1. TASK OVERVIEW
Lecture 5 introduces the foreign exchange market with a particular focus on forecasting exchange rates and the basics of currency-related derivatives and their use in mitigating exchange rate risk. Lectures 6 and 7 introduce various forms of exchange rate exposure that MNCs faces and highlights the various mechanisms to mitigate exchange rate risk exposure. Building on the concepts primarily related to Lecture 5, 6, and 7 this Managing Exchange Rate Exposure Report aims to test and expand your understanding to assess the value of forecasting exchange rate, the most suitable methods of managing exchange rate risk for Nike Limited.
2. MAJOR TASK DETAILS
Understanding the Nature of Exchange Rate Exposure Nike Faces
The task requires you to review the annual report of Nike Limited for 2020 (available in the LMS Assignment Section) and identify the following:
- Nature and the major sources of exchange rate risk exposure Nike faces.
- Briefly explain the types of exchange rate risk exposure and their specific nature. Preferably examples.
- The risk tools management applied to hedge these risks by Nike.
In addressing the above tasks students should review the annual report. Specifically, Part 1 of the report covers the nature of the firm’s business (Item 1 and 1A), Part 2
management discussion section (Item 7), and relevant section of financial and operating highlights.
The expected operating result for quarter 3 (Q3), 2021 for Nike’s US and Chinese operations is provided below.
|Expected Q3 RESULTS OF OPERATIONS|
|North America ($)||China (Yuan)|
|(-) Cost of sales (materials & labor)||6000.00||39688.72|
|Demand creation expense||1500.00||3526.22|
|Total operating expenses||2500.00||32761.28|
|Cash flow before tax||5905.00||-27971.80|
The company believes that due to the current political and trade tensions between China and the USA, the exchange rate between USD/YUAN will be volatile. Currently, the Yuan future contract for quarter 3 is trading at $0.158 per Yuan. Moreover, the expected quarterly inflation in China for Q3 is 1.10 percent and 1.35 percent in the USA. Finally, the forward rate of the Chinese Yuan for quarter 3 contains a premium of 1.12%. Given the macroeconomic information, the CFO believes that a range of Q3 spot rate forecast is possible. Moreover, the company may face significant operating exposure.
Using the projected operating result above, develop the partially consolidated operating performance for Nike for Q3. Develop the ranges of possible consolidated operating performance at various possible exchange rate forecasts. How do you characterize the variability of the cash flow?
Suggest at least two operational restructuring options that can reduce the economic exposure of Nike. Document their impact on your suggested operational restructuring option on the economic exposure of the firm.
- DETAILS OF STRUCTURE AND MARKS ALLOCATION
The submission will be a PowerPoint presentation slide format.
Introduction Part: [20 Marks]
The structure of the presentation slides will be as follows:
- Professional title slide (Contains the title of the Presentation, Subject code, Student Name, and ID). [5 Marks]
- 1 Slide – Presentation Structure in bullet points. [5 Marks]
- 1 Slide – Brief overview of Nike’s business operation. [10 Marks]
PART ONE: [40 Marks]
- 3-4 Slides – Nature and the major sources of exchange rate risk exposure Nike faces. [15 Marks]
- 1-2 Slide – Types of exchange rate risk exposure Nike faces. Include any figure, amount that is discernible in the annual report. [10 Marks]
- 3-4 Slides – The risk management applied to hedge these risks by Nike.
Include quotation if necessary but avoid long quotation from the annual report. [15 Marks]
PART TWO: [40 Marks]
- 1 Slide – Potential exchange rates in Q3. [5 Marks]
- 1-2 Slides – Impact of exchange rate movement on the operating cash flows. [10 Marks]
- 1 Slide – Assessing the scale of operating exposure (variability, range, etc) [5 Marks] 1-2 Slides – Suggested restricting options. [5 Marks]
- 2-3 Slides – Impact of suggested restructuring options on Nike’s economic exposure. [15 Marks]
4. ADDITIONAL FORMATTING NOTES
- The Presentation Document can be submitted either in PPT or PDF format. PDF format is preferable. In the case of PDF format, ensure 1 slide per page during conversion from PPT to PDF format.
- Total word counts will be approximately 1000 words + / – 5%.
- Use suitable colour in a consistent way that improves readability, visibility, and professionalism in presentation [Consider vision impact in choosing colour]
- Materials presented in appendices will not be considered for marking purposes. Markers will consult the appendices to check the authenticity and correctness of the information presented in the main text of the report. The absence of such support in the appendices / Excel file will count against the mark.
- Each table, figure, and graph should be self-explanatory. Readers should be able to understand what that particular table or figure is about and, what is the measurement scale and what it represents.
- Ensure a font size that is fit for the purpose. Generally, 24-28 font sizes for the main text of the PPT slides are fine. For tables, you can use a smaller font size.
- Choose a professional font.
- Dot write too much in each slide. Similarly do not just put bullet point that does not explain much.