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Economics

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In responding to your classmates, share your opinion about the company’s hedging strategy. Offer them suggestions based on what other types of hedging the company might use to fit its product/industry to its risk.

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Response: The company I selected for my final project is Ford motor company, it is an American automotive corporation that designs, manufactures, markets, finance, and services a full line of Ford cars, trucks, SUVs, and electrified vehicles. The company has a total of sixty-seven manufacturing plants worldwide and operates in North America, South America, Europe, Asia Pacific region, Middle East and Africa (Ford 10-K, 2017). My project is focused on Ford expanding into the Chinese market to launch a new line of electric vehicles and set up a manufacturing plant for electric cars since China is the world’s largest auto market. The three main types of currency exposure risk Ford might face includes, the transaction exposure risk, which occurs when outstanding accounts receivable or payable are denominated in foreign currency, that means purchasing or selling on open account is in foreign currency and when borrowing and lending funds in foreign currency (Cavusgil, et al., 2017). Economic exposure risk, this is as a result of exchange rate fluctuation affecting the pricing of cost, the cost of input and the value of foreign investment. Translation exposure risks arises from consolidation. An example is, Ford is prone to risk when combining the financial statements of foreign subsidiaries into the parent’s financial statement, it arises from translating financial statements of foreign subsidiaries that are denominated in a currency different from the home country. There is the risk of value alteration in terms of the balance sheet of the company caused by changes in foreign exchange rates. Hedging for Ford is a way to minimize the variability in cash flow and in accounting earnings that arises from their operations activities. Two major foreign currency derivatives used by Ford includes, the forward contracts and foreign currency options, others include futures contract and currency swap. Forward contract: this requires the purchase or sale of currency units at a future date at a contracted exchange rate. For example, Ford can protect profit by securing a forward contract when they expect a weakening of a foreign currency that contributes in sales and revenue. Currency option are used as an insurance policy against harmful currency movements. Currency option establishes a price for which the currency can be sold but is not required to be sold at maturity. There are two types of options, the call option and the put option. The call option is the right, but not the obligation to buy a currency at a specified price within a specified period or on a specific date. The put option is the right to sell the currency at a specified price. (Cavusgil, et al., 2017). Futures contract: Ford offset their price risk by obtaining a futures contract on a future exchange. this secures Ford of a pre-determined price of their products. Currency swap, a swap is a simultaneous spot of forward transaction. Two parties agree to exchange a given amount of currency for another and, after a specified period of time the original amounts is given back. Ford is doing enough to hedge its risk, Fords revenue over the last five years has being relatively stable. The first quarter of 2018, Ford was above Company average. Revenue improvement of 7.19% year on year, to $ 41,959.00 million. Ford Motor net cash provided by operating activities increased from 2015 to 2016 but then slightly declined from 2016 to 2017. Ford reported a positive operating cash flow of $18.1B for 2017. Ford can also work on their pricing policy for the electric cars by adjusting the price denominated in foreign currency, so that it includes expected future fluctuation.
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The scholar seems to have outlined how hedging is used in Ford to reduce the inconsistency
in cash flow and accounting earnings. However, he fails to show the connection be...


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