Managing Exchange Rate Exposure Report

This presentation provides an in-depth analysis of managing exchange rate exposure. It discusses the nature and major sources of exchange rate risk exposure, types of exposure, risk management strategies, potential exchange rates in Q3, impact on operating cash flows, assessing the scale of operating exposure, and suggested restructuring options. The presentation focuses on Nike as a case study. References to relevant research papers are provided.

Managing Exchange Rate
Exposure Report

Table of Contents
 Introduction
 Part 1
 Part 2
 Conclusion
 References

INTRODUCTION
Nike's business operations
 Nike is the American multinational corporation which has spread its operations in the various
countries around the globe, which is the major reason they are exposed to the foreign currency
fluctuations and associated risks.
 The business operations of the company are ranging from the designing to development and from the
marketing to sales of the footwear, apparels, equipment's, accessories and other related services.
 The company is highly dedicated to the corporate social responsibility and the corporate governance to
generate the positive brand value. The tag-line has inspired for the necessity of the fitness and health
among the potential buyers of the brand.

Part 1
Nature and major sources of exchange rate risk exposure
 The company is exposed to the foreign currency fluctuations as a result of the international sales,
product sourcing and the funding activities that they assume round the world.
 The risks associated with these exposures can either be anticipated or unanticipated against which
a well-developed risk management programme is developed so that the either the risk can be
lessened, delayed or completely be avoided.
 These currency volatility causes the disruptions in the financial and the operational position of the
business and also results pertaining to that period.

Types of exchange rate risk exposure
Types of exchange rate risk exposure
These are the types of the exchange rate risk to which the Nike company is exposed:-
1) Transactional Exposures
 The transactional exposures of Nike are due to the varying product costs. As if the Nike entities across the world
purchases the products from NTC whose functional currency is US dollars, then NTC will be exposed to the
exchange rate fluctuations in various currency denominations. But on the contrary if these entities buy from the third
party factories then they themselves will be exposed to the currency fluctuations.
2) Translational Exposures
 The translational exposures pertaining to the foreign currency fluctuations arise due to the subsidiaries of Nike that
are dealing in the other functional currencies leaving the US dollars aside.

Continue..
Risk management applied to hedge exchange rate risks
 The risk management of the currency exchange rate fluctuations and volatility is done by Nike by taking
the advantage of the natural offsets and the currency correlations that are existing within the portfolio.
 The remaining partial exposures are managed by hedging them using the derivative instruments like the
forwards and options contracts.
 The foreign subsidiaries of Nike uses surplus amount of cash in order to purchase the available for sale
investments which are denominated in the US dollars. These subsidiaries with the other functional
currencies subsequently sale these investments to create the foreign currency exposure and hedge as per
the US GAAP.

Part 2
Potential exchange rates in Q3
Using "Purchase Power Parity" we will calculate Potential Exchange rate in Q3
S= P1/P2
S = Exchange Rate
P1 = Cost of goods in Currency 1
P2 = Cost of goods in Currency 2
Current Potential Exchange rate in Q3 =
E(s) / s = 1+i$ /1+iYuan = 1+1.35 / 1+1.10 = 2.35/2.10 = 1.12
Exchange rate = 0.158*(1+1.35%) = 0.160

Impact of exchange rate movement on the operating cash flows
Expected Q3 RESULTS OF OPERATIONS at 0.158
North America
($)
China
(Yuan) Total
Sales 14448 281814
2962
62
(-) Cost of sales (material and
labour) 6000 251068
2570
68
Gross profit 8448 30619.9
3919
4.5
Demand creation expense 1500 22317.8
2381
7.8
Operating overhead 1000 185032
1860
32
Total operating expenses 2500 207350
2098
50
Operating Profit 5948 -176730
-
1706
55
Interest expense 43 306.835
349.8
35
Cash flow before tax 5905 -177037
-
1710
05
Expected Q3 RESULTS OF OPERATIONS at 0.160
North America
($)
China
(Yuan) Total
Sales 14448 278292
29274
0
(-) Cost of sales (material and
labour) 6000 247930
25393
0
Gross profit 8448 30237.2
38810.
2
Demand creation expense 1500 22038.9
23538.
9
Operating overhead 1000 182719
18371
9
Total operating expenses 2500 204758
20725
8
Operating Profit 5948 -174521
-
16844
8
Interest expense 43 303 346
Cash flow before tax 5905 -174824
-
16879
4

Assessing the scale of operating exposure
 On account of the operational exposure, it is having the potential to significantly
affecting the market value of the company which is long term in nature.
 Due to following the divergent policies, there is a fluctuation in the exchange rates
affecting the operating profits.
 This will lead to depreciation in the value of US dollar or the China’s Yuan. Therefore,
by looking at the above, the range of exposure is less.

Suggested restricting options
It is suggested to Nike to take into consideration, the following
restricting options which will help in mitigating the economic
exposure.
 Operational strategy
 Currency risk mitigation strategy

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Impact of suggested restructuring options on Nike’s economic exposure
 The operational strategy will result into changing the current firm’s operations which
helps in preventing the risks associated with the future currency fluctuations.
 The currency risk mitigation strategy assists in eliminating the economic exposure
pertaining to hedging as the Nike can match the foreign currency outflows with the
inflows.

Conclusion
It can be inferred from the above that it is important for the company to analyze the
exposure associated with foreign exchange in order to implement the right set of actions to
reduce the impact of it on the business.

REFERENCES
 Liao, G. and Zhang, T., 2021. The hedging channel of exchange rate determination. Available at
SSRN 3612395.
 Mahapatra, S. and Bhaduri, S.N., 2019. Dynamics of the impact of currency fluctuations on stock
markets in India: Assessing the pricing of exchange rate risks. Borsa Istanbul Review. 19(1). pp.15-
23.
 Luo, H. R. and Wang, R., 2018. Foreign currency risk hedging and firm value in China. Journal of
Multinational Financial Management. 47. pp.129-143.
 Tiwary, A. R., 2019. Study of currency risk and the hedging strategies. Journal of Advanced Studies
in Finance (JASF). 10(19). pp.45-55.