Hedging Strategies for Foreign Exchange and Commodities - Winner International Limited Case Study

Derivatives
Objective
In the given case study, the CEO of Winner International Limited Mr. Nilson wishes to
devise a hedging strategy to reduce the risk of foreign exchange locations on account of
multinational presence w.r.t sales and procurement. Further, he is also exploring
opportunities to enter into commodities hedging so as to reduce the losses on account of wide
fluctuation of prices of the product and keep the cost of production in control so as to
maximise the profits of the company.
Introduction
The case study presents Winner International Limited business presence wherein the
company procures its raw materials encompassing hot buns, Bone Marrow, Artificial Food
Colouring from Sweden, Poland, Czech Republic while production is carried out locally in
Sweden. Further, the major sales market of the company is Sweden, Germany and United
Kingdom. Accordingly, on the basis of above the country is exposed to following currencies
exposure Sterling Pound, Euro, Czech Koruna and Polish Zloty. Since, the company is
incorporated in Sweden the transaction of domestic currency is not considered as exposure.
Strategies for foreign exchange fluctuation
The summary of exposure of Winner International Limited has been presented here-in-below:
Particulars Purchase Sale Futures
Hot Buns Sweden
Bone Marrow Poland No Beef
Artificial Food Colouring Czech Republic No
Production Sweden Sweden
Germany
United Kingdom
On perusal of the table above, it may be seen that the company has purchase, production and
sale in the home country and thus the requirement of hedging is not required in Sweden.
For Poland, country has a payment exposure as it procures raw material Bone Marrow and
needs to make regular payment in Polish Zloty. The current rate of 1 Polish Zloty = 2.22
Swedish Krona, 1 Polish Zloty = 0.2 Sterling and 1 Polish Zloty = 0.23 Euro. (XE.com Inc.,
2019)Further, Euro and Sterling are more acceptable currency round the globe company shall
enter into currency hedging with these two currencies as it shall reduce the cost of hedging,
Further, the company can use the following types of derivatives to hedge its exposure
(a) Forward Contracts: It is an over the counter derivative instrument and non- standardised.
Thus, the same can be tailor made as per the requirement of the company. However, the
risk of counterparty default is high;