International finance: IBM - Essay Example

?International Finance: IBM Introduction While international business has always driven large corporate entities, the world’s current economic environment has witnessed drastic increases in globalization. Today occurrences in the Asian markets directly affect equities on Wall Street. Organizations throughout the world tentatively look on at developments of the European Sovereign Debt Crisis. In this context of understanding, there is a prominent need for economists, investors, and financial analysts to consider a firm’s international financial involvements. IBM is one such prominent international organization with significant global reach and international trade ("Investor Relations"). The company was ranked the 31st larger company with global involvement, including hundreds of offices and subsidiaries worldwide ("Investor Relations"). The geographic breakdown of revenue is understood as in millions $40,184 from the Americans, $32,583 from Europe/Middle East/Africam, and $20,710 from the Asia Pacific ("IBM"). This essay examines the Foreign Exchange (FX) Risk Management Policy, derivatives for funding and investing, and the extent of offshore and Euromarket funding and investing of prominent technology company International Business Machines Corporation (IBM). Foreign Exchange (FX) Risk Management Policy While IBM has prominent international investment practices, the organization remains headquartered in Armonk, New York. Still, there are substantial degrees of decentralization. In these regards, the corporation has offices and operating subsidiaries in nearly even major country worldwide, with hundreds of regional offices. An investigation of IBM reveals a firmly rooted company and business approach. The organization has general exposure risk. In these regards, they are exposed to exchange rate volatility on foreign currency denominated debt. The company is also exposed to market price changes in broad market indices, including employee compensation obligations. The currency exposure risk is managed through cross-currency swaps that convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These exposures are mitigated by hedging through derivatives, including equity swaps and futures. Another important concern is the company’s Other Comprehensive Income equity account. In terms of the historical shifts in this account, one notes that there have been significant changes over the 2008-2010 period. In 2008 the equity contained in this account in 2008 was in millions, $3,414 with losses recorded at $15,245 ("IBM"). The company demonstrated a significant shift in 2009 with equity in this account $21,845 yet loses reduced to $994; a similar trend occurred in 2010 with $18,830 in equity and $1,712 in losses ("IBM"). As one might expect, IBM implements a substantial degree of hedging mechanisms. From an overarching context, the organization implements the derivatives and foreign exchange market as a means of hedging. The hedging involved for foreign cash assets are foreign exchange trading. In addition to this trading, the company implements foreign exchange forward contracts for this risk management purpose. This cash flow risk is managed in a three period. For the organization’s subsidiaries, cash flow forward and swap contrasts are managed on a two-year basis. The company faces exposure risks in terms of changes in market prices. These exposure risks are managed by derivatives, most prominently equity swaps and futures, which are linked to total return on certain broad market indices and common stock. Another exposure risk is the potential loss faced if a client fails to pay amounts due under contractual terms. This exposure risks are hedged using credit default swaps with a one year or less time frame. Derivatives As indicated above, the company prominently implements derivatives as a means of hedging against exposure risks. There are a number of further concerns related to IBM’s implementation of derivatives as financial instruments. In further examining these elements one considers the areas of mitigation. The organization in keeping with their careful approach to business procedures the company has a number of important standards regarding the implementation of derivatives. Three main standards are implemented. The first is that the company implements hedging of the recognized value of a financial asset or liability -- fair value hedging. The second is that the company uses variability of a forecasted transaction -- cash flow hedges. Finally, the third is that the company uses hedging of a long-term investment -- net investment hedges. One financing element is changes in interest rates. In these regards, derivatives are implements to better align rate movements between the interest rates associated with the company’s lease and financial assets. The related cost of debt is also managed through the derivative market. The company recognizes that there are risks associated with participation in the derivative market. In these regards, the company’s policy is to only enter into contracts with carefully selected major financial institutions based on their credit ratings. The company also reviews and limits credit exposure by continually assessing creditworthiness of counterparts. Finally, the company is a party to collateral security arrangements; as such the company must post collateral when derivative values exceed contractually established thresholds. Offshore and Euromarket Funding and Investing The has extensive offshore and Euromarket funding and investing activities. In gaining a thorough understanding of these funding activities it’s necessary to consider a variety of financial and funding inputs and outputs. With the substantial amount of organizational activities, understanding the extent of the organization’s foreign investment and funding is best understood through a consideration of financial instruments and figures. In terms of international derivative instruments, the company is noted to have substantial foreign exchange contracts, with in millions of income $299. The company also divides offshore funding and investment activities along a number of specific designations. In these regards, the organization distinguishes between Global Business Services, Global Technology Services, Software, and Systems and Technology. These differentiations constitute the general divide the company demonstrating in foreign investment activities. The financial breakdown of these funding activities is for the 2010 year as follows in millions: Global Business Services -- $4,042; Global Technology Services -- $2,777; Software -- $12,605; and Systems and Technology $766 ("IBM"). Another prominent area of Euromarket funding and investing emerges in terms of foreign government securities. In this context of understanding, the company indicates that for the 2010 year foreign government securities totaled $1,054 ("IBM"). The organization also considers offshore and euromarket funding and investing in terms of portfolio strategy. In these regards, the overarching approach is that the organization’s investments are designed as a means of generating returns that will enable the organization to meet its future obligations. It’s noted that, “Careful consideration is given to balancing the portfolio among industry sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns” (“IBM”, pg. 120). The financial breakdown of these portfolio measures are indicated to be at 47 percent equity securities, 46 percent fixed income securities, 2 percent real estate and 5 percent other investments. They also note that in some Euromarket regions a higher percentage allocation to fixed income securities is required. Notably, Euromarket investment generally involves illiquid assets and the implementation of derivatives is generally limited to currency hedging. While the company indicates no substantial change in investment strategy occurred between 2009 and 2010, more recent financial information has not yet been made available regarding the organization’s investment and funding response to the European Sovereign Debt Crisis ("Investor Relations"). Conclusion In conclusion, this essay has examined international finance in terms of International Business Machines (IBM). Within this context of investigation, the essay has considered Foreign Exchange (FX) Risk Management Policy, derivatives for funding and investing, and the extent of offshore and Euromarket funding and investing. It’s demonstrated that IBM has substantial global outreach with regional offices in hundreds of countries throughout the globe. The organization implements currency trading and derivatives as a means of hedging against exposures in these foreign risk measures. References "IBM Annual Report 2010." IBM. N.p., 2011. Web. 3 Dec 2011. . "IBM Investor relations -- Our strategy." Investor Relations. N.p., 2011. Web. 3 Dec 2011. . Read More