The Business of the USA Sports Cars - Research Paper Example

Research Method Executive Summary Various implications of the currency rate fluctuation have been documented along with the role of bank in the global trading. The study has also identified that the currency rate fluctuation involves high amount of risk. Moreover, based on proper analysis and evaluation of the scenario of USASuperCars, it has been recognised that a bank plays an important role in mitigating the risks associated with currency exposure. Besides, it is also identified that a bank has to take various consideration to minimise the foreign exchange rate influence in terms of revenue in the long run. Accordingly, it has been recognized that various short term financial instruments provides the options that help to minimise the possible loss from the transaction. Table of Contents Executive Summary 2 Introduction 4 Purpose of the Study 4 Method in the Study 4 Background 4 HSBC offers 6 Risk-Averse 7 Analyzing the Risks to the Bank 8 HSBC’s Offer 9 Recommendations 11 Conclusion 12 References 13 Appendix 15 Introduction Purpose of the Study The purpose of the study is to investigate the affect of fluctuation of exchange rates in the revenue of businesses especially in USASuperCars context. Moreover, the aim of the study is also to investigate the risks that the bank will undertake to measure adverse effect of exchange rate fluctuations. Correspondingly, the paper intends to analyse the current financial position of the USASuperCars. Additionally, an assessment is conducted with the aim of having a better understanding about the involvement of the bank in operating its businesses. Method in the Study The USA Sports Cars engaged in selling of luxury sports cars and the HSBC bank as the sources to measure the exchange rates in order to measure the fluctuation rate. Moreover, the fluctuations may either increasing or decreasing in the given time span. Thus to conclude table has also been drawn in order to reflect from Japan, UK, Canada, USA and South Africa among others to show the quantity of cars sold during the period. Furthermore, current exchange rates are also taken into consideration to measure the profit and loss for the HSBC. Background USASuperCars is the luxury sports car manufacturer and distribution company. The company is recognised as a global organisation having distribution channel around the world. Besides, high transaction in the global market has led to high reliance of the company over the international currency markets volatility and fluctuations. The prime aim of the company is to provide luxury cars to millions of inhabitants across a world. Company fixes the selling prices in terms of local currencies on the basis of the exchange rate that is prevailing during the delivery time. In the current scenario, the company experienced difficulties with respect to uncertainty in the exchange rates. The company is required to select the appropriate measure and fluctuation in the currency to ascertain the risk involve in the dealing. USASuperCars Revenue Analysis USASuperCars has acquired a strong market share in the international market in terms of style, design and the performance of cars. USASuperCars conduct selling operations of car worldwide and has operating units in seven different locations including the UK, Japan 1, Japan 2, Canada 1, Canada 2 and USA itself. In comparison to other locations, the UK is among the most preferred locations where USASuperCars noticed highest number of selling and purchase orders followed by Japan 1 and Canada 2 in terms of quantity as well as revenue. Figure showing Quantity, Selling Price & Total Revenue in the Worldwide Orders Nevertheless, the company faces significant challenges while enduring the revenue from different locations due to fluctuation of the currency rate, comparatively at a higher rate than in different countries. With fluctuations in the exchange rate, the revenue of company remains uncertain. The calculation of the revenue also advocates that average and mean square errors are $2,193,029.27 and $44,666 respectively, which further indicates the volatility of the company to currency exchange rates. Accordingly, the probability that income hypothesis will be higher than $2,200,000 and $2,250,000 is 0.4364 and 0.2358 respectively, while that probability that the same will be lower than $2,160,000 and $2,130,000 is 0.2296 and 0.808 respectively. Thus, it can be affirmed that probability is high for the revenue to be incurred as higher than $ 2,200,000 but no lesser than $2,130,000. Change Range of Expected Revenue Number Probability More than $2,200,000 0.4364 More than $2,225,000 0.2358 Less than $2,160,000 0.2296 Less than $2,130,000 0.808 HSBC offers As per the current scenario, HSBC is willing to offer USASuperCars, the sum of $2,150,000 in respect to the payment made in the local currencies, wherein the company will have to sign the contract in respect to this offer from HSBC. The assessment further revealed that USASuperCars had an earning of around $2,193,029.27 from the global market. The offer by HSBC is amounted to be $2,150,000 with respect to the expected revenues earned by the company. As from the