Analysis of Foreign Exchange Exposure Management at Mitsui & Co. Ltd.

This report provides a comprehensive analysis of Mitsui & Co. Ltd.'s foreign exchange exposure. It begins with an introduction to foreign exchange exposure and its impact on multinational corporations, followed by a detailed examination of Mitsui & Co.'s specific exposure, including transaction, economic, and translation exposures. The report then explores the tools and techniques used by Mitsui & Co. Ltd. to manage this exposure, such as hedging strategies like forward contracts and currency swaps, and assesses the appropriateness of these approaches. It evaluates the company's financial performance metrics, including cash flow, return on equity (ROE), and price-earnings ratio (PER), in the context of its foreign exchange activities. The analysis includes an examination of the company's financial statements and market risks, along with a discussion of both appropriate and inappropriate aspects of its exposure management. Finally, the report provides recommendations for improving the management of foreign exchange exposure at Mitsui & Co. Ltd., aiming to minimize risks and enhance financial performance in the global market.

Running head: MULTINATIONAL FINANCIAL MANAGEMENT
Multinational Financial Management

MULTINATIONAL FINANCIAL MANAGEMENT
Table of Contents
1. Introduction............................................................................................................................3
2. Understanding Foreign Exchange Exposure..........................................................................3
3. Tools Used In Foreign Exchange Exposure Management.....................................................6
4. Section 3: Application of Innovative Strategies and Recommendation.................................9
4. 1. Foreign Exchange Exposure Issue.................................................................................9
4.2. Technique Implemented by the Company......................................................................9
4.3. Recommendation...........................................................................................................10
5. Conclusion............................................................................................................................11
6. References............................................................................................................................13
7. Bibliography.........................................................................................................................15
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1. Introduction
Foreign Exchange Exposure is one of the major activities taking place in the different
international organizations. It helps a company to deliver products or services to another
country at a fair exchange rate (Sume, 2009). Fundamentally, currency rates in the foreign
countries can be changed any time due to global economic condition. Hence, the value of
invested money in any asset, sales and employment can be changed, wherein an organization
may face loss as well as profit from the currency exchange. This study mainly focuses on the
Foreign Exchange Exposure of any organization namely Mitsui & Co., Ltd. This organization
was established in Japan in the year 1947 (Mitsui & Co., Ltd., 2019). In recent times, the
company conducts wholesale trades in the international market. Hence, recent conduction of
the company in foreign exchange has been explained in this study.
2. Section 1: Understanding Foreign Exchange Exposure
Currency exchange fluctuation is one of the common activities of the international economy,
which affects the businesses directly within a country. However, the cash flow of an
organization can be changed due to this type of fluctuation in the global economy. In relation
to the international organizations, various types of products and services have been sold in
different continents or countries. During this scenario, the profitability volume can be
changed due to market fluctuations. Hence, a company may have to face major profit and loss
due to this type of activities. It can lead an organization towards failure or success. This
phenomenon can also be termed as a Foreign Exchange Exposure, which develops the
organizational capital as well as profitability in the global market. There are mainly three
types of Foreign Exchange Exposures, which has been used by most of the international
organization These exposures comprise ‘First is the transaction exposure’, ‘Economic
Exposure’ and ‘Translation Exposure’. The first one occurs when a currency is already
transferred in another economy and the economy cannot wait for the long period to receive
the return. The second one takes place when the currency has transferred to another economy
and the company receives a certain amount of return after a particular period of time. At last,
a process has been applied for a short period of time in order to receive short term gain from
the foreign market (Dhagat & Raju, 2016).
In relation to Mitsui & Co., Ltd, the key associates of the company conduct an effective
Foreign Exchange Exposure to develop the organizational performance and profitability
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within the global market. Capital market is one the potential aspects in foreign exchange,
wherein the share, bonds and debentures of an organization has been presented in the stock
market to gain capital for new product development (Prasad & Suprabha, 2015). Mitsui &
Co. Ltd. borrowed 4227 billion from the Japanese market including short and long term debt
in the year 2018. The company expected that this amount of debt can provide a greater return
at the end of 2019. However, it is a risky decision of the company, wherein a major loss can
be incurred in the recent future. Cash flow is another aspect of foreign exchange exposures,
wherein an organization receives more capital for the business operation. Mitsui & Co., Ltd
faced loss in foreign exchange cash flow in 2018 at the rate of 248,211 Million Yen (Mitsui
& Co., Ltd., 2018). However, this amount is lower than in the previous years. The changes in
cash flow investment activities have been reflected in the following figure:
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
6,00,000
7,00,000
2014 2015 2016 2017 2018
Cash Flow From Investment Activities and Financing Activities
Amount (I) (Yen)
Amount (F) (Yen)
Figure 1: Cash Flow from Investment Activities and Financing Activities
Source (Mitsui & Co., Ltd., 2018)
Based on figure 1, the company faced more than 6, 00,000 million yen loss in their
investment, whereas the financing activities was found to be low during 2014. This value was
completely inversed in the year 2018, with the loss from investment found to be low and
financing activities found to be higher than ever. The detailed information associated with the
company’s losses was reflected in the following table.
