Tiếng anh chuyên ngành kế toán part 38 pptx

358 Planning and Forecasting Experience indicates that such suppliers would expect to be compensated for bearing this risk and would charge more for their products. 4 An alternative approach, the use of various hedging procedures, is the more common method employed to manage the risk of foreign-currency exposure. RISK MANAGEMENT ALTERNATIVES FOR FOREIGN-CURR ENCY DENOMINATED TRANSACTIONS Hedging is designed to protect the dollar value of a foreign-currency asset po- sition or to hold constant the dollar burden of a foreign-currency liability. 5 At the same time, the volatility of a firm’s cash flow or earnings stream is also reduced. This reduction is accomplished by maintaining an offsetting position that produces gains when the asset or liability position is creating losses, and vice versa. These offsetting positions may be created as a result of arrange- ments involving internal offsetting balances created through operational activ- ities, or they may entail specialized external transactions with financial firms or markets. Hedging with Internal Offsetting Balances or Cash Flows Firms generally attempt to close out as much foreign-currency exposure as pos- sible by relying upon their own operations. These arrangements are often re- ferred to as natural hedges. As an example, consider the following commentary about currency exposure from the 1999 annual report of Air Canada: Foreign exchange exposure on interest obligations in Swiss francs and Deutsche marks is fully covered by surplus cash flows in European currencies, while yen- denominated cash flow surpluses provide a natural hedge to fully cover yen in- terest expense. 6 Air Canada is able to prevent net exposure in the identified foreign currencies by having offsetting cash flows in the same currencies or in currencies whose values move in parallel to the currencies in which Air Canada has interest obli- gations. With the full transition to the Euro in 2002, Air Canada’s currency ex- posure should be markedly reduced because most of the European Community countries will share the Euro as their currency. 7 This will not, of course, alter their exposure in the case of Asian currencies. A sampling of other arrangements that could be characterized as natural hedges is provided in Exhibit 12.2. Virtually all of these examples illustrate the offsetting of exposure through the results of normal operations. In the cases of Baldwin Technologies and Interface, the hedges could be seen to be seminat- ural if they result from a conscious action to create offsetting exposure. That is, does Baldwin Technology determine the cash balances to maintain after first Global Finance 359 determining the extent of their liability exposure? Similarly, does Interface make decisions about the currency in which to borrow depending upon its ex- isting asset exposure? 8 Being the product of calculation and design does not make the seminat- ural hedges any less effective or desirable. In fact, their existence prompts management to be proactive in identifying hedging opportunities that do not EXHIBIT 12.2 Natural foreign currency hedges. Company Natural Hedge Adobe Systems Inc. (1999) We currently do not use financial instruments to hedge local currency denominated operating expenses in Europe. Instead, we believe that a natural hedge exists, in that local currency revenue from product upgrades substantially offsets the local currency denominated operating expenses. Armstrong World Industries Inc. Armstrong’s global manufacturing and sales provide a (1999) natural hedge of foreign currency exchange-rate movements as foreign currency revenues are offset by foreign currency expenses. Baldwin Technology Company The Company also maintains certain levels of cash Inc. (1999) denominated in various currencies which acts as a natural hedge. Baltek Corporation (1998) During 1997, the Company began borrowing in Ecuador in local currency (sucre) denominated loans as a natural hedge of the net investments in Ecuador. Interface Inc. (1999) During 1998, the Company restructured its borrowing facilities which provided for multi-currency loan agreements resulting in the Company’s ability to borrow funds in the countries in which the funds are expected to be utilized. Further, the advent of the Euro has provided additional currency stability with the Company’s European markets. As such, these events have provided the Company natural hedges of currency fluctuations. Pall Corporation (2000) About one quarter of Pall’s sales are in countries tied to the Euro. At current exchange rates, this could reduce our sales by close to 4%. Fortunately, many of our costs in Europe are also reduced by a weak Euro. The weak British Pound also reduces our exposure as most Pall sales to Europe are manufactured in England. This provides a natural hedge and helps preserve profitability. Teleflex Inc. (1999) Approximately 65% of the company’s total borrowings of $345 million are denominated in currencies other than the US dollar, principally Euro, providing a natural hedge against fluctuations in the value of non-domestic assets. SOURCES : Companies’ annual reports. The year following each company name designates the annual re- port from which each example is drawn. 