Case Study: Portofino Company and Foreign Exchange Risk Analysis

This case study analyzes Portofino Company's exposure to foreign exchange risk between December 2012 and January 2013, focusing on transactions involving Brazilian Reals, Guatemala Quetzals, and Pesos. It calculates the gains and losses recognized in net income for 2012 and 2013, identifies the most critical transaction to hedge, and explores how Portofino could have acquired call options to mitigate potential losses. The analysis incorporates historical exchange rates and assesses the effectiveness of hedging measures in reducing the company's overall purchase costs, while also considering the potential negative impacts of hedging contracts without adequate research. The document highlights the importance of hedging in Brazilian Reals and Pesos due to the incurred losses and the potential profits from hedging strategies.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Authors Note:

MANAGEMENT ACCOUNTING
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Table of Contents
1. Finding and analysing the historical data of the currency:....................................................2
2. Determining the net income in 2012 and 2013, while detecting the hedge required for
foreign exchange risk:................................................................................................................3
3. Determining the gain and loss from foreign exchange by using hedging measures:.............4
References:.................................................................................................................................6

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1. Finding and analysing the historical data of the currency:
Currency Amount
Exchange
rate@12/15/
2012 USD value
Exchange
rate@01/
15/2013
USD
value
Loss/
profit
Brazilian
Reals 65,000 0.4792 31,148 0.4916 31,954
(806
)
Guatemala
Quetzals 2,50,000 0.1250 31,250 0.1245 31,125 125
Pesos 4,00,000 0.0781 31,240 0.0791 31,640
(400
)
Total 93,638 94,719 (1,081)
The above table directly provides information regarding historical exchange rate of
Brazilian reals, Pesos and Guatemala Quetzals. This historical exchange rate would
eventually help in identifying the level of profits or loss that would be generated from the
transactions that is conducted by the organization. Portofino company directly made a cheese
during 15th December 2012, while the actual payment were made in 15 January 2013.Dabur
calculation directly in the day that during the purchase the Portofino company was liable to
pay only USD 93,638, which was in accordance with the exchange rate during the period.
However, the payment that was actually made by the organization was relatively at the levels
of USD 94,719. Moreover, it could be understood that the organization incurred a loss of
USD 1,081 from its purchases conducted in foreign countries. Hence, the loss incurred by the
organization directly indicate about the hedging measures that means to be accommodated
during purchases in foreign currency, as it helps in reducing the risk from currency market.
Álvarez-Díez, Alfaro-Cid & Fernández-Blanco (2016) mentioned that purchases conducted
from foreign countries requirements foreign currency, which might fall during the changes in
currency fluctuations and increase the purchasing value of the equipment.

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2. Determining the net income in 2012 and 2013, while detecting the hedge required for
foreign exchange risk:
Currency Amount
Exchange
rate@12/15/201
2
USD
value
Exchange
rate@12/31/20
12
USD
value
Loss/
profit
Brazilian
Reals 65,000 0.4792
31,1
48 0.4880 31,720
(
572)
Guatemala
Quetzals 2,50,000 0.1250
31,2
50 0.1265 31,625
(
375)
Pesos 4,00,000 0.0781
31,2
40 0.0768 30,720 520
Total
93,6
38 94,065
(
427)
Currency Amount
Exchange
rate@12/31/201
2
USD
value
Exchange
rate@01/15/2
013
USD
value
Loss/
profit
Brazilian
Reals 65,000 0.4880
31,7
20 0.4916
31,95
4
(
234)
Guatemala
Quetzals 2,50,000 0.1265
31,6
25 0.1245
31,12
5 500
Pesos 4,00,000 0.0768
30,7
20 0.0791
31,64
0
(
920)
Total
94,0
65
94,71
9
(
654)
Currency Profit or Loss
Brazilian Reals (806)
Guatemala Quetzals 125
Pesos (400)
The above calculations provide a gist of net income or loss that was generated by
Portofino Company during 2012 and 2013.The calculations directly provide adequate
information regarding the relevant loss that was incurred by the organization 2012. This loss
was directly increased to the levels of USD 427 in December 2012. The for the calculation
indicate that in January the loss incurred by the organization was raised to the levels of USD
654, as the exchange rate value started to increase. This increment in the exchange rate had a

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negative impact on the purchase price, which was increased due to the volatility in the
currency market. Therefore, the total loss in that was entered by the organization during the
tenure of purchase and payment was at the levels of USD 1,081.
Therefore, after conducting adequate evaluation of the above calculations it can be
identified that relevant losses incurred in Brazilian Reals and Pesos currency. However,
minor profits were also witnessed in currency Guatemala Quentzals. Hence, it could be
identified that adequate hedging measures needs to be conducted in Brazilian Reals and Pesos
for minimizing the risk attributes of the currency exchange. Thus, Portofino Company needs
to acquire adequate level of exposure in hedging instruments for reducing the risk involved it
currency conversion. On the other hand, Reboredo & Rivera-Castro (2014) argued that
without adequate research the hedging contracts could negatively affect the cash flow
conditions of an organization, which would increase the losses from the contract.
3. Determining the gain and loss from foreign exchange by using hedging measures:
Currency Profit from hedge Hedge cost Profit or Loss
Brazilian
Reals 806 200 606
Pesos 400 200 200
The above table provides an adequate evaluation of the profit that will be incurred by
both Brazilian Reals and Pesos currency after acquiring a call option. This would relatively
help in nullifying the losses that would have been incurred during December. However,
adequate hedging cost needs to be incurred by the organization for minimizing the risk
involved in currency prices. The calculations also indicate that losses from the currency
fluctuations that turned to profits, which would benefit the organization to minimize its
overall purchase cost. However, it would be noted that the risk from January is not mitigated
with the contract of December, as the contract period will end in December 31. Hence, the

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losses that will be incurred from January currency fluctuation will directly reflect on the
profits that were generated from the contract of December.

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References:
Álvarez-Díez, S., Alfaro-Cid, E., & Fernández-Blanco, M. O. (2016). Hedging foreign
exchange rate risk: Multi-currency diversification. European journal of management
and business economics, 25(1), 2-7.
Oanda.com. (2019). Oanda.com. Retrieved 5 March 2019, from https://www.oanda.com/
Reboredo, J. C., & Rivera-Castro, M. A. (2014). Gold and exchange rates: Downside risk and
hedging at different investment horizons. International Review of Economics &
Finance, 34, 267-279.