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Westwood Plastics Inc. Foreign Currency Risk Hedging Strategies

Jason Cowne Kazuo Shirai Yen- nhi Do Julie Nguyen Chatree Jirakranjanavanit FIN 570 Dr. Greco July 6, 2009. Westwood Plastics Inc. Foreign Currency Risk Hedging Strategies. Outline. Economic Outlook Company/Case Background Products Industry Define the issue Transaction Risk

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Westwood Plastics Inc. Foreign Currency Risk Hedging Strategies

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  1. Jason Cowne Kazuo Shirai Yen-nhi Do Julie Nguyen ChatreeJirakranjanavanit FIN 570 Dr. Greco July 6, 2009 Westwood Plastics Inc. Foreign Currency Risk Hedging Strategies

  2. Outline • Economic Outlook • Company/Case Background • Products • Industry • Define the issue • Transaction Risk • Analyze the case data • Basic Issues • Immediate Issues • Cause/Effect Diagram • Critical Exchange Rate • Exchange Rate Trends • Generate alternatives • Select decision criteria • Analyze & evaluate alternatives • Conclusions

  3. Case Data Analysis -Economic Outlook Source: CIA World Factbook

  4. Company Background • Westwood Plastics • Core competency – Manufacture & sales of proprietary plastic products in Canadian marketplace. • License Agreement with Schalle Industry (Cologne, Germany) • Exclusive manufacturing and distribution rights to Cryolac

  5. Case Background Westwood Plastics Payment Loan Schalle Industrie (AG) Canadian Bank • Payment is a note (9.1%, n = 10) • Financing from two sources: Schalle & bank • Revenue is in CAD • Expenses is in EUR • The right to manufacture & distribute premium product, Cryolac Mfg. Cryolac

  6. Company Background - Cryolac Products • Dough Box • White Cryolac Plastic ABS • Plastic manufacturing processes: • 1. Injection Molding • II. Extrusion Molding • Cryolac is a specialized proprietary plastic

  7. Company Background -Plastic Industry Over 3,400 companies Employing 113,000 workers $33 billion Canadian dollars in Total Revenues 85% of plastics exports are bound for the U.S. Lowest production costs for the plastics sector among G7 countries

  8. Define the Issue • Time frame: March 01, 2006 • Revenues are in CAD • Expenses are in EUR • Currency market is highly volatile • Effects of depreciating CAD currency • Pay more EUR • Understand effects of income & cash flows (Projected fiscal 2007 results)

  9. Define the Issue • Projected EBT is $12 Mill CAD @ EUR=$1.3536 CAD • Loan covenant EBT > $9 Mill CAD • Understand tools to manage currency exposure • Recent trend shows CAD appreciating • If CAD depreciates, projected EBT not met

  10. A large portion of its expenses are paid in EUR • All of the company’s revenues are denominated in CAD • A monthly licensing fee of 250,000 EUR • Raw materials necessary for the manufacturing of Cryolac • Costs of servicing: 1 million EUR note for partial payment of the upfront licensing fee Define the Issue - Transaction Risk

  11. Analyze the Case Projected EBT@ CAD $1.3536/EUR • Projected Expense in CAD $ 49,944,000(will pay in EUR) • Converted to EUR 36,897,163 at the budgeted exchange rate of 1.3536 CAD/EUR • Budgeted EBT (CAD/EUR) • CAD $62,002,000-CAD $49,944,000 = CAD $12,058

  12. Case Data Analysis - Basic Issues

  13. Case Data Analysis - Basic Issues

  14. Case Data Analysis - Basic Issues

  15. Case Data Analysis - Basic Issues

  16. Case Data Analysis - Basic Issues

  17. Case Data Analysis - Immediate Issues

  18. Case Data Analysis - Immediate Issues

  19. Case Data Analysis - Immediate Issues

  20. Case Data Analysis - Immediate Issues

  21. Case Data Analysis - Immediate Issues

  22. Cause/Effect diagram Comparing the decision criteria Currency trends The best alternative hedging strategy for the company Measurement of hedges and exposures Sources of financial restriction facing Westwood

  23. CAD per 1 EUR Exchange Rate Chart(Jan 1999 – Jan 2006) Trend Line

  24. CAD per 1 EUR Exchange Rate Chart (Jan 2005 – Jan 2007) • If CAD continue to appreciate against EUR at present rate, then year end EBT will be C$13,069 thousand.

  25. EBT forecast without hedge(Assume exchange rate move on 3/1/06 and stay at level)

  26. 1.4365

  27. Generate Alternatives

  28. Decision Criteria Use of Put option is speculative!

  29. Analyze & Evaluate Alternatives

  30. Analyze & Evaluate Alternatives

  31. Conclusions • Westwood Plastics will use the call option as the optimal hedging strategy • Call Options Advantages • Doesn’t tie up a lot of capital • Limits potential losses without limiting potential gains

  32. Historical Exchange Rate Trend(Jan 2004 – Jan 2009)

  33. Questions???

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