Alliance Design Concepts: Foreign Exchange Risk Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Alliance Design Concepts: Foreign Exchange Risk Case Solution

Problem Statement

Andrew Wagstaff is considering to mitigate the foreign exchange risk causing decline of pre-tax margin of the firm under the light of the recent event, which resulted in 8.2% decline in the pre-tax margin due to the depreciation of CAD against USD.

Identification of Alternatives

Involve the Customer

Involving customer through an increase in the margin in quoted price or decreasing the time for the quoted price acceptance from 30 days or setting the price at the time of project completion although will reduce the foreign exchange risk to a high extent, but these steps will lead towards customers’ dissatisfaction, which is one of the core competencies of Alliance.

Internal Process Changes

One major reason behind the declining pre-tax margin is the lack of cash resources to pay the suppliers. Wagstaff could follow certain cash flow management by reducing the receivable days in order to reduce its cash conversion cycle and pay the suppliers. Alliance can impose the policy to receive the full amount in cash by the completion of the installation rather than giving one month’s extension. This will ultimately enable the firm to pay its suppliers on time and reduce the exchange risk to some extent.

Foreign Exchange Services

The third alternative includes opening a foreign exchange account to avoid the service charges for converting CAD to USD along with reducing time to convert from CAD to USD, which will ultimately reduce currency exchange risk. But, here the firm will need to pay the bank service charges. Another alternative under the foreign exchange service is forward contracts where the firm can get into a forward contract with its supplier at a price slightly greater than the current spot price. Although, it will mitigate the currency exchange risk at a higher level, but it will lead the firm towards a loss incurrence if CAD gets appreciated against USD.

Evaluation of Alternatives

A detailed evaluation of each of the above alternative by stating pros and cons of each alternative is given in Appendix 1.

Recommendations

On the basis of above analysis, Wagstaff is recommended to go with alternative 2 and 3, simultaneously. Improving the internal processes will help the firm to not only mitigate the exchange rate risks to some extent but will also help the firm to mitigate the operational risks other than exchange rate, like liquidity in long term. Along with it, indulging into a forward contract and opening a foreign exchange bank account will help the firm in mitigating its foreign exchange risk without customers’ dissatisfaction.

Appendices

Appendix-1: Evaluation of Alternatives

Alternatives	Pros	Cons
Involve Customers	Foreign exchange risk mitigation Higher pre-tax margins Liquidity	Customers’ dissatisfaction Service charges related to conversion
Internal Process Change	Operational Efficiency Liquidity Reducing exchange risk to some extent.	Customers’ dissatisfaction Time consuming Service charges related to conversion
Foreign Exchange Services	Foreign exchange risk mitigation Higher pre-tax margins Saving service charges related to conversion Predetermined Rate of Equipment. Customers’ satisfaction	Risk of CAD appreciation resulting in declining margins. Bank service charges. Supplier dissatisfaction.

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Alliance Design Concepts: Foreign Exchange Risk Harvard Case Solution & Analysis