Study On Foreign Currency Hedging Of A US Multinational Company

Select a U.S. multinational company, and respond to the following questions:

In terms of currency denomination, describe how the firm prices its revenues and costs.

For multinational enterprises (MNEs) with multiple foreign operations, consider any 2 of those operations and the contribution they are making to the parent firm's profits.

What means do they use to hedge against exchange rate risk?

Using this information, what do you think would be the effect of increases or decreases in the dollar’s exchange value on the firm’s profitability?

Currency Denomination for Revenues and Costs

The overall assessment aims in detecting the level of effect that foreign currency hedging plays in revenues of the organisation. In addition, the current annual report of Starbucks is mainly evaluated, which can help in detecting the level of operations that has been used by the organisation in improving the level of revenues. Furthermore, the impact of contribution of the companies is different region to the revenue to the parent company is mainly evaluated to determine the level of their income. The hedging measure that has been used by the organisation to curb the losses form currency fluctuation is mainly depicted in the assessment. Lastly, the impact of different information on increase or decrease of dollar value is also evaluated to determine its effect on revenue of the company.

1. Describing how the firms price its revenue and costs:

Figure 1: Depicting the annual report of Starbucks

(Source: s22.q4cdn.com, 2018)

The annual report of Starbucks relevantly provides the overall details regarding the revenue measures that has been used by the management. From the evaluation it can be detected that Starbucks relevantly uses USD currency denomination in their annual report for defining the cost and revenue generated during the financial year. The above figure relevant provides all the relevant information regarding the overall cost and revenues that has been generated by Starbucks. Hence, it can be understood that Starbucks use Dollar for depicts their income and expenses. Boddewyn (2016) mentioned that annual report holds all the relevant information regarding the current revenue, cost and other investment that has been made by the company to further their financial position.

2. Detecting the multiple foreign operations of Multinational company operations and contribution to parent firms’ profits:

Figure 2: Indicates the location in which Starbucks operate

(Source: s22.q4cdn.com, 2018)

Starbucks has relevant operations in different segments of the world, which contribute to their enormous income each fiscal year. The annual report of Starbucks relevantly provides all the relevant information regarding the operations that has been conducted in different regions. The above figure indicates that company operates in US, Mexico, Latin America, Canada, China, Korea, Taiwan, Philippines, Indonesia, Malaysia, UK, Turkey, United Arab Emirates, Germany, Saudi Arabia, Kuwait, Russia, Spain and other regions.

Particulars	Americas	China/Asia Pacific	EMEA
Company-operated stores	79.30%	16.46%	3.12%
Licensed stores	68.68%	13.90%	17.31%
CPG, foodservice and other	1.64%	0.29%	2.31%
Total net revenue	69.92%	14.47%	4.53%

The above table relevantly depicts the different regions from which the overall revenue has been generated by the organisation for the fiscal year 2017. From the evaluation of the revenue contribution income from America and China/Asia Pacific can be considered highest. Hence, the evaluation directly helps in determining that America relevantly has the highest level of revenue generated for operations during the fiscal year of 2017, as detected from the annual report. The American region of Starbucks has relevantly contributed 69.92% of the total net revenue that was generated by the company. Moreover, the China/Asia Pacific region has relevantly contributed 14.47% revenue to the total revenues of the company. Lastly, the EMEA has provide a revenue of 4.53% in the fiscal year of 2017. This might eventually help in improving the level of income, which can be generated from the operation over the period of time.

Particulars	China/Asia Pacific	EMEA
Company-operated stores	$                 2,906.00	$     551.00
Licensed stores	$                    327.40	$     407.70
CPG, foodservice and other	$                         6.80	$        55.00
Total net revenue	$                 3,240.20	$ 1,013.70

Therefore, from the evaluation it is detected that the income from China/Asia Pacific has mainly generated the highest level of income overseas for Starbucks. In addition, the income generated from company operated stores is mainly at the level so $2,906.00 million in 2017, while the income from licenced store was at $327.40 million and CPG, foodservices and other provided $6.80 million. The amount relevantly contributed positive revenue for the annual report of the organisation, which has increased its financial position for the fiscal year of 2017. Furthermore, total revenues have been generated from operations of EMEA, where company operated stores revenue is at $551 million, licensed store is at $407 and CPG, foodservices and other is at $55. Hence, it can be detected that the income from the overall overseas is relevantly adequate for Starbucks. Burley (2017) indicated that multinational companies have operations in overseas, which contribute to the revenue and expenses of the income and is accommodated by using adequate currency conversion method. Therefore, it can be detected that income from the region of China / Asia Pacific for Starbucks is the relevantly higher from EMEA region.