calculation, it can be stated that the probability income will be less than $2,150,000 to HSBC’s offer of 16.85%. Hence, it can be stated that around 83% of the revenue will increase over $2,160,000 income. As the calculation reveals that there is only 16.85% probability that the revenue will be lesser than $2,150,000, if the CEO accepts the offer, the company shall have to witness lesser financial risks. Moreover, the company needs high amount of cash to carry out its operations comfortably that gets sufficed through the offer. In this respect, it will preferable to accept the order to reduce the possibility of fluctuation in the foreign currency. However, if the bank intends to use the same money in other investment activities, the bank will prefer payment for longer durations. Besides, by accepting the offer of HSBC, USASuperCars will be significantly benefited, as there will be limited need to bear any additional risks for the company, wherein the company can use this money in further enhancement and other promotional activities. Risk-Averse Risk averse is the phenomena of finance based on which an individual takes their significant decision regarding the attempt to diminish uncertainty in the future position. Risk aversion is termed to the unwillingness of an individual and accepts it with the bargain with more certainty due to having the uncertain payoff that possibly low (Barz, 2007). In the provided scenario, the sales manager of USASuperCars is willing to take the offer that has been made by HSBC whereas; the CEO is reluctant to accept the offer. Based on the above calculation it can be stated that the underline offer is significantly lesser as compare to the expected revenue from its global sales by $ 43,029.27. This implies the fact that in the given scenario, the sales manager of USASuperCars is highly uncertain about the fluctuation in the currency exchange rate and signifies that the offer made by the HSBC will be profitable for the company in terms of the exchange rate. Thus, it can be concluded that the sales manager of USASuperCars is expected to be more risk averse on the other hand; the CEO of the USASuperCars is likely to be take high risk with regard to the profitability of $ 43,029.27 by denying the current offer of the HSBC (Barz, 2007). Analyzing the Risks to the Bank Exchange rate plays an important role for not only to the traders in their export and import activities, but also for corporations like USASuperCars who are dealing in different nations. Thus, the fluctuation in the currency rate is the key determinate in the performance of USASuperCars. Moreover, to measure the impact of fluctuation of currency in the financial position of the company, it is important to estimate its effects in the output, growth, price, and demand and supply. The main reason behind the fluctuation in the currency is the ‘floating rate system’ norm of different nations. As a result, in order to minimise the risk of the fluctuation in exchange rate, the bank is identified to adopt certain measures regardless of the risk adverse measure by offering below the expected rate. In this context, bank measures include letter of credit, currency swapping, forward and future contract, which allows the traders to assists them by considering all the significant risks and provide them effective as well as predetermined return by minimising all the exposure of the risks (Greuning & Bratanovic, 2009; Kelley, 2001). As stated above, international traders are highly affected with the currency fluctuation. Companies are having branches in the overseas markets or engaged in international trading by having various branches in the global market. In such cases, any change in the currency valuation will have a noteworthy impact on its operations (Euro Investor, 2012). If the offer made by HSBC is reduced to the three months rather than twelve months, then it may cause several consequences in both positive and negative ways. During the time span of a year, a country may expose to loss the global index, which can either appreciate or depreciate the currency exchange rate. In this context, if HSBC pays the sum in twelve months’ time rather than three months’ time, it could be beneficial for HSBC because within this specified period the bank would have to hedge the currency to earn significant profit from investing the money in the foreign exchange market. In addition, the offer made within twelve months will be beneficial, as in the current scenario, the expected revenue is higher than its offering to USASuperCars. Additionally, if the company receive the money in short duration i.e. in three months rather than the twelve month time, it will help the company to reduce the cost of borrowing from other sources as the operational cost will be met in shorter duration. Likewise, it will also help the company to reduce the risk exposure and working capital shortfall and utilize the money in other form of operations that includes hiring new employees, development of products, promotional activities and expansion of business among others. In a similar context, USASuperCars would prefer the payment to be made within the time span of three months to reduce the risk involved