Foreign Exchange and Interest Rate Volatility Risks - Essay Example

А Foreign Exchange and Interest Rate Volatility Risks Executive Summary Due to recent global economic turmoil, all business entities encounter uncertainty and the main issue for management is to determine how much improbability to accept as it struggles to enhance investor value. It has become paramount significance for companies like Zapple Plc to properly manage their risk that may arise due to fluctuations in forex and interest rates which may even place the existence of such companies in question if it major part of revenues are from foreign transactions. This research essay deals with the significance of employing risk management techniques mainly to minimise risk arising out of volatility of foreign exchange rate and interest rate movements. Memorandum To: The Board of Directors, Zapple Plc CC: Chief-Executive Officer. Zapple Plc From: John McCain, Financial Consultant Date: 12/24/2018 Re: Regarding your query on risk mitigation Dear Sir, This has reference to the letter from Chairman of the Board of Directors of Zapple Plc about introduction of the Enterprise Wide Risk Management techniques in the company to minimise the risks that may arise due to fluctuations on foreign exchange and interest rate movement risks. I hereby submit my suggestions after careful study of the Zapple Plc financials and future growth commitments. Question 1: Outline and rank all the key foreign exchange and Interest rate exposures which the company faces making reference to the information above. You should then make clear justified recommendations of how your top 2 or 3 risks could be managed 1.1 Risk Due to Volatility of Foreign Exchange Rate Movements: Zapple Plc is facing risk from foreign exchange volatility .Since, its 52% of its outstanding is to be received in USD and 18% of its receivable are to be received in Euros. Zapple Plc has the foreign exchange rate fluctuation risk as it is realising its 52% of its sales in US $ and 18% of its sales realisation in Euros. The fluctuations in exchange rate will increase the peril of the realisable revenues and thus Zapple Plc may incur cash losses if US $ or Euro loses. CFO of Zapple Plc must not only seek the maximum realisation on company sales realisable in dollars and euros but must should also be anxious about transforming values of the currencies invested. For a company like Zapple Plc wherein about 70% of its sales comprises from export revenue, CFO cannot altogether eliminate the foreign exchange risk but only he can manage to contain it. Further, in the balance sheet, debtors balance is shown as £75 m. This means, about 52% of £75 m i.e. £39 m will be received in US$ and £ 13.5 m will be received in Euro. It is assumed that balance of sales proceeds might have been received in cash (£) already. Hence, Zapple Plc has to hedge only the outstanding debtors from US and Europe and such foreign debtors outstanding have to be hedged against any losses due to foreign exchange volatility. Table 1- GBP/USD conversion rates. Foreign exchange Table: Currency 19-3-09 18-03-09 12-03-09 17-02-09 19-03-08 GBP/USD 1.4468 1.4192 1.3933 1.4239 1.9794 Source www.tititudorancea.com For instance, out of its total debtors of £75 m, let us assume about 52% of £75 m i.e. £39 m Zapple Plc will be receiving in USD. If Zapple Plc has exported the same during 19 March 2008 and it would have reported a net sales pertaining to American exports as £52.5 m * 1.9794 = USD 103.92 million in its books. Hence, Zapple Plc might have booked sales as on 19 March 2008 in its books as USD 103.92 as sales revenue from American exports. Let us assume that Zapple Plc has extended liberal credit to American importers for one year period and if American importers settle the same on 19 March 2009, then they would have paid at the existing GPB/Dollar exchange rates as on 19 March 2009. That means, every 1 GBP, the equivalent American dollar rate will be 1.4468 as of 19 March 2009and not 1.9704 USD as existed during 19 March 2008. In other words, Zapple Plc would have received the following amount, if American importers settled their outstanding as follows: £52.5 m * 1.9794 = USD 103.92 million had the American importer settled their dues as of 19 March 2008. £52.5 m * 1.4468 = USD 75.97 million only .had the American importer settled their dues on 19 March 2009. There is a considerable revenue loss to Zapple Plc of USD 27.95 m mainly due to volatility in foreign exchange rates if it has received its sales revenue on 19th March, 2009. Foreign exchange Table 2: GBP / Euro Conversion. Currency 19-3-09 18-03-09 12-03-09 17-02-09 25-03-08 GBP/EURO 0.9405 0.9391 0.9308 0.8851 0.78105 Source www.tititudorancea.com As far GBP / Euro are concerned, GBP is favourable position as it has gained its position from its rate 25-3-2008 to the rate as on 19-3-2009. Since, there is appreciation; Zapple Plc would report gains due to fluctuation in foreign currency i.e. GBP / Euro. 1.2 Risks Due to Interest Rate Movements Interest rate risk can be explained as the risk to the value or profitability of a company due to changes in interest rates. Out of total borrowings, Zapple Plc short term borrowing amounts to £ 300 m and out of this, £ 225 m is having variable rate of interest rates. If interest rates rise sharply, Zapple Plc cost of staying in business may be in jeopardy overnight. Zapple Plc can restrict this risk by employing financial derivatives. One of the remedy available is to restrict the Zapple’s interest rates. i.e. to band an utmost rate that will reign, no matter how top the market rate against which it is nailed may increase. Zapple can change the floating-rate debt to fixed-rate debt by a derivative which is called as interest rate swaps. Let us assume that both overdrafts and bank