International Investment Analysis of VistaJet Holding SA - Case Study Example

International Investment Analysis Contents International Investment Analysis Contents 2 Introduction 3 Company Background 3 Different Foreign Exchange Exposures 4 Institutional Practice to Manage Foreign Exchange Exposures 5 Operating Exposure 6 Managing Operating Exposures 7 Pros and Cons of Hedging Foreign Exchange Exposures 8 Evaluating Futures and Options as a Speculator 9 Recommendations 9 Conclusion 10 References 11 Introduction The management of risks of foreign exchange is considered as very important in order to invest successfully in the forex market. It is considered to have mainly three classifications such as translation, economic, and transaction exposures. Transaction exposure is said to be concerned with the extent to which an organization’s future cash earnings have the potential to get affected by any changes in the exchange rate of currencies. Economic exposure is considered to measure the impacts of changes in exchange rates on an organization’s earnings and cash flows. Translation exposure is also known as accounting exposure. It is involved with the measurement of any impacts that changes in exchange rates is considered to have on the financial statements of organizations as a whole. Organizations are considered to minimize the risk of fluctuating exchange rates through hedging instruments such as swaps, options, futures, money market hedge, and forward exchange contracts. Transaction exposure is also known as short run exposure while economic exposure is considered to deal with long run exposures of an organization. An organization is said to have short term exposure or transaction exposure whenever it is considered to have contractual cash flows such as payables and receivables the values of which are subject to changes due to a change in exchange rate because contracts are denominated in a foreign currency. Long term exposure or economic exposure of an organization is involved with the degree to which an organization’s market value is considered to be influenced by fluctuations in exchange rates. Such adjustments of exchange rates have the potential to significantly impact the position of an organization with regard to its competitors. Company Background VistaJet Holding SA is considered to be a Swiss airline holding company which was founded in the year of 2004. The organization is considered to have its headquarters in Switzerland with satellite facilities in Austria, Nigeria, Malaysia, Hong Kong, China, UAE, Dubai, and UK. The company is said to describe itself as the world’s luxury aviation company and is considered to have three categories of consumers such as high net worth individuals, governments, and major corporations. The organization recently is considered to exhibit its latest aircraft known as a band new Bombardier Global 6000 long range business jet. The organization is considered to be founded in the year 2004 as Air Executive and was renamed as VistaJet Holding SA in the year of 2008. VistaJet Holding SA is considered as an aircraft management company and European private business jet charter. The company is considered to be domiciled in Switzerland and its aircraft excepting those operating in Russia are considered to be registered in Malta or Austria. The aircrafts of the organization that are operating in Russia are considered to be registered in that country. The company is also considering registering its aircrafts in China. Different Foreign Exchange Exposures Foreign exchange exposures are considered to be classified into mainly three types such as economic, translation, and transaction exposure. Transaction exposure is said to be concerned with the extent to which an organization’s future cash earnings have the potential to get affected by any changes in the exchange rate of currencies. Economic exposure is considered to measure the impacts of changes in exchange rates on an organization’s earnings and cash flows. Translation exposure is also known as accounting exposure. It is involved with the measurement of any impacts that changes in exchange rates is considered to have on the financial statements of organizations as a whole. Transaction exposure is also known as short run exposure while economic exposure is considered to deal with long run exposures of an organization. An organization is said to have short term exposure or transaction exposure whenever it is considered to have contractual cash flows such as payables and receivables the values of which are subject to changes due to a change in exchange rate because contracts are denominated in a foreign currency. Organizations tend to exchange foreign currency for domestic currency in an attempt to realize the domestic value of its foreign denominated cash flows. Organizations are considered to negotiate contracts with set delivery dates and prices and as such the volatile foreign exchange market with fluctuating exchange rates are considered to pose significant threat to organizations with respect to domestic and foreign currencies. Long term exposure or economic exposure of an organization is involved with the degree to which an organization’s market value is considered to be influenced by fluctuations in exchange rates. Such adjustments of exchange rates have the potential to significantly impact the position of an organization with regard to its competitors. Such adjustments are also considered to influence the value of an organization and its future cash flows. Economic exposure can significantly impact the present value of future cash flows of an organization. Institutional Practice to Manage Foreign Exchange Exposures The management of foreign exchange risks is