Company

LOGO

IFC ManufacturingFinance 570 – Summer ‘09

Dr. Joe GrecoCalifornia State University, Fullerton

Presented by Sue ShenNhan HoPhuong Nguyen

SynopsisSynopsis

1. Decision criteria

2. Alternatives

3. Evaluation

4. Implementation

1. Decision criteria

2. Alternatives

3. Evaluation

4. Implementation

1. Cause and effect

2. Economic exposure

3. Hedging policy

1. Cause and effect

2. Economic exposure

3. Hedging policy

1.Industry

2. Company

3. Expansion 4. Issues

1.Industry

2. Company

3. Expansion 4. Issues

IntroductionIntroduction AnalysisAnalysis RecommendationRecommendation

Industry BackgroundIndustry Background

• Category : Auto Parts

• Sector: Consumer Goods

• Market Capitalization: 35 Billion (Current)

• Performance dependent on Auto Sales

About usAbout 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%

Major competitorMajor competitor

Magna International Inc.• The biggest Canada auto parts supplier• Capabilities

• D/E=69.05%

Expansion to MexicoExpansion 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

Key PeopleKey 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.

Key PeopleKey People

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

Key PeopleKey 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

Time lineTime line

Basic IssuesBasic Issues

Low

Low

High

High

Importance

Urgency

Immediate IssuesImmediate Issues

Low

Low

High

High

Importance

Urgency

Cause and Effect diagramCause and Effect diagram

Difficult in Getting the loan

Financial Risk Hedging Portfolio

Lack of Tools Operational Practice

Mexico’s Political riskMexico’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

Exposures Exposures

Operating exposure

Transaction exposure

Translation exposure

Economic Exposure

Accounting Exposure

Translation exposureTranslation exposure

• 8.5% interest rate• More Canadian dollar Forward and call options

US Debt 78,060,863

  73,724,528

  64,171,000

  215,956,391

US Asset 62,877,000

Net translation exposure 153,079,391

Hedging 200,000,000Overhedging rate 31%

Transaction exposureTransaction 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)

Operating exposureOperating exposure

• IFC’s revenues and expenses are affected by currency fluctuations.

• Long-term cost and price competitiveness

• Cdn depreciates against USD

IFC foreign exchange portfolio IFC foreign exchange portfolio

Forward

Vanilla optionSingle barrier

Double barrier

Average rate

HedgingHedging

Mitigate financial risk

ForwardForward

Forward EvaluationForward Evaluation

1998 Outright Forward Rate Forecast Exchange Rate Millions of U.S. Dollars Forcasted Gain/Loss Acutual Gain Loss

Jan 1.37 1.3965 1.4562 -45 -1.1907375 -3.879

Feb 1.3602 1.3982 1.4236 -15 -0.57053 -0.951

Mar 1.38 1.4000 1.418 -10 -0.200098333 -0.38

Apr 1.3915 1.4018 1.4302 -10 -0.102843333 -0.387

May 1.4008 1.4036 1.4571 -5 -0.013794167 -0.2815

June   1.4053 1.4717   0 0

July   1.4071 1.5112   0 0

Aug 1.3663 1.4089 1.5745 -10 -0.425823333 -2.082

Sept 1.3588 1.4107 1.5262 -15 -0.7778525 -2.511

Oct 1.3513 1.4124 1.5432 -25 -1.528283333 -4.7975

Nov 1.3471 1.4142 1.5235 -25 -1.677645833 -4.41

Dec 1.2907 1.4160 1.5375 -5 -0.626401667 -1.234

Total         -7.11401 -20.913

Vanilla OptionsVanilla Options

1998 MillionsCanadian

CallsCost

Mark-to-Market Value

Forcasted Rate

Actual Rate

Forcasted Gain/Loss

Actual Gain/Loss

Jan                

Feb                

Mar                Apr                

May                

June                

July                

Aug 5 1.40 -0.05 0.04 1.49 1.57 -0.45 -0.8725

Sept 5 1.40 -0.07 0.05 1.41 1.53 -0.05 -0.631

Oct                

Nov                

Dec 15 1.40 -0.30 0.24 1.42 1.54 -0.24 -2.0625Total     -0.42 0.33    -0.74 -3.57

Loss     0.42      -0.74 -3.57

Double Barrier-Range Binary OptionDouble Barrier-Range Binary Option

TMillions of

PayoutCost

Mark-to-market Value

Forecasted Rate Actual Rate

In the Money Rates

Jan       1.3965 1.4562 1.3750 - 1.4750

Feb       1.3982 1.4236 1.3750 - 1.4750

Mar 10 1.47 2.91 1.4000 1.418 1.3750 - 1.4750

Apr           May           June           July           Aug           Sept           Oct           Nov           Dec          

Total 10 1.47 2.91    

Single Barrier-Swing ForwardSingle Barrier-Swing Forward

1998Swing

Forward Cost Mark-to-Market Value Forecast Real Forecasted

Gain/LossActual

Gain/LossJan Feb Mar Apr May June July Aug Sept Oct Nov

Dec -10 0 0.072 1.4160 1.5375 0 1.375

1.4Cdn Put

1.475Cdn Call

Evaluation of IFC’s Hedging InstrumentsEvaluation of IFC’s Hedging Instruments

• Gains/Losses (in Million USD)

ForwardVanilla Option

Rang Binary

Swing Forward

Total

Forecasted Gain/Loss

-7.11 -0.74 8.53 0 0.68

Actual Gain/Loss

-20.91 -3.57 8.53 1.38 -14.57

Mark-to-Market Value

0.33 2.91 0.072 3.312

Book Gain/Loss

        -17.882

Decision CriteriaDecision Criteria

Hedging AlternativesHedging Alternatives

Forward Options Futures

Alternative 1Alternative 1

Spot Rate 1.4217 Sensitivity Scenario

Outright Forward Rate Forecast XRs Real XRs

1 month -21.2 1.4196 1.3965 1.4562

2 months -39 1.4178 1.3982 1.4236

3 months -62.25 1.4155 1.4000 1.4180

6 months -119 1.4098 1.4053 1.4717

1 year -245 1.3972 1.4160 1.5375

Alternative 1 continuedAlternative 1 continued

• Preferred

• Cdn Put

Forecast Gain/LossReal Gain/Loss

Forward Forecasted Real 68,000,000 -14,570,000

1 year 882,107 6,582,961 68,882,107 -7,987,039

Alternative 2,3Alternative 2,3

• Alternative 2: Vanilla Options

1.40 Canada Put

1.40 USD Call

• Alternative 3: Future Contract

-Cheapest way to hedge

Extra AlternativeExtra Alternative

• Peso 1998

Action& Implementation PlanAction& Implementation PlanAction& Implementation PlanAction& Implementation Plan

Obtain Bank Loans

Manage Hedging Instruments

Make adjustment if needed

Mexican Mexican DreamDream

RecommendationRecommendation

Internal ControlG30 Guide

Strategic Integration

Risk Management

Bank Relations

Accounting Treatment

Success

Company

LOGOIFC Manufacturing