Case Analysis: Swatch Group's Response to Currency Fluctuations

This case study analyzes the impact of the Swiss National Bank's (SNB) decision to discontinue the minimum exchange rate of CHF 1.20 per euro on the Swatch Group. The analysis explores the pressure experienced by the Swiss franc against the euro, the SNB's policy to maintain the exchange rate, and the effects of the policy's removal. It details the immediate consequences for Swatch, including a significant drop in sales, net income, and stock price due to currency fluctuations. The study also examines three actions Swatch could take to minimize the effects of exchange rate volatility: implementing exchange-traded funds (ETFs), utilizing currency forward contracts, and considering currency options and virtual cash strategies. The case provides a comprehensive overview of the financial challenges faced by Swatch and potential mitigation strategies, supported by relevant bibliography.

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STUDENT NAME:
STUDENT ID:
TOPIC: CASE ANALYSIS (SWATCH GROUP)
DATE: 12-07-2019

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Experiencing pressure against the euro
Swiss franc experiences pressure against the euro due to the foreign exchange policy and the
immediate effects are realized in foreign currency purchases. To maintain CHF1.2, the policy
considered to focus on the ceiling of euro per franc. As per the history of good macroeconomic
performance, Switzerland has maintained its consistent growth in terms of reputation and rule.
There was a long-lasting crisis in Europe which was called a Great Recession, due to which the
world ought to have safety in terms of mortgage defaults and fiscal policies. In the year 2008, the
aim was “flight to safety.” Investors from all over the world wanted to have a safe place in which
swiss currency was safe-heaven. Thereby investors purchased large quantities of the Swiss
currency. Thereby the euro-franc increased to more than 50%. Due to this sharp franc
appreciation, the economic growth slowed down in the year 2011. A policy was thereby
introduced that is called the SNB’s exchange rate policy. This helped to put a ceiling on the
Swiss currency which was largely appreciated. This policy was a growth policy in terms of risk
of deflationary and massive overvaluation of the Swiss franc. The foreign exchange rate may
have problems and serious issues in Swiss export. CHF1.2 per euro was the floor rate that SNB
put in terms of enforcing the minimum exchange rate.
Swiss central bank countered strengthening pressure
There is a strengthening pressure by the Swiss central bank due to several financial hedges.
There were currency forward contracts that were largely locked in the exchange rate. With the
total value that is determined in the future portfolio, there is a small fraction that is determined
with the net sales of Swatch that are CHF50 million in Chinese yuan and CHF361 million in
euro forwards. Swatch can work on high pressure while considering several factors in which it

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would have done more to surprise with appreciation1. There should be a time-specific hedge that
is encountered with both the exchange rate and thereby the currency of quantities are predicted
as per the hedging key exchange rate that is largely pegged by the Swiss central bank. Thereby at
this time, there was a strengthening pressure to support the financial hedge of the Swiss
currency.
Immediate effect on Swatch
On the abandonment of the fixed exchange rate against the euro, an immediate effect was
observed in terms of a surprise to the market participants. The discontinuation of the exchange
rate has a different intention which speculated the capital flows of the country. The
discontinuation prevented the major situation of loss while working towards the anticipated
measures and dealing with a somewhat optimistic manner. There is a comparison of exchange
rates that were negatively impacted by the situation. Due to the abandonment of the fixed
exchange rate, the year 2015 was not a great year for the Swatch Group. Thereby the financial
year was largely shaped with the currency shock with euro minimum rate in the beginning. The
shift in sales was observed as an immediate effect on Swatch in the current market. there was a
distortion that was marked highly in the international product pricing structure. This seems that
the currency effects were observed. The sales of Swatch fell by 3% and the currency effect fell
by 2%. The net income of Swatch dropped by 21%. The stock price was even dropped due to the
immediate effect of the exchange rate scenario. While the stock price was down with 20% while
compared to last year.
Three actions to minimize the effects of exchange rate
1 Rajendra, Aitha, Swatch Group and Francogeddon, (Darden Business Publishing: University of Virginia, 2019). 5.

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There are several options in terms of exchange-traded funds to be introduced by Swatch. These
largely focus on short and long term exposure in different currencies. ETF are exchange-traded
funds that can help in mitigating currency exposure with actual performance in terms of diverges
and funds2. The currency risk can be largely eliminated while working on several actions such as;
 Forward contracts
 Currency options
 Virtual cash
These are the actions that can be taken to minimize the exchange rate effects. Swatch can take up
Currency forward contracts that tend to mitigate currency risk. In this step, there is a contract
between the two parties in which specific consideration is provided to the buyer and seller with a
specific amount of brokerage3. Currency options can be provided to the investors with the
obligation to sell or buy the asset or product in a particular currency. The stock simulator will
help to focus on virtual cash strategy.
Bibliography
Aitha, Rajendra, Swatch Group and Francogeddon, Darden Business Publishing: University of
Virginia, 2019
2 Rashid, Latief, & Lin, Lefen, The effect of exchange rate volatility on international trade and foreign direct investment (FDI) in developing
countries along “one belt and one road” International journal of financial studies, vol 6, no. 86, 2018: 1-22.
3 Bin, Wu, Xu, Xuefei and Feng, Zhenzhong, Investment Promotion, Fiscal Competition, and Economic Growth Sustainability. Sustainability,
2018, 10: 45.

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Latief, Rashid., & Lefen, Lin, The effect of exchange rate volatility on international trade and
foreign direct investment (FDI) in developing countries along “one belt and one road”
International journal of financial studies, vol 6, no. 86, 2018: 1-22.
Wu, Bin, Xuefei Xu, and Zhenzhong Feng, Investment Promotion, Fiscal Competition, and
Economic Growth Sustainability. Sustainability, 2018, 10: 45.