Nodal Logistics and Custo Brazil Case Study Solution
Recommended hedging strategy for Nodal
In consideration of the proposed and discussed alternatives;John Penman is advised to purchase a forward contract – customized contact to avoid the significant impact of exchange rate fluctuation on business outcomes and decisions.It would effectively lower or reduce the risk of potential losses incurrence by the adverse market movements.(Conroy, 2009).
Assessment of the company’s hedging strategy
The forward contract seems to be beneficial for the company regarding dealing with the risk of exchange rate fluctuation. It would help the company in fixing the future rate, hence reducing the exposure of downside risk. The forward contract strategy provides a complete hedge, and is flexible regarding the amount to be covered.
In addition to this, the hedging through forward contract would be helpful since the company has a pre-arranged line of credit due to which, no upfront fee would be charged by the bank to Nodal. The forward contract could also be matched with cash flows, and the time period of the exposure. It also provides price protection due to the reason the contract price is not known to others. All of these benefits provide the solid foundation of adopting a forward contract hedging strategy for the purpose of mitigating the foreign currency risk.
Company reducing future risk or creating additional business risk
The Nodal Logistics Corporation has contemplated to invest in foreign real estate to improve the foreign real estate investment for strengthening the long term competitive position of the company globally. Fora foreign real estate investment project; the company should manage its investment property remotely, and should understand the foreign market and keep up with a political and economic situation in order to reap the benefits from the project.
In an early period of time, the company has been managing the foreign currency fluctuation risk by dominating all the lease of industries in the US dollars. The company is further subjected to numerous operational risk in which the company has the higherchances to face difficulty in its operational management. Also, the rents that the company would earn in near future in Brazilian Real should be converted back into dollars for the purpose of fulfilling the REIT requirements for distribution of profit, which would most likely raise difficulty in remitting the funds to the US, due to the reason that any organization seeking to invest in foreign country should register with Central Bank,so that the company would be able for rights application to fund the remittance to home country in the shape of shares ÷nds.(Furfine, 2017).
Appendix A – Options
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