in lengthy transaction time. Correspondingly, the bank can significantly be benefited if it would choose twelve-month payment through investing the money in other form of businesses and provide loan and advances to the customers, which in turn would aid in earning interest (Aswathappa, 2004). HSBC’s Offer USASuperCars accepting the offering i.e. $2,150,000 from HSBC with regard to the minimised exposure of any risk occurrence, the position of HSBC from this trading is depended on the prevailing foreign exchange rate in the market. Thus, it can be considered to be a good offer, as it will help USASuperCars to avoid some risk, including the exchange rate risk as depicted in the appendix. Accordingly, exchange rate risk will be considered to be a major risk for the company because it has customers from seven different countries, which increases the exposure of currency fluctuation and accordingly, there will be high lag time in the currency conversion. Thus, USASuperCars can significantly have less revenue than expected if currency fluctuates at higher level. Thus, if company wants to avoid risk of currency exposure HSBCs offer will be a good choice for the company. Based on the above calculation, the Value-at-Risk of the offering that HSBC is offering to USASuperCars will be $ 2,119,553.70. Subsequently, based on the derived calculation (shown in appendix), it can be affirmed that HSBC’s initial profit amounted to be around $ 43,029.27. Moreover, with respect to the HSBC offer $2,150,000 made in the local currencies reveals that USASuperCars will obtain revenue in time lag of three months rather than the twelve months. Besides, the calculation reflected that there is only around 17% possibility that the revenue will be less than HSBC offer. Contextually, this clearly reveals that the company will significantly earn higher revenue if it refuses the HSBC offer. Thus, the investors or shareholders who are keen of taking risk will refuse this offer. In addition, it is noteworthy to say that the company refuses the HSBC offer, as it will create high chances of risks along with high chances of fluctuation in the final revenue due to currency exposure. Correspondingly, if USASuperCars accepts the offer made by HSBC, then it will be beneficial for the company, as the company is provided with a sound offer without undergoing any risk or uncertainty in other forms. Moreover, it also provides opportunity to USASuperCars to utilise the money in other operations, reinvestment purposes and promotional activities of cars, which will aid in upgrading the operational performance. Thus, it can be stated that the HSBC offer will be a profitable business for USASuperCars. If HSBC has agreed not to convert all/some of the currencies in twelve months’ time, then it can eliminate the transactional exposure by using the various hedging instruments. In this respect, it can minimise the exposure through the use of hedging with the help of various money market contracts. Currency option will be the possible measure to minimise the loss in the circumstances, which allows the option to hold the right not the obligation to buy the currency. Moreover, the interbank market will also provide the opportunity to convert the currencies into the local currency without higher risk. Likewise, the currency swapping will also be a significant option for HSBC (APEDA Agri Exchange, n.d.). In this regard, forward contract would allow HSBC to buy or sell foreign currency on a predetermined amount and time span. Whereas, the currency swapping would facilitate in making cross-currency swapping cash flow in one currency with respect to other currency. Recommendations In the global business context analysis, risk is an important factor while dealing with foreign markets in order to monitor the changes in the currency market. In this context, it can be affirmed that when the investors are not sure about the favourable scenarios in the exchange rates, they hedge the risk with other securities. Thus, in this regard USASuperCars must use hedging instruments such as forward contract method, as a risk management tool. This will enable the company to manage the trading of currency in the security market. Moreover, business practices also play an important role in managing the exposure. Thus, the consideration of the effective hedging tool can enable the company to manage the exposes of violation in the exchange rates and provides effective functioning of the business operations through increasing the revenues of the business. Conclusion From the above analysis and evaluation, it can be ascertained that the traders unlike USASuperCars are conducting their operation in the global context to enhance their profitability and opportunity. Besides, by conducting international transaction, the organisations are highly exposed to the risk of currency fluctuation. It can be also be ascertained that with the increase in the fluctuation in the currency rate, the international traders are highly affected. Moreover, the profitability of USASuperCars will be highly influenced with the devaluation in the currency, as it has majority of revenue from the foreign trading activities. In order to reduce the impact