1. Company LOGO IFC Manufacturing Finance 570 – Summer ‘09 Dr. Joe Greco California State University, Fullerton Presented by Sue Shen Nhan Ho Phuong Nguyen

2. Synopsis 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 Introduction Analysis Recommendation

3. Industry Background Category : Auto Parts Sector: Consumer Goods Market Capitalization: 35 Billion (Current) Performance dependent on Auto Sales

4. About 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%

5. Major competitor Magna International Inc. The biggest Canada auto parts supplier Capabilities D/E=69.05%

6. Expansion 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

7. Key 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.

8. Key People John Trudel –Former treasurer and CFO –An astute user of financial derivatives –Manage IFC’s portfolio on his own –Left IFC in 1997

9. Key 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

10. Time line July 1997 Trudel left IFC Fall 1997 IFC applied for Financing from NY Bank November 1997 Young joined IFC January 1998 Issue: To pass inspection March 1, 1998 Inspection Begins March 15, 1998 Inspection Ends

11. Basic Issues Political Risk Market Risk Operational Risk Economic Exposure Low High Importance Urgency

12. Immediate Issues Update Computer System Understand Value-at- Risk Assess IFC Foreign Exchange Portfolio Pass Inspection Low High Importance Urgency

13. Cause and Effect diagram Difficult in Getting the loan Financial Risk Hedging Portfolio Lack of Tools Operational Practice

14. Mexico’s Political risk Macro-level: Eurasia GroupEurasia Group Micro-level: MIGA and OPICMIGAOPIC Source: Journal of International Money and Finance 25 (2006) 308e329 Solutions: Local connection Insurance

15. Exposures Operating exposure Transaction exposure Translation exposure Economic Exposure Accounting Exposure

16. Translation exposure 8.5% interest rate More Canadian dollar Forward and call options US Debt78,060,863 73,724,528 64,171,000 215,956,391 US Asset62,877,000 Net translation exposure153,079,391 Hedging200,000,000 Overhedging rate31%

17. Transaction 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)

18. Operating exposure IFC’s revenues and expenses are affected by currency fluctuations. Long-term cost and price competitiveness Cdn depreciates against USD

19. IFC foreign exchange portfolio Forward Vanilla option Single barrier Double barrier Average rate Hedging Mitigate financial risk

20. Forward

21. Forward Evaluation 1998Outright Forward RateForecastExchange RateMillions of U.S. DollarsForcasted Gain/LossAcutual Gain Loss Jan1.37 1.3965 1.4562 -45-1.1907375-3.879 Feb1.3602 1.3982 1.4236 -15-0.57053-0.951 Mar1.38 1.4000 1.418 -10-0.200098333-0.38 Apr1.3915 1.4018 1.4302 -10-0.102843333-0.387 May1.4008 1.4036 1.4571 -5-0.013794167-0.2815 June 1.4053 1.4717 00 July 1.4071 1.5112 00 Aug1.3663 1.4089 1.5745 -10-0.425823333-2.082 Sept1.3588 1.4107 1.5262 -15-0.7778525-2.511 Oct1.3513 1.4124 1.5432 -25-1.528283333-4.7975 Nov1.3471 1.4142 1.5235 -25-1.677645833-4.41 Dec1.2907 1.4160 1.5375 -5-0.626401667-1.234 Total -7.11401-20.913

22. Vanilla Options 1998Millions Canadian Calls Cost Mark-to- Market Value Forcasted Rate Actual Rate Forcasted Gain/Loss Actual Gain/Loss Jan Feb Mar Apr May June July Aug51.40-0.050.04 1.491.57-0.45-0.8725 Sept51.40-0.070.05 1.411.53-0.05-0.631 Oct Nov Dec151.40-0.300.24 1.421.54-0.24-2.0625 Total -0.420.33 -0.74-3.57 Loss 0.42 -0.74-3.57

23. Double Barrier-Range Binary Option T Millions of Payout Cost Mark-to-market Value Forecasted RateActual Rate In the Money Rates Jan 1.39651.4562 1.3750 - 1.4750 Feb 1.39821.4236 1.3750 - 1.4750 Mar101.472.91 1.40001.418 1.3750 - 1.4750 Apr May June July Aug Sept Oct Nov Dec Total101.472.91

24. Single Barrier-Swing Forward 1998 Swing Forward Cost Mark-to-Market Value ForecastReal Forecasted Gain/Loss Actual Gain/Loss Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -1000.072 1.4160 1.537501.375 1.4Cdn Put 1.475Cdn Call

25. Evaluation of IFC’s Hedging Instruments Gains/Losses (in Million USD) Forward Vanilla Option Rang Binary Swing Forward Total Forecasted Gain/Loss -7.11-0.748.5300.68 Actual Gain/Loss -20.91-3.578.531.38-14.57 Mark-to- Market Value 0.332.910.0723.312 Book Gain/Loss -17.882

26. Decision Criteria FlexibilityRiskProfitabilityFeasibility

27. Hedging Alternatives ForwardOptionsFutures

28. Alternative 1 Spot Rate1.4217Sensitivity Scenario Outright Forward RateForecast XRsReal XRs 1 month-21.2 1.41961.39651.4562 2 months-39 1.4178 1.39821.4236 3 months-62.25 1.41551.40001.4180 6 months-119 1.40981.40531.4717 1 year-2451.39721.41601.5375

29. Alternative 1 continued Preferred Cdn Put Forecast Gain/Loss Real Gain/Loss ForwardForecastedReal68,000,000-14,570,000 1 year882,1076,582,96168,882,107-7,987,039

30. Alternative 2,3 Alternative 2: Vanilla Options 1.40 Canada Put 1.40 USD Call Alternative 3: Future Contract -Cheapest way to hedge

31. Extra Alternative Peso 1998

32. Action& Implementation Plan Obtain Bank Loans Manage Hedging Instruments Make adjustment if needed Mexican Dream

33. Recommendation Internal Control G30 Guide Strategic Integration Risk Management Bank Relations Accounting Treatment Success

34. Company LOGO IFC Manufacturing