loan of Zapple is due by 9 months from now, It is to be observed that in the case fixed rate loan like commercial paper and secured notes which Zapple owes, any increase in Libor rates will affect Zapple as the interest costs in these loans will be increasing. This minimises the liquidity of Zapple. Let us assume Zapple has tied these loans at an interest of 7% which is at libor + 300 bp over Libor. If the market interest rates increased to 9% in a 3 months period, then Zapple will incur additional interest expenses. = £225 * 7 * 1/400= £3.93 million as interest charges for a quarter. = £225*9*1/400 = £5.06 million as interest charges for a quarter. Hence, if the interest increases from 7 to 9% in a 9 month time, then Zapple has to pay an additional of £1.13 m which would definitely impact its profitability and liquidity. To mitigate the risk, if an option is bought by Zapple at strike price by paying £ 100,000, then at the loan repayment date, Zapple could repay the amount with interest of £5.06 m by exercising its option. Suppose, interest rates fall below 7% , then Zapple will repay with interest charges of £3.93 m with additional cost of £100,000 being the cost for option. Thus, with an option, Zapple can reap advantages of favourable interest-rate movements. (Collier et al, 2006.pp 391) 1.3 Loss Due To Valuation of Stock At U.S. Table 3: Foreign exchange Table: Currency 19-3-09 18-03-09 12-03-09 17-02-09 19-03-08 GBP/USD 1.4468 1.4192 1.3933 1.4239 1.9794 Source www.tititudorancea.com Zapple Plc is having US based stock of £ 125 m. Let us assume, for the year ending 31st March 2008, Zapple Plc might have valued its stock 125* 19794 = $ 247.25 m. Let us assume that Zapple Plc‘s balance sheet as on 19-3-2009. The same stock value will be accounted as 125 * 1.4468 = $ 180.85 m. Hence, there is loss of (247.25- 180.85) = $ 66.40 m between these two periods due to valuation of stock. Hence, profitability of Zapple Plc will be affected by $ 66.40 m if it closes its books of account as on 19-3-2009 mainly due to fluctuations in foreign exchange between GBP versus US dollars. Further, its current assets will be also reported less by $ 66.40 in the balance sheet as of 19-3-2009. These illustrates that Zapple Plc should have proper ERM (Enterprise Risk Management) techniques to mitigate these apparent losses. 1.4 Accounting Treatment of gain or loss due to forex operation Incomes or losses due to forex operation are normally reflected in the revenue statement for the phase in which there is a variation in the forex rates. Profits or losses on foreign currency transactions shall be construed to be hedges and long-term investment due to inter-company transactions where settlement is not expected in near future which are always not included in the gross revenue but will be reported as profit or loss on foreign exchange transaction which will be shown in the stock-holders equity section. For instance, Kraft Food Inc has reported about its foreign exchange gain or loss in its 10 K Report as under: 2007 $ (In million) Accumulated gain / (loss) at start of the year (4) Transfer of realized gains / losses in fair value earnings (10) Unrealised gain / (loss) in fair value in 41 Accumulated gain or (loss) at December 31 27 1.5 Value at Risk VAR (Value at Risk) is a mathematical calculation that establishes the uppermost limit of risk exposure that might be attained over a particular period of time within a specific level of confidence. For example, a VAR calculation might conclude that, with a 95% confidence level, the uppermost loss that might be incurred from Zapple interest rate exposure is £ 10 m. For instance, HSBC Holdings Plc employs VAR replica which are footed on a model that obtain probable future scenarios from past trends of registered market prices and rates by recognising their inter –association between various rates and markets like foreign exchange and interest rates. 1.6 Volatility Risk In forex swap, the pressure exerted by on the liquidity of U.S. dollar is analysed as many European banks with U.S. dollar assets have undergone stress in funding these positions during the high volatility period. Thus, U.S dollar liquidity pressures are substituted by forex swap spreads, or the spread between Euro or pound sterling during a three month period and U.S dollar forward rates and the U.S OIS rate for three months. Likewise , volatility on interest rates is the another appraisal of volatility risk which relates the uncertainty about the future path of interest rates ,substituted by the oblique volatility of swap points which are just an option to enter into an interest rate swap with maturities between 30 days and 280 days. (IMF, 2008, pp81). 1.7 Covering Risk for high value transactions (more than $ 10 m transactions). Zapple has to receive about £52.5 m as export receivables from U.S buyer. Zapple is well aware that currency options offer a flexible optional hedge against transaction exposure. If Zapple buys a put option on £52.5 m, this transaction offers Zapple with the right, but the not the obligation, to sell up to £52.5 m at a fixed exchange rate irrespective of the future spot rate. With its pound receivable, Zapple would safeguard itself by exercising its put options if the pound gets weakened by that time but would reap advantages by letting its put options conclude unexercised if the pound strengthened in the mean time. (Kim, 2006, pp1228). Thus, considering the global worst economic debacle during 2008, Zapple should realise that risk management is the basic pre requirement for mitigating any financial risk involved due to both foreign exchange and interest rate fluctuations. If proper EWRM is not in place, Zapple may face catastrophic incidents that lead to even the existence of Zapple will be at stake. It is essential that Zapple to integrate its business aims and preferred risk profile with advanced technology strategy. Thus, Zapple should ensure that it has real, well-defined EWRM (Enterprise Wide Risk Management) in place so that any financial eventualities due to volatility in interest rates and foreign exchange rates are mitigated. (Sapient, 2009). 