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International Business fiunance

International Business Finance Mid-term assignment

Your aunt runs a very successful manufacturing company based in Ealing. In a timehonoured local tradition, the firm produces high-quality “London-yellow” bricks, sold nationwide in premium shops, aimed mostly at restoration and high-end residential building.
The annual turnover of the company was £ 5 million last year and your aunt expects a steady 5% growth from the UK sales, although her net profit margin is only 5%. Recently she participated in a trade-mission to South Asia and was surprised with a positive response of potential buyers interested in purchasing a “piece of Old Merry England”.
After her trip she has already signed firm contracts which will double the turnover of the firm next year and she expects further orders which together will comprise 2/3 of the total firm’s turnover. The profitability of overseas orders (including transportation costs) is the same as the UK ones at the current spot exchange rate.
All the costs of the company are in Sterling, while all overseas buyers insisted on signing two contracts of the same size denominated in their local currencies: Indian rupee and Chinese yuan – she agreed to these conditions. The contracts are based on a “take or pay” rule. She investigated the credit-worthiness of her new buyers and was assured by both British Foreign Service and rating agencies that her partners’ rating is impeccable and that they never failed any payment.
Whilst she has a strong managerial background in operational management and she is convinced that she will be able to expand operations to meet the new demand (i.e. she does not expect any operational risk), she currently lacks the necessary financial knowledge with respect to foreign exchange and risk management. She hopes that you, as a CLBS student, will be able to help her.
The last finance course your aunt took was several years ago but she clearly remembers being taught that derivatives may play a role in managing her new foreign currency exposure. She read, however, that in 2002Warren Buffet in his report to Berkshire Hathaway shareholders wrote that “I view derivatives as time bombs, both for the parties that deal in them and the economic system… In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”.

Your aunt wants you to write her a memorandum outlining how the derivatives would help her business to manage risks. Please prepare a memorandum to answer your aunt’s query. In particular, in very clearly separated sections, critically evaluate:
1 The key risks her business will face as a result of international expansion – 20 marks
2. Presentation of key derivatives she can use in managing the above risks – 20 marks
3. Critical analysis of Warren Buffet words and their applicability to this case – 60 marks
Your aunt requires a fully referenced paper (using Harvard Referencing) so that she can check the original ideas behind your views as well as definitions of used terms. She expects no more than 2,000 words in this memorandum – footnotes and appendices are NOT included in the word count. You may use bullet points in your answers. Please note that your aunt expects a report which is tailored to the actual need of her business.

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