considered to have become increasingly important for organizations operating on the global platform. In floating rate systems, prices of currencies are considered to be determined by their demand and supply. There is existence of numerous external factors which are said to be responsible for the fluctuations in currency. These fluctuations expose an organization to risks of foreign exchange. In this regard, it can be said that economies are considered to become more open and with increase in international trading, organizations in a significant manner are exposed to fluctuations in foreign exchange rates (Rajan, 2003, pp. 47-50). Organizations, in an attempt to manage foreign exchange risks, are considered to resort to hedging. But it should be noted at this point that organizations are not considered to hedge fully because it is considered to be very expensive and as such they tend to hedge in the short term. Natural hedging and forwards are considered as very popular with regard to managing foreign exchange risks. The main principle with regard to hedging in futures and forwards is to take a position which is considered as opposite to that taken by the firm in the spot market. For instance, if an organization is to export gods, it can be afraid of a possibility of devaluation in foreign currency. In this regard, the organization can sell futures or forwards in order to make a gain from such a possible devaluation and to compensate for the losses that are incurred (Goldstein, 1986, pp. 52-55). In the same manner, if an organization is to import goods, it could buy futures or forwards in an attempt to minimize losses if there is an appreciation in the concerned currency. Operating Exposure Operating exposure is said to be involved with the degree of risk that an organization is considered to be exposed when there is change in currency values that are considered to be relevant to the operations of an organization. Exchange rate changes have the potential to significantly affect the values of some assets of an organization and as a consequence impact its overall profitability. In this regard, the company should position its assets in such a way such that exchange rate changes exhibit a favourable change or a very small change. Non monetary assets of an organization are said to be influenced by operating exposures. Non monetary assets include facilities and equipment and such other assets. Exchange rate changes are considered to have the potential to influence the value of these assets over time (Taillard, 2012, pp. 81-84). This can result in increase or decrease of operating cash flows of an organization. If operating exposure of an organization is considered to result in higher expenses for the organization, it can lead to reduced flow of earnings and consequently smaller profits for the organization which can have a detrimental effect on the competitive position of the organization. It should be noted at this point that operating exposure is considered to be a projection of what is going to happen in future. It is mostly due to this reason that assessment of the degree of operating exposure is considered to be a constant process. If an organization is able to manage its operating exposure in an efficient manner, it could minimize its losses to a considerable extent and could create a position for growth for the organization in the future (Jain, 2007, pp. 61-64). Failure to effectively manage the operating exposure of an organization can lead to loss of value to key assets of an organization and also could hamper its productivity in the future times. Managing Operating Exposures The modern economy has become increasingly globalised because organizations are considered to be involved in numerous international activities such as cross border sourcing, exports, establishment of overseas production and sales facilities, and setting up of joint ventures with foreign partners. The cash flows of such organizations are considered to be very sensitive to fluctuations in exchange rates. The management of operating exposure of an organization is not considered as a short term tactical issue. The following are said to be the strategies that organizations could use to manage their operating exposures: I) Selection of low cost sites for production: If the company VistaJet Holding SA expects that its domestic currency is strong or likely to become strong, it can consider establishing its manufacturing facilities in a foreign country where costs are considered to be low due to underpriced production factors or undervalued currency. It could also consider establishing and maintaining manufacturing facilities in various countries such as to deal with fluctuations in exchange rate in a very efficient manner. II) Flexible sourcing policy: An organization can have its manufacturing facility located only in the domestic country but still it can deal with the fluctuations in exchange rate in a very effective manner by sourcing its input materials from such a country where such costs are considered to be low. If the domestic currency of an organization is considered to be very strong, it can purchase its components and materials from low cost foreign suppliers in order to remain competitive. It could also consider hiring low cost guest workers from foreign countries on behalf of high cost domestic workers in an attempt to remain competitive (Rush, 2013, pp. 73-77). Pros and Cons of Hedging Foreign Exchange Exposures Organizations tend to manage exposures to foreign currency mainly through hedging. Hedging is concerned with taking a position, acquiring a contract, an asset, or a cash flow that may rise or fall in value and can offset the fall or rise in value of an existing position. While