IFC Manufacturing Finance 570 – Summer ‘09 Dr. Joe Greco California State University, Fullerton

1. IFC Manufacturing Finance 570 – Summer ‘09 Dr. Joe Greco California State University, Fullerton Presented by Sue Shen Nhan Ho Phuong Nguyen

2. Introduction Analysis Recommendation • Industry • 2. Company • 3. Expansion • 4. Issues • Cause and effect • Economic exposure • Hedging policy • Decision criteria • Alternatives • Evaluation • Implementation Synopsis

3. Industry Background • Category : Auto Parts • Sector: Consumer Goods • Market Capitalization: 35 Billion (Current) • Performance dependent on Auto Sales

4. About us • Headquarter at Toronto • Specialized in auto parts production in North America with focus on safety Seating systems Bumper Safety belts • Supplier for GM, Ford and Chrysler; Toyota and Honda (Ontario) • D/E=77.21%

5. Major competitor Magna International Inc. • The biggest Canada auto parts supplier • Capabilities • D/E=69.05%

6. Expansion to Mexico • Construct production facility in Mexico • Contagion effect of the Asian market crisis in 1997 • Marketplace volatility in underdeveloped countries • Weaken Mexican peso position against Canadian Dollars. • Fund requirement of 826,000,000 Mexican pesos • Seek fund from The Manufactures Bank of NY

7. Key People • Herve Villa • IFC’s founder and CEO • Mexican-Canadian entrepreneur • Ph.D in mechanical engineering • Worked for Ford Motor Company for 6 years • Management style: give full power to his subordinates.

8. Key People • John Trudel • Former treasurer and CFO • An astute user of financial derivatives • Manage IFC’s portfolio on his own • Left IFC in 1997

9. Key People • Bob Young • Present treasury and CFO • Joined IFC in November 1997 • Has 15 years experience in management accounting • Has no experience in the treasury aspect

10. Time line

11. Basic Issues Low High Importance Urgency Low High

12. Immediate Issues Low High Importance Urgency Low High

13. Cause and Effect diagram Hedging Portfolio Financial Risk Difficult in Getting the loan Lack of Tools Operational Practice

14. Mexico’s Political risk • Macro-level: Eurasia Group • Micro-level: MIGA and OPIC • Source: Journal of International Money and Finance 25 (2006) 308e329 Solutions: • Local connection • Insurance

15. Operating exposure Economic Exposure Transaction exposure Accounting Exposure Translation exposure Exposures

16. Translation exposure • 8.5% interest rate • More Canadian dollar Forward and call options

17. Transaction exposure • Net U.S. Dollar Exposure from Transactions (in US$000s) • U.S. Dollar Payables (in US$000s) • U.S. Dollar Receipts (in US$000s)

18. Operating exposure • IFC’s revenues and expenses are affected by currency fluctuations. • Long-term cost and price competitiveness • Cdn depreciates against USD

19. Mitigate financial risk Vanilla option Single barrier Forward Hedging Double barrier Average rate IFC foreign exchange portfolio

20. Forward

21. Forward Evaluation

22. Vanilla Options

23. Double Barrier-Range Binary Option

24. Single Barrier-Swing Forward

25. Evaluation of IFC’s Hedging Instruments • Gains/Losses (in Million USD)

26. Decision Criteria

27. Forward Options Futures Hedging Alternatives

28. Alternative 1

29. Alternative 1 continued • Preferred • Cdn Put

30. Alternative 2,3 • Alternative 2: Vanilla Options 1.40 Canada Put 1.40 USD Call • Alternative 3: Future Contract -Cheapest way to hedge

31. Extra Alternative • Peso 1998

32. Action& Implementation Plan Obtain Bank Loans Mexican Dream Manage Hedging Instruments Make adjustment if needed

33. Internal Control G30 Guide Success Bank Relations Strategic Integration Accounting Treatment Risk Management Recommendation

34. Thank You ! IFC Manufacturing