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Year Amount (I) (Yen) Amount (F) (Yen)
2014 6,59,818 13,237
2015 3,86,397 1,26,193
2016 4,08,059 50,548
2017 3,53,299 50,265
2018 2,48,211 6,52,292
Cash Flow From Investment Activities and Financing Activities
Table 1: Cash Flow from Investment Activities and Financing Activities
Source (Mitsui & Co., Ltd., 2018)
Besides, the cash flow activities return on equity (ROE) as well as the price earnings ratio
(PER) also quantify the foreign exchange exposure of an organization (Alssayah &
Krishnamurti, 2013). With respect to Mitsui & Co., Ltd, the company operates its business in
the international market. These can provide recent feasibility of foreign exchange exposure.
According to the report of Mitsui & Co., Ltd., 2018, it has been found that the company
maintained 10.86% ROE in 2018, which is significantly higher than the past five years. In
addition, the PER of the company is 7.67 in 2018, which can be considered as the moderate
value in the last five years. Though, this value increased in the year 2017, it can be
considered as a great outcome of the company with respect to foreign exchange exposure.
The following figure and table thus depict all the changes from 2014 to 2018.
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2014 2015 2016 2017 2018
Return on Equity (ROE) and Earnings Ratio (PER) of Mitsui &
Co., Ltd.
ROE
PER
Figure 2: Return on Equity (ROE) and Earnings Ratio (PER) of Mitsui & Co., Ltd.
Source (Mitsui & Co., Ltd., 2018)
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Year ROE PER
2014 9.65 7.59
2015 7.74 9.43
2016 -2.23 0.00
2017 8.61 9.42
2018 10.86 7.67
Return on Equity (ROE) and Earnings Ratio (PER) of Mitsui & Co., Ltd.
Table 2: Return on Equity (ROE) and Earnings Ratio (PER) of Mitsui & Co., Ltd.
Source (Mitsui & Co., Ltd., 2018)
3. Section 2: Appropriate and Inappropriate Aspects of the Foreign Exchange Exposure
Management
Every international organization has market risk when delivering products to the foreign
market. However, every new market of asset and sales provides expected profitability to an
organization. Sometimes, major market risk is arrived at due to economic change in a
particular country or the entire global economy. This situation can lead an organization
towards a significant loss. For this uncertain activity, innumerable international organizations
conduct proper management to reduce the foreign exchange risks. Hedging is one of the
effective techniques, which is considered appropriate by the majority of the organizations to
secure organizational finance during the period of economic transformation (Taušer & Čajka,
2015). Hedging can be defined as a process of investment, wherein an organization invests its
money into another firm. The value of the money does not change in this investment. Hence,
an organization receives a proper backup during difficult period of hedging. Mainly two types
of hedging have been used by an organization namely financial and operational hedging. In
relation to financial hedging, an organization contributes largely in investing money to the
market for bonds and debentures in order to secure financial background. On the other hand,
operational hedging helps an organization to make a strategy and to pay all the debts in the
market, thereby reducing the financial stress of the company (Das & Palit, 2019). By
following these processes, an organization can reduce the financial risk of the market to a
large extent.
In relation to Mitsui & Co., Ltd, the company faces major loss in 2017 in its foreign exchange
exposure and is hence regarded as an inappropriate aspect. The value of the exchange rate has
been found as 50 billion yen, which is lower than the previous years (Sano, 2017). For this
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reason, the company uses certain risk management tools to reduce the recent issues associated
with foreign exchange exposure. Forward Contracts is one of the processes, which can help
any organization to create a contract with various parties to lock a volume of currency, which
further helps in the times of financial crisis. The key associates of Mitsui & Co., Ltd. follow
Forward Contracts in order to secure their funds in the market. In addition, the company uses
currency swap agreements, interest rate swap activities, commodity features and swap
contracts to conduct hedging properly within the international market. Based on these
hedging techniques, the company focuses on certain specific derivatives instrument such as
Fair Value Hedges (used for interest expenses), Cash flow hedges (securing market earnings),
Hedges in Net Investment and Hedging Operations to secure the organization from foreign
exchange risks. By using these instruments, the company can prevent the market risks and its
impacts.
