Brusivalmport Transaction Exposure
Question 1
Analyze and measure (using Value at Risk methodology) a company´s transaction exposures for each month of next year (including cash-flows based on the orders from the previous year, according to a described time structure of sales and costs).
The time structure of the cash flows that would occur each month for the next twelve months has been described in the case, which is summarized in the table as follows:
Purchases % Currency Sales % Currency
Poland 50% PLZ Czeck Republic 40% 40% EUR, 60%CZK
China 30% USD Slovakia 30% EUR
Italy 20% EUR Germany 30% EUR
The total sales for the past year have been provided, which have been equally distributed for each of the next 12 months from January to December with sales of 3750000 CZK per month. Moreover, the total manufacturing costs have been calculated in Euros since these are the costs for the additional work that needs to be performed in Germany. After this the wages, depreciation, energy and the transport costs have all been calculated in CZK which is the domestic currency.
The 5 year and the 3 year loan operating payments have also been stated as the outflows for each month in CZK and EUR respectively. After this, the computations have been performed for the purchases on the basis of the time structure of the purchases as shown in the excel spreadsheet. Purchases are made 4 times a year in the month of January, March, June and September. However, in order to compute the purchases for Poland, China and Italy in the domestic currency, the total purchases figure have not been provided in the case. Therefore, in order to calculate the total purchases, the total sales have been taken and the income before tax has been deducted.
Furthermore, all the operating expenses in terms of CZK have also been subtracted and the remaining figure calculated is the total cost of the purchases. These have been split in equal proportions for the four months based upon the percentage of the purchases made in each of the four months and the proportion of the purchases made from Poland, China and Italy as shown in the table shown above.
Based on this data, the total purchase has been computed in CZK and then the total exposure, which is basically the total profit per month, has been computed. Lastly, based upon a confidence level of 95% the value at risk has been calculated for each of the month. Looking at the value at risk in percentage terms, it seems that the risk of loss is very high for the firm and that it needs to adopt a financial hedging strategy to mitigate the risks to which the firm is exposed to as a result of the exchange rate movements and its foreign receipts and payments...........................
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