Discuss about the Financial Management for Samsung Electronics Co Ltd.
When a firm or company works on a global or international basis, it means that its activities involve other country currencies also apart from its domestic currency or home currency. For example, for a company having its home business in the USA works globally and has its various branches all over the world. In such as case, US Dollar will be the home currency for that company and all other currencies such as UK Pound, Indian Rupee, etc will be foreign currencies for the said company.
Foreign Exchange (Currency) Exposure is the risk that the global firms are prone to, which performs their activities on a global or international basis. When such activities involve dealing in currencies other than home currency also, these activities are said to have a foreign exchange risk or exposure. The risk or exposure is there when the future inflows and outflows of a global firm depend on any foreign currency exchange rates or value (Bartram & Bodnar, 2012). Foreign Exchange (Currency). The most important of all these types of exposures is Transaction Exposures that is primarily considered by almost every global company due to its direct impacts on the economy of the company.
Case Study on Samsung Electronics Co Ltd
Multi National Company Samsung Electronics Co Ltd is selected for the purpose of the study. In this case study, it will be explained that what kind of transaction, translation and economic exposures does Samsung face and how it deals with such exposures & what instruments it uses to deal with such exposures.
Samsung Electronics Co. Ltd. is a Multi National Company having its headquarters in the Republic of Korea. The group operates on a worldwide basis and deals in manufacturing and selling of digital media products and telecommunication products. It has its subsidiaries all over the world including Korea, America, Europe, Africa, China and rest of Asia. As the company operates in various foreign currencies, there arise different kinds of exposures or risks. One of these is market risks which are directly related to the foreign exchange fluctuations. Other risks are credit risk and liquidity risks (Samsung, 2016). The financial risk management is a very important operation for such big companies and departments and officers are designated at all the regional headquarters for managing and planning about the reduction of such risks. When there is likely to be a change in cash flows of a company due to change in exchange rates, such form of Foreign Exchange Exposure is said to be a transaction exposure (Robert et. al, 2010). When there are fluctuations in foreign exchange rates, the companies consider the overall impact that the fluctuations are having such as market prices of products, the effect on profitability, etc. Such overall changes are said to be due to Economic Exposure (Waite, 2016). The foreign currency exposure to financial assets and liabilities are stated below:
Translation Exposure or Accounting Exposure happens for Samsung as it converts the assets and liabilities of their subsidiaries into their home currency as a part of their accounting practice. Such a gain or loss at the time of conversion is said to be due to translation exposures. The foreign currency transactions are converted into the functional currency by utilization of the exchange rates that prevails on the transaction date or valuation where the re-measurement are done (Samsung Electronics, 2016). The gains and losses that occur from the transactions settlement and from translation are denominated in foreign currencies and realized as profit or loss.
The assets and liabilities that are considered under risk management include assets such as cash, amounts receivable from debtors, short-term investments and another short term saleable current assets and liabilities include payables to short-term suppliers, borrowings, financial liabilities, etc. The company has to deal in various currencies of the countries where the subsidiaries are located and hence is exposed to foreign exchange currency risks (Kim & Redmond, 2017). The cash outflows and cash inflows are directly affected when there are changes in exchange rates. Hence it is very important to keep an eye on the financial risks associated and their appropriate management.
Way to deal with Exposures and Instruments used
The company and its subsidiaries have set their financial risk management policies and keep such policies updated from time to time as per the changes in market risks. Such policies include determination of foreign exchange risks, identifying correct methods to deal with their risks, applying instruments such as hedging to deal with these risks, monitoring timely actions were taken and their consequences, etc.
Also, the company keeps tracks of all the receivables and payables that are denominated in foreign currencies and will be converted into home currency and the impact such conversion will have on the company’s profitability positions. The main techniques and instruments that are used by the company for managing the Foreign Exchange Currency Exposure are Hedging Techniques which can be further classified into Natural Hedging and Financial Hedging (Kim & Redmond, 2017).
Natural Hedging technique helps in reducing the difference between cash inflows and cash outflows when dealing in a particular foreign currency. It is an effective method for reduction in financial risk but it is a very lengthy procedure and may take a long time in its implementation (Eun & Resnick, 2011).
Financial Hedging technique uses purchasing of financial hedging instruments such as forward contracts, future contracts, swaps and currency options. Forward Contracts are the contracts which are done to buy or sell a particular amount of currency at a pre-decided price so that the exchange rate fluctuations do not have many adverse effects (Robert et. al, 2010). Such contracts are bought from and sold through Banks and Foreign Exchange Brokers. For Example, An Indian Company exports products to the US-based company. For a transaction, the US company agreed to pay 1500 US$ to the Indian Exporter after 3 months. The Indian Exporter enters into a forward contract with a bank to sell 1500 US$ at the end of 3 months @ INR 60.00 per US $. This is a process to reduce transaction exposure where the Importer will get an assured and pre-decided amount and can reduce the exchange rate fluctuation risks (Simonin, 2016). Other such Instruments are Currency Options and Swaps.
Samsung and other Multi-National Companies use such hedging instruments as a measure to safeguard themselves from the exchange rate fluctuations and other market risks. But apart from this other methods are also used by such companies to manage the overall financial risks associated with such companies such as finding new buyers in different countries at competitive rates and entering into fixed price contracts with them, predicting future sales so that appropriate arrangements can be planned for making payments and receiving payments from the customers with minimal exchange rate fluctuation effects.
Bartram, S. M & Bodnar, G.M 2012, ‘Crossing the Lines: The Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets’, Journal of International Money and Finance, vol. 31, no. 4, pp. 766–792
Eun, C S & Resnick, B. G. (2011). International Financial Management. New York, NY: McGraw-Hill/Irwi
Kim, H & Redmond, T 2017, A Hedge Fund Giant in Samsung Empire Finds Hurdles Close to Home, viewed 22 April, 2017 https://www.bloomberg.com/news/articles/2017-02-26/a-hedge-fund-giant-in-samsung-empire-finds-hurdles-close-to-home
Robert C, Brian H.L & Paul C 2010, How to Understand Business Finance, Kogan Page Limited
Samsung 2016, Samsung Corporate profile, viewed 11 September 2016, https://www.samsung.com/us/aboutsamsung/corporateprofile/
Samsung Electronics Co Ltd. and Subsidiaries 2016, Consolidated financial statements, viewed 22 April, 2017 vihttps://images.samsung.com/is/content/samsung/p5/sg/ir/docs/2016_con_quarter04_all.pdf
Simonin, D 2016, International Strategy: The Strategy of Samsung Group, viewed 11 September 2016,https://www.researchgate.net/publication/285370984_International_Strategy_The_Strategy_of_Samsung_Group
Waite, S 2016, Samsung Asset Management Plans Global Macro Hedge Fund, viewed 22 April, 2017 https://www.bloomberg.com/news/articles/2016-06-01/samsung-asset-management-plans-global-macro-hedge-fund