360 Planning and Forecasting require, for example, the use of either exchange-traded or over-the-counter de- rivative instruments. While somewhat less contemporary, there are other examples of using a firm’s own operations and activities to offset foreign-currency exposure. For example, California First Bank (now part of Union Bank) had a Swiss franc borrowing in the amount of Sfr20 million. 9 As this represented liability expo- sure to California First, Exhibit 12.1 shows that an increase in the value of the Swiss franc results in a foreign-currency transaction loss. The goal of the hedge would be to create a gain in this circumstance to offset the loss on the Swiss franc borrowing. Again, Exhibit 12.1 reveals that a gain would be produced from asset exposure in the Swiss franc in the case where the Swiss franc ap- preciated in value. California First Bank sought an opportunity to establish an asset position in the Swiss franc for the same amount and term as the existing Swiss franc obligation. It created this offsetting position by making a loan and denominat- ing the loan in the Swiss franc. This apparently met the borrower’s needs and also served the hedging objective of California First Bank. In an even more creative arrangement, Federal Express created a natural hedge of a term loan that was denominated in the Japanese yen. 10 This was ac- complished by a special structuring of transactions with its own customers. As Federal Express explained: To minimize foreign exchange risk on the term loan, the Company has commit- ments from certain Japanese customers to purchase a minimum level of freight services through 1993. Federal Express needed Japanese yen to make periodic repayments on the term loan. The arrangements with its Japanese customers ensured that yen would be available to pay down the term loan. If the yen appreciates against the dollar, the dollar burden of the Federal Express yen debt increases and re- sults in a transaction loss. However, this loss is offset in turn by the increase in the dollar value of the stream of yen receipts from the freight-service con- tracts. 11 If instead the yen depreciates, a gain on the debt will be offset by losses on the service contracts. A summary of the operation of this hedge is provided in Exhibit 12.3. California First and Federal Express both employed arrangements with their customers in order to create hedges. In addition, purely natural hedges EXHIBIT 12.3 Offsetting gains and losses produced by Federal Express hedge. Change in the value of Change in Dollar Value Change in Dollar Value Foreign Currency of the Loan (Liability) of the Revenue (Asset) Appreciates Increases (loss) Increases (gain) Depreciates Decreases (gain) Decreases (loss) Global Finance 361 may exist due to offsetting balances that result from ordinary business transac- tions with no special arrangements being required. Several hedges that appear to be of this nature were presented in Exhibit 12.2, for example, Adobe Sys- tems and Armstrong World Industries. Two other examples that appear to be totally natural are the cases of Lyle Shipping and Australian mining companies. Lyle Shipping, a Scottish firm, had borrowings in the U.S. dollar. An in- crease in the value of the dollar would increase the pounds required to repay Lyle’s dollar debt and result in a transaction loss. However, because Lyle’s ships were chartered out at fixed rates in U.S. dollars, there would be an off- setting increase in the pound value of future lease receipts—a transaction gain. 12 A similar natural hedge is generally held to exist for Australian mining companies whose product is priced in U.S. dollars. Should the U.S. dollar de- preciate, the exposure to shrinkage in the Australian dollar value of U.S. re- ceipts (asset exposure) is offset by similar shrinkage in the Australian dollar value of their U.S. dollar debt (liability exposure). 13 Fashionhouse would probably find it difficult to duplicate the hedging techniques used above by California First and Federal Express. Circumstances giving rise to a natural hedge, as in the case of Lyle Shipping, may not exist. It might have some capacity to hedge by applying the method of leading and lag- ging. This method involves matching the cash flows associated with foreign- currency payables and receivables by speeding up or slowing down their payment or receipt. Moreover, once Fashionhouse has operations in Denmark, it may be able to create at least a partial hedge of its asset exposure by funding operations with Danish krone debt. If natural hedging opportunities are not available, then Fashionhouse has the full range of both exchange-traded and privately negotiated currency derivatives that it can use as a hedging instru- ment to hedge currency risks. The hedging requirements of the European operations of Fashionhouse should be reduced by the introduction of the Euro. Even though Denmark is not one of the original 11 members of the European Monetary Union (EMU), its European exposure with the 11 countries will be reduced to a single cur- rency, the Euro. Hedging with Foreign-Currency Derivatives Foreign-currency derivatives are financial instruments that derive their value from an underlying foreign-currency exchange rate. Some of the more common currency derivatives include forward contracts to buy or sell currencies in the future at fixed exchange rates, foreign-currency swaps, foreign-currency fu- tures, and options. The forward contracts and over-the-counter options have the advantage of making it possible to tailor hedges to meet individual require- ments in terms of amounts and dates. The exchange-traded futures and options have liquidity and a ready market, but a limited number of dates and contract sizes. Examples of the use of both types of instruments, privately negotiated and exchange traded, are discussed next. 362 Planning and Forecasting Forward Exchange Contracts A forward contract is an agreement to exchange currencies at some future date at an agreed exchange rate. The exchange rate in a contract for either the pur- chase or sale of a foreign currency is referred to as the forward rate. For ward contracts are among the most popular of the foreign-currency derivatives, fol- lowed by privately negotiated (over-the-counter) currency options. 