] 6,500,000,000 and expects to make a gross profit of 45% and a net profit of 20% in FY ending June 2023. Raw material comprises 20% of manufacturing costs where inventory is negligible owing to the JIT manu- facturing system deployed by the Gii factory.
Gii has developed a new product which is ready for commercialisation. The pilot marketing took place in the last quarter of 2021, and funding for the launch of the product will be raised through the issue of corporate debt instruments by June 2022. With the current economic uncertainty, and expected continuation of market volatility, the directors are re-evaluating their strategy. The main issue is to determine whether to use Eurobonds to raise capital as usual, or whether they should be reverting to domestic bonds in their country of domicile: Country (A). The new product will source supplies from Country (B) and be sold into the same Region as the existing products.
Gii repatriates all profits to Head office and prepares its accounts in Country A’s currency according to the financial reporting standards in that country (Country A) due to listing require- ments imposed by stock exchanges and investor requirements there.
In the past, Gii focused on transactional risk and tended to hedge currency fluctuations using OTC forward contracts. However, international developments over the past few years have seen a rise in regional alliance instability (e.g.: NAFTA being renegotiated with both Mexico and Canada by the United States), fragmentation of regional alliances (e.g.: BREXIT – the United Kingdom having departed the EU), and the emergence of bilateral arrangements (e.g.: EU/Canada Free trade agreement signed in February 2019, and the recognition of Israel by other Middle-Eastern countries in 2020).
With the potential for very high levels of volatility in international markets becoming the norm as a result of ongoing COVID-19 complications, along with the high number of changes af- fecting the International Financial Reporting Standards (including changes in the Conceptual Framework in 2018), the directors of Gii decided to call a special board meeting.
During this special board meeting and, as a result of their deliberations, they have decided to re-evaluate the approach taken to managing international risks and have requested that you, the financial director of Gii, to prepare a report of no more than 2500 words covering the 2022- 23 financial year wherein you set out your recommendations for the management of these risks, foreign exchange/hedging costs, and the implications of debt financing for the new prod- uct project. The board requires that you detail (in appendices) the workings and assumptions underlying your discussion and recommendations.
Report:
The following key areas should be addressed in your report:
a) Introduction. (4 marks)
b) Prepare and evaluate a separate PESTEL analysis for the countries in which the company is domiciled; trades; and sources materials or components, with a view to identifying the key transaction, economic, and translational risks for Gii in each country/region. (15 marks)
c) Prepare currency-pair charts, derived from the BPS terminal, reflecting the exchange rates over the period including January – December 2021 for all currency pairs in which Gii transacts. Extract a table of data, reflected in the chart, for each currency pair, clean the data, and ensure alignment for evaluation. (8 marks)
d) Using the scatter diagram functions in EXCEL, or deploying the Analytics Add-in ‘Regression’ tool1, calculate the regression (Trend) line and R2 coefficient of determination. This will be your primary forecasting tool to project forward the expected exchange rates for each pair for the 12 months including July 2022 to June 2023. (8 marks)
e) Based upon the data extracted in c) above, investigate the availability and quality of other recognised FX forecasting techniques (i.e.: IRP; PPP; Fischer inflation projections), and use at least one to project forward the expected exchange rates for each FX pair for the 12 months including July 2022 to June 2023. (15 marks)
f) Compare the regression forecast (d) with your alternative tool(s) in (e) and discuss your findings. Decide which forecasting tool best predicts future exchange rates for your currency pairs and provide a clear rationale for that choice. (10 marks)
g) Evaluate how the company could benefit/suffer losses from the use of Currency Options (bid/ask spread is the intermediary charge), futures, or the use of Currency Swaps (Bid/Ask spread where available or 0.05% is the intermediary charge for each flow) instead of OTC forwards ( 1.50% is arranging bank charge) to manage currency risk. Use examples from the Gii data and analysis above to demonstrate your assertion. (20 marks)
h) Evaluate the risks when using domestic bonds to raise capital for the new product launch project versus the deployment of Eurobonds. (10 marks)
i) Conclusion (5 marks)
j) Presentation and Referencing. (5 marks)
(Total 100 marks)
