Financial Risks Corvette Company Is Facing - Essay Example

Research Methods Answer to Questions The total mean is 219 2868 dollars while the standard deviation is 44668.76 dollars. 2. a. Probability that revenue will exceed $2,200,000 is 0.4364. b. Probability of revenue exceeding $2,225,000 is 0.2358. 3. a. Probability of the revenue being less than $2,160,000 is 0.1658. b. Probability of the revenue being less than $2,130,000 is 0.1758. 4. $2,150,000 that HSBC is willing to pay a US based super car may be a good deal and at the same a bad deal. The decision lies with the sales manager and the Chief Executive Officer. It is a matter of risk taking. 5. The manager had his own reasons for giving in to the offer. On the other hand, the CEO definitely had his own argument as to why he refused the offer. According to the CEO, the offer may cost the company. There may be a status quo, which predisposed the CEO to refuse the alternative that was risky. The CEO is more risk averse since he/she is in charge of the entire company. 6. When a financial organization decides to take part in financing activities, there are a number of risks that the move. The risks include political risks and foreign exchange risk. The risks make it difficult for the institution to maintain reliable and constant revenue. 7. Paying the amount in three months’ time may be reached at if the paying company is capable of availing the amount in three months’ time. Financial ability is the main contributes much to the financing action. The bank would prefer the payment to be made in twelve months since the longer the bank transacts the payment, the higher the bank interest earned (Pratt, 2011). 8. Once the USASuperCars accepts the HSBC’s offer, the risk will lie on the financial institution too. The bank, on the other hand, may gain or lose depending on the exchange rates. The probability of the bank making a loss are minimal because HSBC native currency is in sterling pounds which are stronger that the dollars. 9. The fixed sum of money is about $2,150,000 without exchange rate risk while HSBC has 29% chance to lose and 5% chance to gain more than $200,000. Analyzing the information keenly, the exchange rate is risky to HSBC. The bank is either going to generate a profit of five percent of the loss of about twenty-nine percent. 10. The bank may save the money as a local currency. The bank may also opt to convert the currency into another currency. Business Report Executive Summary  I am writing this report to make financial decisions for Corvette Company, which sells luxury sports cars to various countries in the world. The company is situated in the United States and deals with a unique brand of cars. The good reputation of the company has seen it move far ahead of other car selling companies. The success of the company is due to coordination between different departments. The managing board makes decisions that have seen Corvette retain it unbeaten reputation in the entire globe. Good quality and affordable produce are indeed the pushing force behind its success (Guffey & Loewy, 2013). I will analyze the financial risks, which Corvette Company is facing, and the probable revenue range. I will express my opinion on the sure US dollar sum revenue of $2,150,000 in return for the uncertain revenue in local currencies. The currency that has been agreed to express all the transactions is in US dollars. The US dollar is the agreed means of payment in the world. All international business transactions are done through a common currency. The expected return is $2,175,398.05, and the fixed sure sum offered by HSBC is $2,150,000. It seems an unfair contract because it costs Corvette Company $25,398. However, the cost is just 1.17% of the expected revenue. HSBC charges a little bit to take on the exchange rate risk for the customer. It is a good deal for Corvette Company to receive for sure. The fixed sum of money is about $2,150,000 without exchange rate risk while HSBC has 29% chance to lose and 5% chance to gain more than $200,000. Analyzing the information keenly, the exchange rate is risky to HSBC. The bank is either going to generate a profit of five percent of a loss of about twenty-nine percent. All the decisions lie with managing body. The entire management has to look at the current market trends and decide whether it is worthy to take the risk or not. Introduction The consumption, production of goods and services are highly globalized in this integrated world economy nowadays. The increasing liberalization of international trade further internationalize consumption pattern around the world. The multinational corporations are making relentless efforts to source their inputs and locate the production anywhere the profits are higher, and the costs are lower in the world. They are exposed to foreign exchange risk in cross-border transactions unavoidably which they would not encounter in merely domestic transactions. Content  The demand and sales amount for luxury sports cars had been declining sharply since 2008 when the global economy declined with the outbreak of global financial crisis. The global economic situation furthered to worsen since 2010 when European sovereign debt crisis broke out accidently (Yunus & Weber, 2010). The companies in the luxury industry like Corvette are experiencing a hard time since they have to reduce all kinds of expenses in order to survive. Locking of all the revenue from the foreign market could be a good idea because they have no ability to take any risk including exchange rate risk.  