School of Business and Management Studies, Niagara College

SCHOOL OF BUSINESS AND MANAGEMENT STUDIES, NIAGARA COLLEGE

BICG 9403 – INTERNATIONAL TRADE FINANCE

WINTER 2015

CASE #4

Instructions: Analyze the following three cases and answer the questions for each case. Apply the risk management framework to all three cases.

Case 4-1
You’re the treasurer of Warm Wear Inc., which imports wool shoes from around the world. Kreploc, a company in the country of Slobodia, has a product that your marketing department would like to carry and doesn’t require payment until 90 days after delivery. Unfortunately the Slobodian blivit tends to vary in value by as much as 30% over periods as short as three months. This makes you reluctant to do business with Kreploc because of exchange rate risk. The marketing department can’t understand why you have any concerns at all. Prepare a brief explanation including an illustration of why you’re concerned and suggest various strategies that Warm Wear can employ to mitigate the risk.

Case 4-2

You’re a manager of the Overseas Sprocket Company, which imports a great deal of products from Europe and the Far East and is continually faced with exchange rate exposure on unfilled contracts. Harry Byrite, the head of purchasing, has a plan to avoid exchange rate losses. He suggests that the firm borrow enough money from the bank to buy a six-month supply of foreign exchange, which would be kept in a safety deposit box until used. “We’re never have another unexpected exchange rate loss again, “ says Harry. Prepare a polite response to Harry’s idea. Explain why you do or do not like his idea, and suggest an alternative if you feel that one is appropriate.

Case 4-3

ADB, a Canadian company, has signed a contract to supply and install air conditioning equipment to a hotel chain in a Middle Eastern country. ADB has calculated the cost of manufacture and installation to be $640,000 (Canadian dollar) and the contract will take 12 months to complete. The company typically adds a 20% profit margin to the cost to determine the selling price (estimated selling price for this contract will be $768,000 (Canadian Dollar)). The contract states that payment will be made in the local currency (FLC) after completion of the project one year from now. The company does not always hedge its exchange rate risks, especially with trades in the USA. Some managers of ADB believe there is no merit in hedging currency risk with any of their contracts. The spot exchange rate is FLC 5.89 to 1 CAD. The local currency (FLC) has weakened by 20% to the Canadian dollar over the last year. However, some managers feel that this trend will be reversed during the coming year. One of the countries bordering the country with which ADB is dealing has recently imposed restrictions on the monies that can be sent overseas to foreign investors. If ADB is to extend its operations in this region the restrictions may prove problematic.

Due date: Completed report (typed in Word) to be submitted on BlackBoard via SafeAssign not later than Monday 20 April 2015 at 11:59 pm.
Assessment: See Rubric for allocation of marks.