Winner International: Managing FX Risk with Derivatives Strategies

This case study examines Winner International Limited's approach to hedging foreign exchange and commodity price risks using derivatives. The company faces currency exposure due to its multinational operations, involving procurement from Poland and the Czech Republic, and sales in Germany and the United Kingdom. The analysis suggests strategies for managing Polish Zloty and Czech Koruna exposures, recommending the use of currency futures for their reliability and lower counterparty risk. It also explores commodity hedging strategies for live cattle and hot buns, advising the company to book futures based on market trend analysis. The study emphasizes offsetting foreign liabilities against foreign income to reduce conversion costs and leveraging stable global currencies like Euro and Sterling. The aim is to minimize losses from currency fluctuations, control production costs, and maximize profitability, with the assumption that foreign revenue sufficiently covers foreign purchase costs. Desklib offers a wide range of solved assignments and past papers to aid students in their studies.

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;

(b) Future Contract: It is an exchange traded derivative instrument and standardised. Thus,
the same cannot be tailor made as per the requirement of the company. However, the risk
of counterparty default is negligible;
(c) Options: The Company may invest in options and shall reduce the risk of downfall of
currency beyond a certain point. However, the company has to pay an upfront premium
which shall be the expense for hedging. There are two types of options (a) Call option (b)
Put Option.
(d) Swap: The company can enter into swap agreement to reduce exposure to foreign
exchange by taking loan in the foreign currency and converting to Home currency and
paying the same later on along with interest from sales value.
In the present case since company shall directly settle Euro/ Sterling for Polish Zolty without
converting to Swedish Krona it shall eliminate the cost of conversion. Further, the company
shall use futures as they are safe and more reliable than other modes of derivatives. In
addition, since the volume shall be high the cost of hedging shall be less as the currency is a
global currency. [Since no data regarding the volume of currency is given, it is assumed that
the revenue shall be sufficient enough from foreign economies to offset the cost of purchase
from other foreign companies].
For Czech Republic, country has a payment exposure as it procures raw material Artificial
Colouring and needs to make regular payment in Czech Koruna. The current rate of 1 Czech
Koruna = .411 Swedish Krona, 1 Czech Koruna = 0.34 Sterling and 1 Czech Koruna = 0.04
Euro. 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,
(The Money Converter , 2019)
Further, the company can use the following types of derivatives to hedge its exposure
(e) 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;
(f) Future Contract: It is an exchange traded derivative instrument and standardised. Thus,
the same cannot be tailor made as per the requirement of the company. However, the risk
of counterparty default is negligible;
(g) Options: The Company may invest in options and shall reduce the risk of downfall of
currency beyond a certain point. However, the company has to pay an upfront premium
which shall be the expense for hedging. There are two types of options (a) Call option (b)
Put Option.
(h) Swap: The company can enter into swap agreement to reduce exposure to foreign
exchange by taking loan in the foreign currency and converting to Home currency and
paying the same later on along with interest from sales value.
In the present case since company shall directly settle Euro/ Sterling for Czech Koruna
without converting to Swedish Krona it shall eliminate the cost of conversion. Further, the
company shall used futures as they are safe and more reliable than other modes of
derivatives. In addition, since the volume shall be high the cost of hedging shall be less as the
currency is a global currency. [Since no data regarding the volume of currency is given, it is

assumed that the revenue shall be sufficient enough from foreign economies to offset the cost
of purchase from other foreign companies].
Thus, company shall offset the foreign liability against foreign income so as to reduce the
double conversion cost. Further, the currencies like Euro and Sterling are more stable as they
are global currency.
Commodities Hedging
The current Live cattle Price is 128.775 in US market while the futures are showing a
downward trend with June 2019 Pricing showing a down trend of 119.95 and the June, 2020
shows a price of 113.90. Thus, from the future trading analysis it may be seen that market
shall show a downward price trend, thus company should hedge itself by booking futures at
lower prices if it perceives that the prices of product shall not fall below a certain level. If the
company believes that the prices shall go below the set prices it can short sell the futures.
(MarketWatch, Inc., 2019)
Similarly for hot buns the above strategy may be used.
References:
MarketWatch, Inc., 2019. Live Cattle. [Online]
Available at: https://www.marketwatch.com/investing/future/lcj9
[Accessed 6 March 2019].
The Money Converter , 2019. Convert Swedish Krona to Czech Koruna. [Online]
Available at: https://themoneyconverter.com/SEK/CZK.aspx
[Accessed 5 March 2019].
XE.com Inc., 2019. XE Currency Charts: GBP to PLN. [Online]
Available at: https://www.google.com/search?client=firefox-b-d&ei=sa5-XJvYFNX-
9QPGurvYCw&q=polish+zloty+against+sterling&oq=polish+zloty+against+sterling&gs_l=psy-
ab.3..35i39.1228.1228..1497...0.0..0.155.155.0j1......0....1..gws-wiz.......0i71.8q1e4miN2oE
[Accessed 5 March 2019].