NODAL LOGISTICS CORPORATION Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

NODAL LOGISTICS CORPORATION

Nodal Logistic Corporation was a Real Estate Investment Trust located was New York City. It had operation of warehousing and logistics property acquisition as well as development in various markets. Nodal Logistics also had operation under tax structure. Revenues were generated mainly from property rents and leases and 90% of these revenues were distributed among shareholders as dividend. Their properties were located near the airports, sea ports and other major mobility areas. These locations were ideal for their clients for storage purposes and these clients were third-party logistics. They had operations in 15 countries with the portfolio of about 140 million square feet and served more than 3000 customers globally.

Problem Statement:

Nodal Logistics’ operations were mainly based on the US Dollar Denomination but when they were expanding their operations into emerging market in Brazil they faced a problem. As there was a law that all the leases and contracts must be in Brazilian Reals; hence this exposed Nodal to the liquidity and currency exchange risk.

Quantitative Analysis:

Nodal Logistics Corporation gained experienced in investment through successful acquisitions of warehousing and logistics property. Nodal Logistics had operations in North American, European and Asian markets with the portfolio of 140 million square feet and served 3000 customers globally. Nodal Logistics was considered to be a slow mover for entering into an emerging market and they now decided to focus onto these markets. Brazilian market was an opportunity for new investment and this made it possible to diversify its operations and enjoy the steady growth, as they enjoyed it through different investments.

Investments in foreign markets are highly volatile and it is more volatile if the investment is made in an emerging market. These volatilities are known as fluctuations in currency rates and liquidity risk. However Nodal Logistics manages all of its currency risks for industrial leases through Dollar denomination and for investment in the Brazilian market, the only risk involved was the Brazilian law, under which all the real estate investment contracts should be in the Brazilian Currency. The fluctuation of Brazilian currency rates was continually subjected to the liquidity risk as rent income generated over years was in Brazilian Real. These earnings were converted into Dollars to fulfil the Real Estate Investment Trust requirements for profit distribution.

Nodal Logistics was concerned about the investment returns generated from the Brazilian project over years. Nodal Logistics’ was concerned about the economic conditions because they were always uncertain to predict for a period which results as fluctuations in exchange rates, which significantly reduced the projected cash flows. Investment in Brazilian market posed two threats to Nodal Logistics, firstly contracts were in Brazilian Real denomination and secondly it generated returns on investment in Brazilian Real. These returns were converted periodically into Dollar denomination. These periodical conversions would threaten the projected cash flows as any uncertain fluctuation could occur during these periods. To mitigate these fluctuations in exchange rates and liquidity risk; Nodal Logistics must adopt an appropriate hedging technique.

Nodal Logistics could consider adopting different hedging strategies to mitigate above explained risks. These hedging strategies also evaluate the performances of the risks on the bases of initial cost, investments returns and NPV.

(a) Remain uncovered using spot market rate over time to exchange Brazilian Real

(b) Purchase Forward Contracts to sell the Brazilian Real

Please refer the excel sheet for the calculation of Dollar proceeds using various hedging strategies. These calculations are calculated under the following sheets of excel:

Remain Uncover
Forward Contracts
Option Contracts

Forward rates as a Benchmark

First step to evaluate different strategies is to set the benchmark. Forward exchange rate is set as benchmark because it is the optimal strategy for Nodal Logistics Corporation, as it mitigates the currency risk and through this Nodal Logistics can easily predict the Dollar proceeds. Nodal Logistics can also use the current exchange rate as benchmark because fixed rate is a viable approach for the management.

(a) Remain uncovered using spot market rate over time to exchange Brazilian Real

To remain uncovered, following assumptions are used and calculated in Remain Uncover sheet which are as follows:

Brazilian Real exchange rate against US Dollar to be fixed at BRL 1.795:

The analysis in Remain Uncover of excels show that the cash flow in Dollar domination proceeds will be totalled as $15,126,195, at a present value of $10,279,691. Furthermore, appreciation of BRL against US Dollar will result in incremental cash flows for Nodal Logistics................................

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