of the currency fluctuation, different technique are used that includes the various financial instruments such as option, currency swapping among others in order to hedge the currency and offset the possible impacts. Thus, in this regard, a number of mechanisms will help the USASuperCars to combat the effects of exchange, including the forward contracts and other financial instruments in order to manage the currency exposure to minimise and mitigate risk. References Aswathappa, A., 2004. International Business, 2e. Tata McGraw-Hill Education. Barz, C., 2007. Risk-Averse Capacity Control in Revenue Management. Springer Science & Business Media. APEDA Agri Exchange, No Date. How to Avoid Foreign Exchange Risk. Exchange Rates, Forward Exchange Contracts, Currency Futures & Currency Options. [Online] Available at: http://agriexchange.apeda.gov.in/Ready%20Reckoner/How_to_Avoid_Exchange.aspx [Accessed November 08, 2014]. Duffe, D. & Pan, F., 1997. An Overview of Value at Risk. Preliminary Draft. [Online] Available at: http://www.mit.edu/~junpan/ddjpa.pdf [Accessed November 08, 2014]. Euro Investor, 2012. How Exchange Rate Fluctuations Affect Companies. News. [Online] Available at: http://www.euroinvestor.com/ei-news/2012/07/17/how-exchange-rate-fluctuations-affect-companies/19796 [Accessed November 08, 2014]. Greuning, H. V. & Bratanovic, S. B., 2009. Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Risk Management. World Bank Publications. Kelley, M. P., 2001. Foreign Currency Risk: Minimizing Transaction Exposure. International Law Section, pp. 32-35. Kohler, U. & Kreuter, F., 2005. Data Analysis Using Stata. Stata Press. Mathematics Learning Centre, No Date. Statistics and Standard Deviation. To Calculate the Mean and Standard Deviation of Lists, Tables and Grouped Data. [Online] Available at: http://www.cqu.edu.au/__data/assets/pdf_file/0009/15966/STSD.pdf [Accessed November 08, 2014]. Schermerhorn, J. R., 2011. Exploring Management. John Wiley & Sons. Appendix Q1: Country Quantity Price Exchange Rate Selling Price Per Unit ($) Total Selling Price ($) [X] Exchange Rate Standard Deviation ($) UK 12 57500 1.405 80787.5 969450 0.041 Japan 1 5 8400000 0.00903 75852 379260 0.00045 Japan 2 3 9000000 0.00903 81270 243810 0.00045 Canada 1 1 97000 0.82491 80016.27 80016.27 0.0342 Canada 2 3 100000 0.82491 82491 247473 0.0342 South Africa 2 4100000 0.0211 86510 173020 0.00083 USA 1 100000 1 100000 100000 Total 27 2193029.27 0.019814445 Given USASuperCars sale figures, the mean and standard deviation of the total revenue will be The mean of the total revenue will be $ 2,193,029.27 Standard Deviation = √ (12*57,500)2 * 0.0412 + (5*8,400,000 + 3*9,000,000)2 * 0.000452 + (97,000+3*100,000)2 * 0.03422 + ( 2*4,100,000)2 * 0.000832 = $ 44,666 Source: (Kohler & Kreuter, 2005; Mathematics Learning Centre, n.d.) Q2: a) Transforming x into z: z = x-Mean/SD P (x>2200000) = P (z > 2200000-2193029/44666) = P (z > 0.156) =0.4364 b) P (x>2250000) = P (z> 2250000-2193029/44666) = P (z > 0.716) =0.2358 Q3: a) Transforming x into z: z = x-Mean/SD P (x < 2160000) = P (z < 2160000-2193029/44666) = P (z < -0.739) = P (z > 0.739) =0.2296 b) P (x < 2130000) = P (z < 2130000-2193029/44666) = P (z < -1.41) = P (z > 1.41) =0.808 Q4: P (x < 2150000) = P (z < 2150000-2193029/44666) = P (z < -0.96) = P (z > 0.96) =0.1685 Thus, the offer made by HSBC is not a good offer to USASuperCars, as the company is having around 83% possibility that the total revenue will exceed over $2,150,000. Q5: Calculation reveal that USASuperCars having 16.85% possibility that the revenue will be lower than $ 2,150,000. Therefore, this could be affirm that USASuperCars sales manager is high risk- averse than the CEO. Q6: HSBC offers $2,150,000 to USASuperCars apart from the currency fluctuation risk, the bank is also having the risk of interest rate risk, operating risk, competitive risk, liquidity risk and credit risk among others. Q7: The pay in three months’ and twelve months’ time is having noteworthy differences because higher the time span, higher the risk with lag in the conversion time, which will affect the financial stability of the company. Thus, USASuperCar will prefer three-month payment to reduce the uncertainty of borrowing costs and utilise the money through reinvesting the same in other operation to gain significant revenue. On the other hand, HSBC will prefer to make the payment in twelve- month, as the bank will have the opportunity of utilizing the money in other business and operation to gain significant benefit. Q8: Country Quantity Price Provided Exchange Rate Selling Price Per Unit ($) Total Selling Price ($) [X] Current Exchange Rate Selling Price Per Unit ($) Total Selling Price ($) [X2] UK 12 57500 1.405 80787.5 969450 1.59 91425 1097100 Japan 1 5 8400000 0.00903 75852 379260 0.0087 73080 365400 Japan 2 3 9000000 0.00903 81270 243810 0.0087 78300 234900 Canada 1 1 97000 0.82491 80016.27 80016.27 0.88 85360 85360 Canada 2 3 100000 0.82491 82491 247473 0.88 88000 264000 South Africa 2 4100000 0.0211 86510 173020 0.08 328000 656000 USA 1 100000 1 100000 100000 1 100000 100000 Total 27 2193029.27 2802760 Q9: Banks expected profit= $2193029.27- $2,150,000= $ 43,029.27 P (Q Read More