Risk Management Assessment of adidas – Salomon

1. Corporate Risk Management FM: Dr.IdaJudaWidjojo MME-34 - Group 2 : AlvenDesnecmen FeraDamayanti WidyaretnaBuenastuti ZakariaNurDjajadinataHalim Risk Management Assessment of adidas – Salomon

2. Agenda • SNAP SHOT • Risk Management Approach • Risk Typology • Risk Assessment, Mapping and Mitigation • Marketing Risk • Operations Risk • Social & Environmental Risk • Legal Risk • Financial Risk

3. Snap Shot of adidas-Solomon • Background • Maker of sporting goods worldwide behind NIKE • Share profit of Business Unit adidas major than Salomon and Taylor Made adidas Golf. • History • 1926 Dassler built the factory • 1960 & 1970 expand globally • 1997 becomes adidas-Salomon

4. adidas Risk Management • Approaches: • Fully integrating with day-to-day business function at all organization level. • Early to the risk identification, evaluation, effective communication and management risks. • Prepare and implement appropriate reporting & contingency plan • Participate management and employee

5. Risk Typology Market Risk Credit Risk Liquidity Risk Operational Risk RISKS Legal & Regulatory Risk Business Risk Strategic Risk adidas’ Risks Financial Risk Reputation Risk

6. Risk Assessment & Mapping

7. Risk Assessment & Mapping

8. Risk Assessment & Mapping

9. Risk Assessment & Mapping

10. Financial Risk Typology Equity Price Risk Interest Rate Risk Transaction Risk Market Risk Forex Risk Translation Risk Commodity Risk Financial Risk Issue Risk Transaction Risk Credit Risk Issuer Risk Portfolio Concentration Counterparty Risk

11. Risk Assessment & Mapping

12. Forex Risk Management • Operational Hedging • Currency Netting • Proxy Hedging • Foreign Currency Debt • Changes to purchasing/processing • Transfer Exchange Rate Risk • Asset & Liability Hedging • Instrumental Hedging • Spot Transaction • Forward Contract • Swaps • Forex Swaps • Currency Swaps • Closing out a swap • Currency Futures • Forex Option • Exotic Options • Forex Collars • Average Rate Option • Barrier Option (Knock In – Knock Out) • Compound Option

13. FORWARD CONTRACTS • Forward Rate : outright quotation and swap rate (% or points) • Forward Premium – Forward Discount (% or points) • Selling Forward– Buying Forward • Selling a forward contract vs Buying a forward contract • Credit line needed

14. FOREIGN EXCHANGE OPTION (FORWARD OPTION) • Option Premium • Strike Rate • Option duration • American Option vs European Option • Call option vs Put option • Purchase of Option  hedging • Sell of Option  speculating • Over the counter vs Exchange traded • Option position : • In the money • At the money • Out of the money

15. Managing Forex Risk - Transaction • Instrumental Hedging • adidas-Solomon use two risk mitigations for Forex Risk Management, Instrumental Hedging: Forward Contract and Option • Shifting to options based hedging, from previously concentrated on forward contract, give adidas Solomon room to take advantage of favorable exchange rate development • adidas-Solomon can access several other alternatives for Forex Risk Mitigation (see previous slide ), Main suggestion: • FOREX COLLARS, to enjoy flexibility with lower cost vs Option Other alternatives, depend on situations: • CURRENCY SWAPS, if can find counter parties • CURRENCY FUTURES, for lower cost, subject to contract size and delivery date

16. Managing Forex Risk - Transaction • Operational Hedging • adidas-Solomon use • Currency Netting (assumption) • Foreign Currency Debt, due to liability in USD • Other Operational Hedging adidas-Solomon can consider • CHANGES TO PURCHASING, change payment to Euro

17. Translation Risk Exchange rate for revenue and expense Exchange rate for asset and liability

18. Managing Forex Risk - Translation • Asset-Liability Hedging • adidas-Solomon use • Spot Rate for Asset & Liability Translation for Group and all monetory items in Individual Financial Statement of Group Companies • Average Rate for Revenues & Expenses Translation for Group • Hedge the balance sheet risk This is already right mitigation

19. Risk Assessment & Mapping

20. adidas-Solomon Interest rate Effect +1% € 11 Million (after-tax Erarning) Interest Rate -1%

21. INTEREST RATE OPTIONS • CAPS • A series of interest rate options (caplets) to protect against rising interest rates. • European style • At the expiry date of each caplets, the cap seller reimburse the cap buyer for the difference if reference rate > strike rate

22. INTEREST RATE OPTIONS • FLOORS • A series of interest rate options (caplets) to protect against falling interest rates. • European style • At the expiry date of each caplets, the cap seller reimburse the cap buyer for the difference if reference rate < strike rate • Alternative of buying a cap is selling a floor

23. adidas: Sell Floor = Buy Cap 2001 2002 REF. RATE REF. RATE CAP = 3.6% CAP = 3.2% REF. RATE REF. RATE

24. Managing Interest Risk • Available Tools • Interest rate swap • Cross currency & Interest rate swap • Forward Interest Rate Swaps • Interest Rate Options • Cap • Floors • adidas-Solomon, only uses 1 tools to manage the interest risk • Since its liability to outsource is dominated in USD in various countries, adidas-Solomon should use the INTEREST RATE SWAP • The term of 5 years can be shortened to 2-3 years to reduce the uncertainty of volatility of interest rates

25. Risk Assessment & Mapping

26. Thanks