The CEO and the entire managing board are experiencing a hard time on making decisions concerning the company. At some point, the board seems to differ on the ideas, leaving a question mark. As known, sports cars are among the most expensive cars in the world. The cars can only be afforded by a few in the society. As seen before, the world market is faced by a number of challenges ranging from minor to major. Among the major ones are world crisis, for instance, European Sovereign Debt Crisis and Global Financial Crisis. Due to such, the company has to device surviving techniques. The orders of Corvette‘s five customers are showed in the following table. The selling prices are fixed in local currencies, but exchange rates are subject to the prevailing rates at the time of the delivery 12 months from now. The report with these estimates stated that these rates are normally distributed and independent. Table 1: Sales Amount, Price, and Statistic of Exchange Rate in different countries.  Global Orders Rate of Exchange Buyer Amount Sales Price Average Standard deviation UK 12 £ 57,500 $ 1.41 0.041/ £ Japan 8 Y17400000 $ 0.009 0.00045/ Y Canada 2 CAD 197,500 $ 0.824 0.0342/ CAD South Africa 3 R 4,100,000 $ 0.824 0.00083/ R USA 2 $ 100,000 $ 0.0211     Table 2: Expected revenue and risks of different areas and Corvette. Customer Distribution Mean Variance Standard deviation UK Normal 978,145.20 808,976,943.95 28,442.52 Japan Normal 624,883.85 967,579,752.13 31,105.94 France1 Normal 160,680.00 44,475,561.00 6,669.00 France2 Normal 242,256.00 101,099,003.04 10,054.80 South Africa Normal 169,433.00 44,420,892.01 6,664.90 For Corvette Normal 2,175,398.05 2,100,663,074.53 45,832.99 The distribution of uncertain revenue for Corvette is normal, and the mean and the standard deviation of the uncertain revenue is 2,175,398.05, 45,832.99. From the table 2 above, we can see that USA was under performance as it has lower revenues with higher risks. There were repeated countries on the charts. The repeated countries have been combined together to come up with one whole sum of the countries. Among the countries that had repeated performance were Japan and Canada. Their total amount of money has been combined together. Table 3: Corvette’s possible revenues and the probability the company may exceed / less Possible Revenues Probability Exceed 2,250,000 0.05 Exceed 2,500,000 0.00 Less 2,150,000 0.29 Less 2,000,000 0.00   Table 3 shows possible revenues and the probability that the company may exceed / less; From table 8, it can be seen that the company has 5% chance to get over $ 2,250,000 but less than $ 2,500,000 revenues; while has 29% chance to get less than $ 2,150,000 but more than $ 2,000,000 revenues. HSBC offers to give out a fixed sum of $2,150,000 with the return of the revenue to the local currencies. It is $25,398 less than the expected return. It costs Corvette 1.17% of the uncertain expected revenue to get a riskless sure sum. The return of revenue would be the best idea for the companies in a luxury industry like Corvette. Certain revenue is important because they can‘t take on risk in hard times. Furthermore, revenue matters a lot for a company like Corvette. The company cannot afford to make such risks during hard market times. HSBC is taking on interest rate risk apart from exchange rate risk. It would good for the company in a hard time to be conservative with riskless revenue. The Sales Manager is more risk-averse if he was willing to give in HSBC‘s offer, but the CEO seems not to be a risk-averse because sales manager is more conservative. The Chief executive officer to fear what may be as a result of taking the order. The sales manager seems to be more of a risk taker compared to the CEO, who is worried about losing the entire amount through the loss. As seen earlier, the Sales manager gave in to the offered amount by HSBC. On the other hand, the CEO has his worry based on the fact that it is a hard economic time, and his company cannot afford to lose money in case the entire project does not bear fruits. The payment would be nine months early if the offer is to be paid by the sure sum in a period of three months rather than in time duration of twelve months. The bank would prefer the payment in a period of twelve months so that they will not make the payment 9 months early without interest. The opposite of the company, Corvette would prefer the payment to be