1. MGMT 575 Group B Case Study 2 September 16, 2012 Samantha Allison Leah Bond Lisa Cochran Louis Latimer

2. Overview  Company Background  Statement of Problem  Courses of Action  Financial Information  Analysis  Recommendations  Conclusion  References

3. Company Background  Exacta, s.a. is major French machine tool manufacturer.  Currently sells within Europe and the United States.  Only 1/6 th of annual U.S. exports are subject to currency risk.  Interested in opening a new plant in N. Carolina, opening the door to potential new sales to Canada and Mexico.  N.C. plant will be a $380 million investment with expected annual revenues of $420 million and expected annual net profits of $52 million.

4. Statement of Problem  CEO and Finance Director are concerned with currency risks between Euro and Dollar.  Considering offsetting $380 million U.S. plant investment by issuing dollar bonds.  What would Exacta’s exposure be from new U.S. plant?  How would it change from the current exposure?  What is the most effective and inexpensive approach to hedging for that exposure?

5. Courses of Action  Option 1 – Finance the new plant by a $380 million bond issue in dollars.  Option 2 – Sell forward at the beginning of each year the expected revenues of the plant.

6. Financial Information  Two thirds output exported, mostly within the European Union.  Net-60 invoice produces one sixth current exposure to U.S. currency risk.  New plant in US expected cost $380 million.  Projected revenues of $420 million and net profit of $52 million annually.

7. Financial Information  What would Exacta’s exposure be from new U.S. plant?  How would it change from the current exposure?  What is the most effective and inexpensive approach to hedging for that exposure?

8. Analysis  Current Exchange Rates  Forward Exchange Rates  Spot Rates

9. Current Exchange Rates PriceChange%Change Day Range 52 Week Range EUR/USD1.3128+0.0141+1.0865% 1.2985 - 1.3169 1.2090 - 1.4155 AUD/USD1.0557+0.0011+0.1052% 1.0537 - 1.0624 0.9388 - 1.0856 GBP/USD1.6214+0.0062+0.3808% 1.5808 - 1.6254 1.5234 - 1.6302 USD/JPY78.4000+0.9150+1.1809% 77.5050 - 78.3850 75.8265 - 83.7100 EUR/JPY102.9243+2.2621+2.2472% 100.7555 - 103.0273 94.1172 - 111.5114 EUR/GBP0.8097+0.0056+0.6906% 0.8037 - 0.8116 0.7790 - 0.8788 USD/CAD0.9711+0.0022+0.2229% 0.9634 - 0.9722 0.9634 - 1.0536 USD/CHF0.9268-0.0084-0.8961% 0.9240 - 0.9354 0.8598 - 0.9957 Current Exchange Rates

10. QuoteDayWeekMonthYear 14-Sep-1213-Sep-127-Sep-1215-Aug-12 15-Sep- 11 Quote % Chg Quote% ChgQuote % Chg Quote % Chg Quote Forex Spot Rates - 9 Majors EUR/CH F 1.21040.1%1.20940.4% 1.205 0 0.3% 1.201 4 -0.4%1.2066 EUR/JP Y 100.35830.0% 100.40 07 1.2% 99.23 02 2.3% 97.02 93 -8.8% 106.35 26 EUR/US D 1.29210.3%1.28842.2% 1.261 3 2.1% 1.234 9 -10.8%1.3846 GBP/EU R 1.24810.0%1.2478-1.0% 1.260 7 -0.8% 1.270 4 11.3%1.1410 GBP/US D 1.61290.3%1.60771.1% 1.590 1 1.4% 1.568 8 -0.7%1.5804 USD/AU D 0.9544-0.2%0.9564-2.1% 0.976 7 2.6% 0.951 6 -1.9%0.9699 USD/CA D 0.97550.1%0.9741-1.4% 0.988 2 -0.4% 0.992 3 0.8%0.9846 USD/CH F 0.9368-0.2%0.9387-1.8% 0.955 4 -1.8% 0.972 9 11.6%0.8714 USD/JP Y 77.6578-0.3% 77.924 1 -1.0% 78.67 36 0.1% 78.57 27 2.3% 76.770 0 Current Spot Rate Exchange

11. Currency Conversion

12. CurrencyLastDay HighDay Low% ChangeBidAsk EUR/USD1.31111.31281.3111-0.11%1.31111.3116 GBP/USD1.62201.62381.6217+0.04%1.62201.6227 USD/JPY78.32078.42078.320-0.08%78.32078.370 USD/CHF0.926000.927300.92620-0.08%0.926000.92690 USD/CAD0.971600.971800.97030+0.05%0.971600.97220 AUD/USD1.05331.05601.0535-0.14%1.05331.0538 Current Currency Table

13. Recommendations  Exacta should choose Option 2: Sell forward at the beginning of each year the expected revenues of the plant Stability for Exacta and customer  Exacta should NOT choose Option 1: Must comply with U.S. regs for traded bonds Must register with SEC Very long process U.S. debt-rating agencies would determine credit worthiness

14. Conclusion  Exacta concerned with currency risks between Euro and Dollar.  Exacta should sell forward at beginning of each year expected revenues of the plant.

15. References Brealey, R., Myer, S., & Allen, F. (2011). Principles of corporate finance. (10th ed.). New York, NY: McGraw- Hill Irwin Currency Center. (2012). Retrieved September 15, 2012 from http://finance.yahoo.com/currency-investing Currency hedging. (2011) Retrieved September 13, 2012 from http://www.theglobeandmail.com/partners/a dvedc1111/currency-hedging-essential-to- profiting-from-international- trade/article1355447/?page=all Derivatives to Hedge Risk. (2010). Retrieved September 13, 2012 from http://www.investopedia.com/articles/stocks/04/12220 4.asp#axzz26PIszfXh

16. References Foreign currency hedging. (2010). Retrieved September 13, 2012 from http://www.buzzle.com/articles/foreign- currency-hedging.html Spot Exchange Rates. (2012). Retrieved September 15, 2012 from http://www.foreign-trade.com/currency- outlook.htm Yankee Bond. (2011). Retrieved September 13, 2012 from http://www.investopedia.com/terms/y/yankeebond.asp #axzz26PIszfXh