it can protect organizations from the potential of any loss, it is considered to eliminate any gains that may arise from the increase in value of an asset. The main purpose of organizations for hedging is to increase the value of organizations. The value of a firm is considered to be the present value of all future cash flows that are expected to occur in the future for the organization. If an organization is considered to have risky expected future cash flows, it should apply a higher discount rate to calculate its present value. Organizations that are considered to hedge such foreign exchange exposures are considered to significantly reduce its risk with respect to the value of future expected cash flows. But opponents of currency hedging are of the opinion that any reduction in the variability of future expected cash flows is not considered as sufficient. Firstly, it could be said that shareholders of an organization are considered as capable enough to spread their currency risk in accordance with their risk tolerance and preferences. Secondly, the management of currency risk is said to reduce the variance that have the potential to reduce the expected cash flows due to the existence of hedging costs and as such the real advantage of hedge is considered to depend on the trade off between these 2 impacts. Evaluating Futures and Options as a Speculator Speculators are considered as those persons who trade in currencies, equities, bonds, commodities, and derivatives and take huge risks in an attempt to earn higher profits. They are considered to anticipate the future price movements of stocks in an attempt to make quick and large gains. Speculators and hedgers are considered to move together. Hedgers are considered to transfer risks while speculators tend to absorb that risk. Both types of traders are required in the market such as to maintain balance of the market. Speculators mostly take risks in order to make profits. They have no interest in owning the product and are considered to sell and buy futures contract in an attempt to make profits when the prices of such securities move in the right direction. Hedgers tend to buy futures contract in an attempt to protect themselves from price swings in the future. He involves himself in trading of futures such as to drive out risks of business in an efficient manner. Options are considered as financial derivatives which provide an option to its holder to sell or buy a specified asset by a given time and at a specified price. Options are major sources of leverage as they are considered as cheap compared to actual stock. This allows traders to control larger positions in options as compared to the underlying stock. The anticipation by speculators of the situation of an asset will largely determine the option strategy that they would follow with regard to that particular asset. Recommendations The management of foreign exchange risks is considered to have become increasingly important for organizations operating on the global platform. It can be said that economies are considered to become more open and with increase in international trading, organizations in a significant manner are exposed to fluctuations in foreign exchange rates. The company VistaJet Holding SA could consider taking various measures in an attempt to deal with fluctuations in foreign exchange in an efficient manner. It should establish and maintain manufacturing facilities in various countries to deal in an effective manner with the fluctuations in foreign exchange. The company should also consider sourcing its input materials from such countries where costs of materials are considered to be quite low. If the domestic currency of the organization is considered as strong, it could consider taking the route of sourcing materials from other countries in an attempt to remain competitive. The company should also consider diversifying across different product lines in an attempt to reduce its exposure to fluctuations in foreign exchange. Conclusion Foreign exchange risks should be managed very efficiently by organizations operating in a global platform. The modern economy has become increasingly globalised because organizations are considered to be involved in numerous international activities such as cross border sourcing, exports, setting up of joint ventures with foreign partners, and establishment of overseas production and sales facilities. The organization VistaJet Holding SA can considerably reduce its exposure to fluctuations in foreign exchange by diversifying across different business lines. The main idea behind such an act is that each individual business of the organization may face to an extent exchange rate risks but the organization as a whole may not be exposed to significant risks with regard to fluctuations in foreign exchange. The organization VistaJet Holding SA should seek to manage its operating exposure in an efficient manner such that it could minimize its losses with regard to changes in exchange rates and could create a position for growth for the organization in the future. References Goldstein, M., 1986. The Global Effects of Fund-Supported Adjustment Programs. Washington: International Monetary Fund. Jain, N., 2007. Foreign Exchange Risk Management. New Delhi: New Century Publications. Rajan, R., 2003. Sustaining Competitiveness in the New Global Economy: The Experience of Singapore. Massachusetts: Edward Elgar Publishing. Rush, J., 2013. Foreign Exchange Risk Management. New Jersey: Wiley. Taillard, M., 2012. 101 Things Everyone Needs to Know about the Global Economy: The Guide to Understanding International Finance, World Markets, and How They Can Affect Your Financial Future. New York: Adams Media. Read More