14 These pri- vately negotiated contracts can be tailored to meet the user’s needs in term of both the amount of currency and maturity of the contract. Exchange-traded currency derivatives, such as options and futures, come in standard amounts of currency and a limited number of relatively short maturities. Forward-Contract Hedging Example An example may help to illustrate the application of a forward contract to hedging currency exposure. Near the end of 2000, the forward contract rate for the British pound sterling (£), with a term of one month, was about $1.45. The $1.45 is the direct exchange rate be- cause it expresses the price of the foreign currency in terms of dollars. The comparable indirect rate is found by simply taking the reciprocal of $1.45: 1/$1.45 equals 0.69. The dollar is worth 0.69 pounds. If a U.S. firm had an account payable of 100,000 pounds due in 30 days, a hedge of this liability exposure could be effected by entering into a forward contract to buy £100,000 for delivery in 30 days. Buying the currency through the forward contract is necessary because the firm needs the pound in 30 days to satisfy its account payable. If the dollar were to decline to $1.48 against the pound over this 30-day period, then the dollar value of the account payable would increase, creating a foreign-currency transaction loss. That is, it would take more dollars to purchase the £100,000. However, offsetting this loss would be a gain from an increase in the value of the forward contract. The right to buy £100,000 at the fixed forward rate of $1.45 increases in value as the value of the pound increases to $1.48. The effects of this foreign-currency exposure and associated forward-contract hedge are summarized in Exhibit 12.4. For the EXHIBIT 12.4 Hedge of foreign-currency liability exposure with a forward contract. Item hedged: account payable of £100,000 Value of the account payable at payment date, £100,000 × $1.48 = $148,000 Value of the account payable when initially recorded, £100,000 × $1.45 = 145,000 Foreign currency transaction loss $ 3,000 Hedging instrument: forward contract to buy £100,000 @ $1.45, 30 days Value of the forward contract at maturity, £100,000 × ($1.48 − $1.45) = $ 3,000 Value of the forward contract at inception, £100,000 × ($1.45 − $1.45) = 0 Gain on forward contract $ 3,000 Global Finance 363 sake of simplicity, we are assuming that the spot value of the pound is equal to the forward rate at the inception of the forward contract. 15 The gains and losses would be reversed if the U.S. firm in the above ex- ample had a pound sterling accounting receivable. Moreover, the creation of a hedge of this asset exposure in the pound sterling would call for the sale and not the purchase of the pound sterling through the forward contract. Appreci- ation of the pound sterling to $1.48 produces a transaction gain on the account receivable for the U.S. firm. This would in turn be offset by a loss on the for- ward contract. The value of the forward contract declines when the spot value of the pound sterling, $1.48, is greater than the rate to be received through the forward contract, $1.45. Beckman Coulter Inc. provides a useful description of the offsetting gains and losses created by hedges: When we use foreign-currency contracts and the dollar strengthens against for- eign currencies, the decline in the value of the future foreign-currency cash flows is partially offset by the recognition of gains in the value of the foreign- currency contracts designated as hedges of the transactions. Conversely, when the dollar weakens, the increase in the value of the future foreign-currency cash flows is reduced by the recognition ofany loss in the value ofthe for- ward contracts designated as hedges of the transactions. 16 Notice that Beckman Coulter talks of its future foreign-currency cash flows. This constitutes asset exposure to Beckman Coulter in the foreign cur- rency. If the dollar strengthens, then it follows that the foreign currency de- clines in value. The dollar value of the steam of foreign cash flow decreases. Because Beckman Coulter is long the cash flow, it would hedge this exposure by selling (taking a short position) the foreign currency through the forward contract. Examples of Forward-Contract Hedging from Annual Reports A sampling of firms that disclosed the use of forward contracts, and the types of exposure they are hedging, is provided in Exhibit 12.5. There are a substantial number of different hedge targets in this small set of companies. They include: • Inter-company loans. • Cash flows associated with anticipated transactions. • Bonds payable. • Accounts payable. • Accounts