In the year 2018 and 2017, the company used aforesaid hedging techniques to control the
market risk, which helped the company to reduce the market loss during 2018. The following
table and graphs has highlighted on all the aspects in details. The usage of hedges and its
benefits has also been explained below based on the provided graphs and charts.
-
2,00,000
4,00,000
6,00,000
8,00,000
10,00,000
12,00,000
14,00,000
16,00,000
18,00,000
2018 2017
Hedges
Fair Value Hedge
Cash Flow Hedge
Hedges of the net
investement in a
foreign operation
Figure 3: Hedges
Source (Mitsui & Co., Ltd., 2018)
Year Fair Value Hedge Cash Flow Hedge Hedges of the net investement in a foreign operation
2018 1,01,320 18,049 10,13,700
2017 15,82,671 15,642 10,46,671
Table 3: Hedges
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Source (Mitsui & Co., Ltd., 2018)
Based on the figure and table 3, it has been found that the Fair Value Hedge of the company
was significantly increased in 2018, which depicts that the market risk of the company
associated with interest has increased. In relation with the cash flow hedge, small changes can
be identified in the year of 2018. Hence, the foreign exchange exposure does not affect the
organizational cash flow. The company received expected profitability from the market. On
the other hand, investment and operation hedges do not even create any impact on the
business operations of the company.
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4. Section 3: Application of Innovative Strategies and Recommendation
4. 1. Foreign Exchange Exposure Issue
Foreign exchange exposure needs to be managed properly so that the apparent risks, which
exist in the organization, can be minimized to the utmost level possible. Specifically, the
evaluation of the risks associated with the foreign exchange reveals that Mitsui & Co Ltd., is
directly exposed to the risks with respect to the exchange rate fluctuations. This particular
fluctuation illustrates an adverse impact on the operating results of the company. Even
though, the reporting currency of the said organization is the Japanese Yen, there are other
important portions as well, such as, consolidated revenues, business operations and operating
expenses, which are apparently denominated in other currencies. This, in turn, results into
depreciation or appreciation value of other provided currencies as compared to the Japanese
Yen, which illustrates an outcome of material transaction losses or gains. There is a specific
reason as to why the afore-mentioned issue persists in the organization and the reason
involves the fact that the cost of revenues, revenues, administrative, general and selling
expenses is are mostly directly affected by the stated fluctuations (MITSUI & CO., LTD,
2019).
4.2. Technique Implemented by the Company
The entire afore-mentioned issues are properly dealt with by the implementation of hedging
as it is a perfect protection strategy, which is implemented in the form of trading techniques.
It is the appropriate strategy, through which the management of the foreign exchange
exposure of Mitsui & Co Ltd., can be distinctly handled. Its fundamental aim is to ensure
competitiveness amidst the organization by taking immediate steps at the time of abrupt
financial fluctuations faced by the company. Provided the stated condition, the hedgers tend
to assume an opposite position with respect to the futures market. That position, relatively
holds a significant position, but is a complete offsetting. The main goal for the
implementation of hedging into the financial aspects of the company is to negatively avert the
outcomes of the financial fluctuations and to make no signs of attaining profits. Thus, it can
be apprehended that the final outcome derived from hedging is roughly zero. Nevertheless, it
must not be forgotten that there are costs involved with hedging, which in other words is
termed as transaction costs. The costs include brokerage fee, margin costs, potential margin
maintenance costs and finally the opportunity costs, which are associated with the funds
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invested in the margin (Šperanda & Tršinski, 2015). Thus, the implementation of this
particular tool in the company is sufficient enough to handle the finance-related adverse
situations, which largely surrounds its foreign exchange exposure.
4.3. Recommendation
On the basis of the above-mentioned issues and applied techniques, the strategies that can be
advised in this scenario is netting and matching. Besides, the existence of the risks that are
sorted by Mitsui & Co Ltd., there are other threats posed towards it, which actually involves
the issues associated with the currencies. In this regard, netting technique can be effectively
implemented in the company. The reason for stating this is the fact that netting directly tends
to imply offsetting exposures on one currency with an exposure to another or similar
currency. Precisely, the netting technique applies to that situation where the expectations
range from exchange rates to move high in a certain way, where gains or losses at the
foremost exposed section is bound to be offset by losses or gains at the time of the exposure
of the second currency. There are two types of netting, which can be easily implemented into
the operations of the company namely, bilateral and multilateral netting. Specifically, in
bilateral netting, it is evident that each pair of the available subsidiaries are seen to net out
from their distinct positions that too from each other. Eventually, the flows are subsequently
reduced on the basis of the sales illustrated by the netting partner or by lowering the
purchases experienced by the companies (Gupta, 2016; Mawanza, 2016 ).
