Foreign Exchange Risk Management at AB Foods

FOREIGN EXCHANGE
RISK MANAGEMENT AT
AB FOODS

Table of Contents
Background of AB foods.................................................................................................................3
Foreign exchange risk management policy at AB foods.................................................................3
3.......................................................................................................................................................5
Two Most Important foreign exchange exposure to AB foods...................................................5
Hedging options to be used by AB foods in short term and long term for effective management
of their business...........................................................................................................................5
Hedging techniques for managing transaction exposure.............................................................5
Recommendation on the foreign exchange hedging strategies....................................................6
4.......................................................................................................................................................7
Conclusion of company’s current foreign exchange exposure....................................................7
Challenges....................................................................................................................................7
Best way to forward.....................................................................................................................7
REFERENCES................................................................................................................................8
Books and Journals......................................................................................................................8
Online..........................................................................................................................................8

Background of AB foods
AB foods or Associated British foods is a multinational company in the processing and retailing
of foods sector based in London, UK. It is a second largest producer of many food ingredients in
the world. The present report is based on discussion pertaining to foreign exchange risk
management in the context of AB foods.
The company is having quite good financials in terms of their profit margins but they have
reportedly increased their cash reserved from some percentage which is a major concern for the
company while managing foreign exchange rate volatility and accordingly demanded for taking
exposure into the functional currencies and other currencies in which the company’s transactions
take place (Bandaly, Shanker and Şatır, 2018). The company is headquartered in London, United
Kingdom. So, its local currency is sterling pound in which company usually deals with their
associated business stakeholders. Also, the basic functional currency of the company is the one
associated with its local operations that is, Sterling pound. But due to the company being a
multinational concern, it has operations in many distinct region of the world and accordingly
exposed to many currencies in which its transactions take place. Therefore, when there is a
change in the exchange rates, it gives rise to transactional exposure in the business whereas when
assets, liabilities and other financial results are translated of foreign operations into local or
functional currency that is, sterling pound while consolidating the group’s financial performance
and financial position on balance sheet date, there is an emergence of translation exposure.
Manufacturing facilities of AB foods: It markets its ingredients in all over the world by
restricting its manufacturing facilities to some of the geographical regions that is, Europe, India
and America. So, due to having manufacturing at different regions having different local
currencies gives rise to transaction exposure in the country (Giambona and et.al., 2018).
Sourcing of raw materials in AB foods: There are many business units of AB food’s group who
is indulged in selling and purchasing of raw materials in different foreign currencies such as US
dollars and Euro currency (due to its existence in a Eurozone) which accordingly gives rise to
transaction exposures when there is a fluctuations in exchange rate or when the transactions are
translated into their functional currency that is, sterling pound. There is always some
differentiation present in the exchange rates between two currencies (Bergman and Rosén, 2021).
Remaining activities of business except the sourcing of some of the raw materials is carried out
in a functional currency itself.
Foreign exchange risk management policy at AB foods
Foreign exchange risk management refers to the hedging strategies incorporated by businesses
and investors which includes some measures that can be used to protect the value of assets and
liabilities and cash flows due to the unfavorable fluctuations taking place in the exchange rate of
the currencies in the nearer future. Currencies are considered as the most important and major
factor which derives the threat to the group’s financial performance and financial position that is
AB foods in any given period due to the fluctuations occurred in the exchange rates of the
currencies in which the company used to deal with other business units with functional currency
other than the Sterling pound. So, there must be some hedging strategy in place to lower down