receivable. • Net investments in foreign subsidiaries. • Expected acquisition transaction. Over-the-counter currency options are a close second in popularity as a hedging instrument and their nature and use are discussed next. 364 Planning and Forecasting EXHIBIT 12.5 Hedging with forward contracts. Company Hedging Targets Armstrong World Industries Inc. Armstrong also uses foreign currency forward exchange (1999) contracts to hedge inter-company loans. Arvin Industries Inc. (1999) Arvin manages the foreign currency risk of anticipated transactions by forecasting such cash flows at the operating entity level, compiling the total Company exposure and entering into forward foreign exchange contracts to lessen foreign exchange exposures deemed excessive. Dow Chemical Company (1999) The Company enters into foreign exchange forward contracts and options to hedge various currency exposures or create desired exposures. Exposures primarily relate to assets and liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that the currency fluctuations could affect the dollar value of future cash f lows related to operating activities. Tenneco Inc. (1999) Tenneco enters into foreign currency forward purchase and sales contracts to mitigate its exposure to changes in exchange rates on inter-company and third party trade receivables and payables. Tenneco has from time to time also entered into forward contracts to hedge its net investments in foreign subsidiaries. UAL Inc. (1999) United enters into Japanese yen forward exchange contracts to minimize gains and losses on the revaluation of short-term yen-denominated liabilities. The yen forwards typically have short-term maturities and are marked to fair value at the end of each accounting period. Vishay Intertechnology Inc. In connection with the Company’s acquisition of all the (1999) common stock of TEMIC Semiconductor GmbH and 80.4% of the common stock of Siliconix, Inc., the Company entered into a forward exchange contract in December 1997 to protect against fluctuations in the exchange rate between the U.S. dollar and the Deutsche mark since the purchase price was denominated in Deutsche marks and payable in U.S. dollars. At December 31, 1997, the Company had an unrealized loss on this contract of $5,295,000, which resulted from marking the contract to market value. On March 2, 1998, the forward contract was settled and the Company recognized an additional loss of $6,269,000. SOURCES : Companies’ annual reports. The year following each company name designates the annual re- port from which each example is drawn. Global Finance 365 Currency Option Contracts A common feature of option contracts is that they provide the right, but not the obligation, to either acquire or to sell the contracted items at an agreed price. The agreed price is called the strike price. In addition, options are considered to be in the money or out of the money based upon the relationship between the strike price and the current price. The prices in the case of currency options are currency exchange rates. For example, a currency option contract is out of the money if the option provides the right to buy the Irish Punt at $1.12 when its spot price is $1.10. Conversely, an option is in the money if it provides the right to sell the German Mark at $0.45 when its spot value is $0.43. An option contract that gives the holder the right to sell a currency at an agreed rate, the strike price, is called a put option. The contract that provides the right to purchase the currency at an agreed rate is termed a call option. The cost of acquiring an option is termed the option premium. The option pre- mium is a function of a number of variables. These include the strike price, the spot value of the currency, the time remaining to expiration of the option and the volatility of currency and interest-rate levels. Option values are estimated using methodologies such as the widely used Black-Scholes option- pricing model. Options Contrasted with Forwards Options are frequently characterized as one-sided arrangements. Consider the case of a firm that wishes to hedge ex- posure resulting from an Euro account receivable. The Euro amount of the re- ceivable is E62,500. Because the firm wishes to protect the dollar value of an asset position (exposure) in the Euro, it would invest in a Euro put option, with a maturity that is consistent with the collection date for the receivable. A sin- gle exchange-traded option is acquired and the option premium is $1,000. The spot value of the Euro is $0.88, resulting in a dollar valuation for the Euro re- ceivable of $55,000 ($0.88 × 62,500 = $55,000). The strike price is also $0.88, meaning that the option contract is at the money, that is, the strike price and spot value of the currency are the same. 17 We will assume that at the expira- tion date for the option contract the spot value of the Euro is, alternatively, $0.84 and $0.92. The effects of these two different outcomes are summarized in Exhibit 12.6. Unlike the option contract, a forward contract does not permit the holder to decline to fulfill the obligation simply because the hedged currency did not move in an unfavorable direction. The forward contract is a symmetrical arrangement. If a forward contract had been used to hedge the Euro exposure in Exhibit 12.6, then there would be offsetting gains and losses on both the Euro accounts receivable