Gaz de France Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question # 01: Refer to Exhibit 5. Among the economic indicators provided, which do you think is the one of the most key parameter that would drive the exchange rate of French franc against dollar?

gaz de france case solution

Answer:

Amongst many economic indicators provided in the exhibit 5 which drives the exchange rate of Franc against dollars, the most important is the foreign exchange reserves. This indicator helps in the transactions with different countries for the purpose of trading as countries are differentiated on the basis of their political factors and non-political factors involved, inflation rate, and interest rate. Therefore, these factors affect greatly the exchange rate system and the particular economic indicator of foreign exchange reserve maintains those factors with a related country. The exhibit 5 refers to the company’s potential in driving the exchange rate for Franc against dollars and many of the factors have been listed that drives the exchange rate for France.

Question # 02: Based on the data of your chosen economic indicator, what is its trend over the period 1980 to 1985 and how would you expect the French Franc to move against the dollar over these years? Will it appreciate or depreciate against the dollar?

Answer:

While considering the economic indicator of foreign exchange reserves, the trend between the years 1980 to 1985 indicates the decline in foreign exchange in the initial two years of the country. However, since 1983 the foreign exchange of France has increased in an ascending order. For the first two years, a heavy decline was measured by 21.16% and then a further decline in the year 1982 by 26.94%. However, due to the changes in country’s policies, the foreign exchange had remarkably boosted for the three years which includes an increase in the percentage by 23.73%, 5.79%, and 27.31% in the years 1983, 1984, and 1985 respectively. The trends of these years represents that the Franc against the dollars have appreciated and as well as depreciated. The decrease in the trend of foreign exchange reserves was due to the company’s expansionary monetary policy which helped to appreciate the dollar against Franc. However, the result in the increase of foreign exchange reserves was due to the implementation of country’s policies regarding restrictions in the monetary policy which ultimately depreciated the dollar against Franc.

Question # 03: Now look at Exhibit 6 and comment whether the actual French Franc Rate reflect the trend that your answer in 2. Above would have suggested

Answer:

The trends of the exchange rate for Franc against the dollar presented in exhibit 6 differs slightly in respect with trends mentioned in the above question. The trends in Exhibit 6 describes that for the year 1980 to 1984, the dollar has appreciated against Franc, whereas, in the above question it was suggested that the dollar would appreciate in the initial two years 1981 to 1982. Furthermore, the dollar’s foreign exchange has been depreciating from 1985 second quarter and it further depreciates in the remaining quarters for the particular year. As discussed in answer 2 that the dollar would depreciate after the two initial years, this suggestion has slightly remained affirmative and closely related to exhibit 6.

Question # 04: Please explain the reasons what were the risks that Gaz de France was facing which forced it to enter into the swaps and forward transactions

Answer:

The first issue faced by Gaz de France was appreciation of dollar against Franc due to which the company indulged with the Swap contracts. The financial risks were also associated with the company in the year 1986 since the dollar depreciated against Franc. The company did not manage the systematic risks for depreciating of dollar, however the company could reduce the forward exchange contracts to eliminate the financial risks associated with the company. The second issue was the issuance of Franc bonds in the US denominated currency due to which the company had used the swap instrument for hedging its local currency to reduce the Franc currency risk. The strategy of currency swap helped the company to appreciate the value of its bond and hence decreasing the interest payments. As the currency swap was fixed, it also helped in increasing the profitability of the company due to the declining of interest payments................................

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