Foreign Exchange Management in Perfect Pieces Limited

Ltd is exposed to exotic flip guess because it buys some of its production inputs from overseas and pays for them in outside specie has sales r hithertoue in unlike currency and competes with other manufacturers whose be are denominated in strange currency. The fraternity imports from parvenu Zealand, Japan, and the United States. The clubs foreign currency payable are in the US Lars, NZ clams, and Nipp adeptse yen. On the other hand, the sales are mostly conducted in US dollars.Proceedings of the multinational Academy for Case Studies, Volume 10, Number 2 Lass Vegas, 2003 varlet 74 UP Lads delineation environment consisted predominantly of the US dollars, the NZ dollar, and the Japanese yen. The foreign currency denominated sales were roughly 52 part of congeries sales 40 per cent in US dollars, and 12 percent in New Zealand dollars. The companys estimate of US dollar denominated payable was 36 percent of total sales 19 percent in US dollars, 12 percent in Japanes e yen, and 5 percent in New Zealand dollars.In habitual UP Ltd gives customers an average credit period of in the midst of 3 to 6 months while the average credit period for each(prenominal) foreign currency denominated payable was 3 months. There was therefore a working capital gap as the collection of accounts receivable was long-term than accounts payable. This situation was made worse by the fact that 40 per cent of the sales were denominated in US dollars and the US dollar was weakening against the Australian dollar. There was no cover taken out for the icon in US dollars because the fiscal controller who acted as the companys exposure passenger vehicle design the US dollar would shortly strengthen.Previously the US dollar was stronger than the Australian dollar and the company had gained from the US dollar denominated receivables. This experience had apparently, surprisingly, made the companys exposure theatre director submit it inappropriate to hedge the US dollar. T he responsibility for identifying FEMME was in the reach of a financial controller, with the assistance of the general autobus. They hedged 50 per cent of the transactions for accounts payable in Japanese yen, and accounts receivable in New Zealand dollars. The financial accountant, in consultation with the general manager, bought forward contracts to cover the exposures.Most precedential members of the company were concerned with manufacturing, promoting and marketing products rather than foreign substitute exposure management. It was increasingly becoming difficult for the general manager to meet the financial accountant in order to manage FEE because the general manager had to deal with other company duties. Previously, the general manager and the financial accountant met at to the lowest degree once a day to assess foreign throw market movements. The increasing inability to meet the general manager as frequently as before was making the financial accountant concerned.The financial accountant was anxious that he should be left-hand(a) totally to make decisions in matters as volatile as the foreign mass meeting movements. The financial accountant felt that it was important to specify Job descriptions in order to attach responsibility for the monitoring and compilation of foreign exchange information. Presumably, he hoped, that would lead to increasing resources in his section. He explained The two clerks in my section are responsible for helping me in ash management, tri only ife management, as well as compiling foreign exchange exposure management forecasts. The finance section is very understaffed.The engineering and marketing functions were considered much important than financial management. The finance section was non only understaffed, but it also needinessed properly qualified and experienced personnel. The general manager estimation that taking personal interest in treasury matters would mitigate the reek of alienation that was percei ved by the financial accountant. The lack of understanding about the importance of FEMME among most of the company officers was discernible urine the interview. Most senior managers considered the primary tasks in the company to be the operational activities, namely manufacturing, procurement, and selling.Lass Vegas, 2003 scalawag 75 In terms of the organizational structure for exposure management, members of the company felt that centralization should be pursued subject to other considerations. unrivaled senior member of the company verbalize The task of identifying and managing foreign exchange exposure is too onerous to be left in the detention of only one functional unit The financial accountant was a relatively Junior officer in the company and had robbers in essay to obtain information he needed to manage exposure.Since FEE is a result of activities that transcend one functional unit, and can be constrain by lack of resources such as trained and experienced staff, and la ck of appropriate equipment, this seemed to call for a company-wide policy from the top. The dialogue with most members of the company confirmed that there was no company-wide policy for FEMME. The next point was to consider the extent of risk aversion. Most members of the company were keen that currency risk should be avoided as much as possible.Some of the members wondered why the company should not invoice customers in Australian dollars rather than foreign currencies. As to the general attitude to foreign exchange risk, some members tell that they generally prefer average expected overtake with average risk to high return with high risk for any business involving foreign currency denominated receivables and/or payable. But if the company was considering projects which involved no foreign currency receivables or payable, then high expected return and high risk projects could be considered.One of the senior officers, however, pointed out that foreign exchange considerations are but one factor. He was supported by another senior officer who said that sometimes the company may have other overriding strategic considerations to take into account, such as obtaining a share of the market even if that means at the expense of incurring foreign exchange loss. The companys foreign exchange rate forecasts were mainly obtained from banks and publications such as the Financial reexamine newspaper. The information on foreign exchange rates was prepared manually.The lack of computerizing was considered hindrance to better monitoring of exposure management. The influence of the satisfaction with foregoing foreign exchange forecasts on hedging could only be commented on by the financial accountant and the general manager who carried out hedging of FEE. They both said that satisfaction with previous foreign exchange forecasts had tokenish influence on the way they hedged. They were not confident with the forecasts they used. As they said Foreign exchange forecasts are J ust forecasts, they are never the same(p) as the actual exchange rates so we are unremarkably less confident about them.The extent of hedging is a situational matter. UP Ltd was involved in foreign exchange transactions at least once a fortnight. It was evident that the intensity of involvement in foreign exchange transactions did not have any influence on the hedging behavior. In spite of the fact that the US dollar denominated receivables were left exposed, Proceedings of the International Academy for Case Studies, Volume 10, Number 2 page 76 most members felt that the extent of involvement in foreign currency denominated business should be accompanied by much hedging activity.