made in a period of three months so that they receive the payment nine months early without paying interest (Kuiper, 2009). That will be good for the company‘s account receivable and cash flow. Paying the sum of money in a period of nine months greatly favors the bank. The bank will have to make a large amount of interest in the transaction. The large profit is because the interest is earned on a monthly basis. Contrary to the same, the company opts that the deal is done as fast as possible. If a deal matures in a period of three months, the company will have saved a large amount of money (Droms & Wright, 2010). The probability of the bank to incur a loss is high. The risk of the loss is about 29 percent. The percentage has been shown above if Corvette has accepted HSBC‘s offer and the financial institution is forced to make the conversion of all currencies into US dollars at the wavy exchange rates. There is probability that the exchange rates may or may not favor the entire process. In case the process lies on the better side, there will be much to celebrate about. Contrary to the situation, the loss of about twenty-nine percent is breath taking for a bank. The bank defines its Value-at-Risk as any loss that takes effect at the 5th percentile of the entire uncertain revenue on the five percent left tail of the table of distribution. From this point of view, the bank’s Value-at-Risk would be $ -47,554.34, which means it has 5% chance that the bank would loss more than this amount. As a compensation of taking the exchange rates risk of the company, the bank’s expected profit is $25,298.05. However, the profit is not guaranteed. The chances of getting the profit are very minimal. There are only 5% chances of getting profit and 29% chances of getting a loss. The bank is more likely going to get a loss. The evidence is seen when chances of getting a loss are almost six times as those of getting a profit. The bank can use derivatives like forward or future contract to hedge the exchange rate risk if the currencies are withheld with no exchange in the near future. The process will take about twelve months for the expectations to be realised. Conclusion For a company to survive in the business world, there are several challenges that it has to face to become a giant. Just like Corvette, there are several challenges that the company is facing. The challenges are difference in opinions among the management. For instance, the sales manager and the Chief Executive Officer differ in opinion on whether to take the business offer given out by HSBC or turn it down. The manager has a willing heart of striking the deal while the Chief Executive officer is not ready to take in the deal. This action leaves a company in suspense on whether to go by the word or to just let it go. On the other hand, the bank is torn between two on whether to make a payment or not. Assumptions show that the probability of the company to make a profit is about Five percent while the probability of it making a loss is about thirty percent (Krizan, Merrier, Logan & Karen, 2010). Furthermore, there are other challenges that face companies in the world of business. Especially in international business, the risk of suffering losses is high. A number of factors may be attributed to this case. First, the influence of political stability and fluctuating exchange rates, which both play a critical role in international business. For example, if the political state allows/favors foreign investors and foreign executives, then this act creates a favorable environment for more and more business to come into the economy. A government that will put off international business may create other policies. Additionally, Fluctuating currency plays a major role in business. There may be a rise or a drop in the exchange rates. All these change with time. If the rates rise, then it is a favor to the business, and when there is a fall beyond the original price, then there is a loss. The trend is unpredictable and varies depending on other factors beyond which a business can control. It is always a matter of being prepared for the better or the worst. Indeed the business is a gambling game. No one knows the winner. References DROMS, W. G., & WRIGHT, J. O. (2010). Finance and Accounting for Nonfinancial Managers All the Basics You Need to Know. New York, Perseus Books Group. http://public.eblib.com/choice/publicfullrecord.aspx?p=530357. GUFFEY, M. E., & LOEWY, D. (2013). Essentials of business communication. Mason, OH, South-Western Cengage Learning. KRIZAN, A.C., MERRIER, P., LOGAN, J.P., & KAREN, S.W. (2010). Business Communication. New York: Cengage Learning. KUIPER, S. (2009). Contemporary Business Report Writing. London: Cengage Learning. PRATT, J. (2011). Financial accounting in an economic context. [Hoboken, NJ], Wiley. YUNUS, M., & WEBER, K. (2010). Building social business: The new kind of capitalism that serves humanitys most pressing needs. New York: Public Affairs Read More