and on the forward contract, whether the Euro ap- preciated or depreciated in value. One-Sided Nature a Hedge with a Currency Option An option contract is simply permitted to expire unexercised if an option contract is out of the 366 Planning and Forecasting money at its maturity. The option contract is designed to protect the holder against possible shrinkage in the dollar value of the Euro account receivable that would result from a decline in the value of the Euro. In the first case, where the spot value of the Euro did decline, then the option is exercised and a gain of $2,500 is produced to offset the transaction loss of $2,500 on the Euro account receivable. However, in the second case, where the spot value of the Euro rose, the option is permitted to expire unexercised. After all, it per- mits the sale of the Euro at $0.88 when the spot value of the Euro is $0.92. The option contract expires without value. Hedging a Euro receivable with a forward contract will result in a gain on the forward contract when the Euro declines in value and a loss when the Euro increases in value. These gains and losses will in turn offset the loss on EXHIBIT 12.6 The operation of a currency option. Expiration-date spot value of $0.84 Notional amount of the put-option contract, in Euros 62,500 Strike price of the Euro put option $0.88 Spot value of the Euro 0.84 Amount by which option is in the money .04 0.04 Contract gain $ 2,500 Initial dollar value of the Euro receivables Accounts receivable in Euros 62,500 Times spot exchange rate $0.88 $55,000 Final dollar value of the Euro receivables Accounts receivable in Euros 62,500 Times spot exchange rate $0.84 52,500 Transaction loss on accounts receivable $ 2,500 Expiration-date spot value of $0.92 Strike price of the Euro put option $0.88 Spot value of the Euro $0.92 The option is permitted to expire without being exercised. The contract provides the oppor- tunity to sell the Euro for $0.88 when its value in the spot market is $0.92. It has no value upon its expiration. Initial dollar value of the Euro receivables Accounts receivable in Euros 62,500 Times spot exchange rate $0.88 $55,000 Final dollar value of the Euro receivables Accounts receivable in Euros 62,500 Times spot exchange rate $0.92 57,500 Transaction gain on accounts receivable $ 2,500 Global Finance 367 the ac count receivable that results when the Euro declines in value and the gain that results when the Euro increases in value. The behavior of a hedge using a forward contract versus an option is summarized in Exhibit 12.7. The symmetrical behavior of the forward contract in its hedging applica- tion is evident in Exhibit 12.7. In each of the four combinations of exposure and exchange rate movement the gains and losses on the balance sheet expo- sure are offset in turn by the losses and gains on the forward contracts. How- ever, the option contracts produce offsetting gains and losses only in those cases where the unfavorable exchange rate change takes place. 18 Notice that a gain is produced on the option contract to offset the loss on the balance sheet asset exposure when the foreign currency depreciated. Currency depreciation when the firm has asset exposure is an unfavorable rate movement. In the case of liability exposure, notice that a gain is produced by the option contact when the foreign currency appreciated. The corollary of appreciation of the foreign currency is depreciation of the dollar. This is an unfavorable rate movement because it causes the dollar value of the liability to increase. In the other two cases, where the option contracts expire without value, the currency move- ments are favorable: (a) asset exposure and the foreign currency appreciated and (b) liability exposure and the foreign currency depreciated. The positions taken in the forward and option contracts differ based upon the nature of the foreign-currency exposure. With the forward contract, the foreign currency is purchased in the case of liability exposure and sold in the EXHIBIT 12.7 Behavior of hedge gains and losses with a forward versus an option. Type of Exposure Hedged Derivative Contract Asset Forward Contract Put Option Foreign currency appreciates Gain on asset exposure Loss on the forward Contract expires with contract neither gain nor loss; option holder loses initial option premium paid Foreign currency depreciates Loss on the asset exposure Gain on the forward Contract expires with a gain contract Liability Forward Contract Call Option Foreign currency appreciates Loss on the liability Gain on the forward Contract expires with a gain exposure contract Foreign currency depreciates Gain on the liability Loss on the forward Contract expires with exposure contract neither gain nor loss; option holder loses initial option premium paid . operations and activities to offset foreign-currency exposure. For example, California First Bank (now part of Union Bank) had a Swiss franc borrowing in the amount of Sfr20 million. 9 As this represented. receipt. Moreover, once Fashionhouse has operations in Denmark, it may be able to create at least a partial hedge of its asset exposure by funding operations with Danish krone debt. If natural hedging. against for- eign currencies, the decline in the value of the future foreign-currency cash flows is partially offset by the recognition of gains in the value of the foreign- currency contracts designated