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ExactO , S.A. Corporations

ExactO , S.A. Corporations. Adrienne Newsome Financial Management II Southwestern College, KS . Background. Exacta, s.a. is a global manufacturing plant based out of Lyons, France Large portion of sales are based out of the Europe Union, in addition to booming sales in the U.S.

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ExactO , S.A. Corporations

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  1. ExactO, S.A. Corporations Adrienne Newsome Financial Management II Southwestern College, KS

  2. Background • Exacta, s.a. is a global manufacturing plant based out of Lyons, France • Large portion of sales are based out of the Europe Union, in addition to booming sales in the U.S. • Exacta, s.a. sees an opportunity for starting a manufacturing plant in South Carolina • New plant could possible lead to sales in Mexico

  3. Statement of problem • South Carolina plant will be an investment of $380 million, the plant is expected to be operational by 2012 • Exacta, s.a. is expecting revenues to be $420 million • Exacta, s.a. expects net profit of $52 million a year • Currency risk has become a major concern. • $380 million dollar investment could increase currency risk if the dollar fell below the Euro

  4. Potential Options for management review • Interest rate parity • The difference in interest rate must be equal to the difference between the forward and spot exchange rates • Exacto, s.a.is located in both countries money can easily be deposited in both countries • Selling money forward • If Exacto is contracted to receive a specific dollar amount and they receive money before changing it to dollars exacto can fix the price by selling the money forward • Hedging the difference between the foreign and spot rate exchange when payment is received

  5. Potential options for management review Continued • Transaction exposure • If the value of currency falls by a certain percentage for the euro or dollar then exacto can sell forward the amount of dollar or euro • High exposure • They can undertake the operational hedging by balancing production closely • They can control exposure by the following actions: • Borrowing foreign currency, selling currency, forward currency options, interest rate swaps

  6. Continued… financial Options • Purchasing Power Parity • Purchasing power parity suggest that difference in the rate of inflation will be offset by a change in the exchange rates

  7. essential financial information and analysis • Spot currency exchange rate is 1.4201 • Indirect quote to buy US currency is 0.7041 • Annual forward rate is - .0016 • Interest rate parity example, US interest rate is 1.52% and interest rate France is 4.50% the difference in interest should equal the spot rate. In this case, the spot and exchange rate are not equal

  8. Analysis continued • Purchasing power parity example • If prices in the rise in the US by 2.0% and by 4.0% in France the current spot rate x expected difference in inflation rates = 1.4201 x 1.040/1.020 = 1.44%

  9. RECOMMENDATION AND CONCLUSION • Use difference financial strategies such as purchasing power parity and exchange rate parity to help offset cost • Depending on the transaction and how long the contracts they will need to close monitor the exchange rates or use the tactic of selling forwards.

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