3. Indicating the means of hedge used by the organisation:

Contribution of Overseas Operations to Parent Firm's Profits

Figure 3: Indicating hedges used by Starbucks

(Source: s22.q4cdn.com, 2018)

Exchange rate risk is relevantly prominent for Starbucks, as the revenue will relevantly decline due to the high level of risk inmoved in currency conversion. Therefore, the company uses different level of hedging measure for reducing the total risk involved in currency conversions and maintain adequate level of income from operations. Furthermore, the above figure relevantly depicts the level of hedging activities, which are conducted by the organisation over the 2017 fiscal year. From the evaluation the company has been using interest rate swap, cross currency swap and foreign currency for adequately minimises the relevant negative impact on revenue, while converting the oversea income to USD. Cohn (2016) mentioned that companies use the hedging measurer for minimising the negative impact on their currency conversion, which helps them to maximises the value of converted current in their home currency.

Starbucks has adequately used derivatives for minimising the negative impact on the currency conversion, which has mitigated the exchange risk and allowed the company to minimise the losses from the conversion. The above figure also depicts the values of amount that is being invested in derivatives by Starbucks, which has helped in curbing the exchange risk. The cross current swap relevantly holds a value of $514 million, while Interest rate swap holds, $750 and Foreign currency holds $901 million. These has relevantly allowed the organisation to maximise the revenue generated overseas and limit the loss from currency conversion.

Figure 4: Indicating gain and loss from derivatives

(Source: s22.q4cdn.com, 2018)

The above figure relevantly depicts the level of gains and loss that has been incurred by Starbucks, while maintaining the level of derivates instrument that aimed for minimising the exchange risk. Hence, from the evaluation it can also be detected that losses from the overall currency derivatives was witnessed by the organisation during the fiscal year of 2017. On the other hand, the overall interest hedges provided the positive returns during the fiscal year of 2017. Gali (2015) argued that companies without conducting adequate research incur losses from hedge, which directly reduces the level of income for the period of time.

4. Indicating the effect of increase or decrease in the dollar’s exchange value on the firm’s profitability:

The alterations in the overall dollar exchange values have adequate impact on the performance and revenue generating capability of Starbucks. In addition, the evaluation of annual report depicts that the revenue of the company is mainly recorded in dollars, where the increment in dollar value against other currencies will negatively influence revenue of the company and vice-versa. Hence, from the evaluation it can be detected that values of the dollar declining against other currency would eventually allow the organisation to improve the level of income from operations. Henceforth, negative impact on the profitability of Starbucks is mainly detected when the overall value of USD increases in comparison to other countries.

Particulars	Current	Increment	Decline
Value in Amount	€        1,000,000	€        1,000,000	€        1,000,000
Value of EUR/USD	$                  1.13	$                         1.24	$                         1.02
Value in USD	$        1,130,000	$              1,243,000	$              1,017,000

The above table relatively represents the assumption of how the overall value in USD of Starbucks might change with the increment and degradation of the currency value. From the first instance it should be understood that the organization will eventually earn $1,130,000 in the current rates of converting the euro into USD. However, if the USD value against the Spears relatively declines then the euro amount for each USD will be greater which is shown in incremental section. This is mainly increased the overall value of USD that was previously owned by the organization to the amount of $1,243,000. This relatively indicates and identifies when the overall value of USD decreases then the organization will relatively have higher revenues from the overseas operations. Gilpin (2016) indicated that the use of adequate hedging option allows the organization to minimize the negative impact of currency fluctuation and streamline the level of revenues that is generated from operations.

The example can be further elaborate if the value of Euro converted to USD declines to the levels of $1.02 from $1.13 then the profit on by the company would be relatively decline in value.  this instance can be witness in the overall table where the  value in USD as a relatively different from the levels $1,130,000 to $1,017,000.Therefore it could be understood that the value of USD has direct impact on the overall revenue generation capability of Starbucks. Declining values of USD would eventually increase revenues why the declining values would erode the profit of the company.

Conclusion:

The assessment aims in identifying the overall hedging measures that is used by Starbucks for controlling the overall losses from exchange risk. Furthermore, Starbucks relatively uses different derivative contract for controlling the overall risk from currency exchange, which is relatively depicted in their annual report. Moreover, the annual report also depicts the relevant income that is generated by the organization from oversea operation. In addition, the revenue that has been generated overseas is compared to the actual revenues of the organization to determine the contribution made by the company’s overseas branches. The impact of change in dollar value is also depicted which indicates that the overall income of the company might be degraded due to fluctuations in currency value. The increment in USD would eventually degrade the overall value of Starbucks while the decline would eventually boost the revenues of the company. Hence, it could be understood that the overall performance of Starbucks is dependent on the volatile currency market and the valuation of USD against other competitive Nations.

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