Similar issue that persists in the Mitsui & Co Ltd. deals with the currency inflows and
outflows as these poses a huge impact on the foreign exchange exposure. Sustenance of this
particular problem can be easily solved with the implementation or introduction of matching.
This technique signifies a procedure, where the concerned organization is seen to match the
equivalent currency inflows with that of the currency outflows. All of this is done by
considering the timing and amount related facts in mind. In other words, it can be stated that
this technique ensures helping a company at the time of handling similar payments and
receipts that too in the similar currency and at the same time. The company can then easily
match both the payments and the receipts altogether. It is important to understand that
hedging is actually needed in cases where unmatched portion with regards to the foreign
currency cash flows exists. This specific kind of operation is identified or rather referred as
natural matching. Additionally, another possibility persists, which is also known as parallel
matching. The parallel matching is actually referred as the situation, where profits incurred in
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one foreign currency are expected to be situated in an opposite position or offset by the losses
that are to be incurred by the other currency. In such situation, if both the currencies remain
parallel, the instance of parallel matching can be highlighted (Laurea, 2013). Thus, it can
eventually be stated that both the netting and the matching techniques can be introduced in
the organization as the other issues related to the foreign exchange exposure as faced by the
Mitsui & Co Ltd., can be dealt effectively.
5. Conclusion
Considering all the aspects, Mitsui & Co., Ltd. id found to be performing well in the market.
However, the company faced major risk in the market due to economic fluctuations
associated with the interest rates. In relation with the cash flow and other foreign exposure
activities, the company does not face major issues. Hence, the company can perform well in
the market in case they consider more hedging techniques to achieve market goals in the long
run.
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6. References
Alssayah, A. & Krishnamurti, C., 2013, ‘Theoretical framework of foreign exchange
exposure, Competition and the Market Value of Domestic Corporations’, International
Journal of Economics and Finance; Vol. 5, No. 2, pp. 1-14.
Das, K. K.& Palit, S., 2019. ‘Foreign exchange risk management: a critical review of
literature’. International Journal of Management, IT & Engineering, vol. 9 iss. 2, pp. 176-
192.
Dhagat, A. & Raju, R., 2016, ‘Measurement of foreign exchange exposure for selected Indian
firms’, Amity Journal of Finance, Vol. 1, No. 1, pp. 92-106.
Fexco Financial Services., 2019, ‘3 currency risk management tools every business needs’,
viewed 5 July 2019, < https://fexco.com/fexco/news/3-currency-risk-management-tools-
every-business-needs/#>
Gupta, A.K.,2016. ‘Hedging Tools and Techniques for Foreign Exchange Exposure in India’.
Journal of Research in Humanities & Soc. Sciences, vol. 4, iss.5, pp. 48-53.
Laurea, Tesi di, 2013. ‘Hedging Strategies for Currency Risk’. Financial Markets,
Accounting and Management, pp. 1-80.
Mawanza, W., 2016. ‘Foreign Exchange Exposure Management Practices by Zimbabwe’s
Tourism and Hospitality Companies: A Case for the Depreciation of Rand (2014-
2016)’. Foreign Exchange, vol. 8, no. 4, pp.123-132.
MITSUI & CO., LTD, 2019. Risk Factors, Management Policy, viewed 05 July 2019,
<https://www.mitsui.com/jp/en/ir/management/risk/index.html>
Mitsui & Co., Ltd., 2018, ‘Annual securities report’, viewed 5 July 2019,
<https://www.mitsui.com/jp/en/ir/library/securities/__icsFiles/afieldfile/2018/06/29/
en_99yuho.pdf>
Mitsui & Co., Ltd., 2019, Corporate profile, viewed 4 July 2019,
<https://www.mitsui.com/jp/en/company/outline/profile/index.html>
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Prasad, K., & Suprabha K. R., 2015, ‘Measurement of exchange rate exposure verses cash
flow approach’, Procedia Economics and Finance, vol.25, pp. 394-399.
Sano, H., 2017, ‘Japan's Mitsui Life shifting to euro bonds from dollar due to hedging costs’,
viewed 5 July 2019, <https://in.reuters.com/article/us-japan-insurance-mitsui-
idINKBN17M0O9>
Šperanda, I. & Tršinski, Z., 2015. ‘Hedging as a business risk protection
instrument’. Ekonomski vjesnik: Review of Contemporary Entrepreneurship, Business, and
Economic Issues, vol. 28, no.2, pp.551-565.
Sume, C. E., 2009, ‘Foreign exchange exposure and management: case study of two large
multinationals’, Master Degree Project, pp. 1-28.
Taušer, J. & Čajka, R., 2015, ‘Hedging techniques in commodity risk management’, Faculty
of International Relations, University of Economics, Prague, vol. 60, no. 4, 174–182.
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