2. Outline how your recommendations will be integrated as part of an enterprise wide risk management policy Due to recent global economic turmoil, all business entities encounter uncertainty and the main issue for management is to determine how much improbability to accept as it struggles to enhance investor value. Vagueness offers both opportunity and risk, with the probable to enhance or erode value. Enterprise risk management (ERM) facilitates management to efficiently deal with vagueness and integrate both opportunity and risk and incrementing the capacity to foster value. COSO’s (Committee on Sponsoring Organisations) ERM framework assists businesses to access their framework for internal control and to improve their internal control systems. These frameworks have been integrated into strategies, canons and regulations and are being used to enhance the control activities in shifting towards attainment of their defined goals. ERM framework is offering key codes and concepts, a general communication and a crystal clear track and direction and became more persuasive. Using derivatives have become common by business to manage risk. According to Bodnar, Hyat and Marstson (1998), about 84% of non-financial large US companies use derivatives to manage their risk. If the companies do not use derivatives, then they are simply speculating on prices and heading towards risk. Further, the usage of derivatives has exploded recently in corporate circle. It is estimated that derivatives market’s size is more than $ 88 trillion. It is to be noted that formulating EWRM and introducing a EWRM system is expensive but it offers many advantages for Zapple. A EWRM helps to mitigate the risk arising from foreign exchange rate and interest rate fluctuations as these two risks if uncontrolled can even place the Zapple out of business. Thus, survival of Zapple is ensured by introducing a EWRM. However, establishing centralised risk management controls may pose many difficulties to Zapple, as Zapple is organised into silos and division top executives may not like power usurped from them. However, the top management should see that EWRM is established in Zapple so that it could handle risk arising from foreign exchange rate and interest rate fluctuations which is mammoth in nature. However, derivatives should be more properly used to manage the risk. Inappropriate usage of derivatives may end in many well-publicised misfortunes in the 1990s. Thus, improper usages of derivatives have landed giant corporations like Procter& Gamble, Metalgesellschaft and Long-Term Capital Management in trouble. Further, due to lack of proper internal controls and due to inappropriate trading, some companies and even governments have lost billions of dollars in the past. Some of the famous companies that have lost considerable amount by improper derivative usage were Baring Bank, Orange County, Sumitomo Corp and Daiwa Bank. If proper EWRM is not in place, Zapple may face catastrophic incidents that lead to even the existence of Zapple will be at stake. It is essential that Zapple to integrate its business aims and preferred risk profile with advanced technology strategy. Thus, Zapple should ensure that it has real, well-defined EWRM (Enterprise Wide Risk Management) in place so that any financial eventualities due to volatility in interest rates and foreign exchange rates are mitigated. (Sapient, 2009). 3. Using a wide range of literature, discuss whether the company should actually manage the exposures which you have outlined. The director is particularly interested in any relevant academic theory and in state of the art practitioner articles in publications such as GT NEWS. As we have seen already that Zapple is prone to risk due to fluctuations both in foreign exchange and interest rate movements. Let us see, how it can manage such risks in this section. The risk that Zapple faces is mainly of translation exposure or it sometimes known as ‘accounting exposure.’ A translation exposure quantifies the impact of an exchange rate change or movement on published financial results of Zapple. Current exchange rates are used to translate the foreign –currency assets and liabilities of Zapple mainly to expose the risks involved. In accounting parlance, the variance between exposed assets and exposed liabilities are normally known as ‘net exposure.’ If exposed assets are bigger than exposed liabilities, then foreign-currency depreciation will end in exchange losses and any foreign –currency appreciation will end in exchange gains. Further, if exposed assets are lesser in value than the exposed liabilities, depreciation in foreign-currency will result in exchange gains and any foreign-currency appreciation will end in exchange losses. For companies operate in different countries (MNC’s) or having business transaction with different nations like Zapple, they used to consolidate their global operations into their home currency. Zapple has the following net exposure £m US Based Property 50 US Based Stock 125 US based Debtors 52.5 Total Exposed assets 227.5 Total exposed liabilities Nil Net Exposure 227.5 Currency 18-03-09 17-02-09 GBP/USD 1.4192 1.4239 Foreign exchange fluctuation between above two dates = 0.0047 Total loss due to forex fluctuation on 227.5 will be 1.06 £m. It is to be noted that this translation loss of 1.06 £m do not involve any real cash flows since they are only translated into £ and not converted into £. In simple parlance, these losses exist only on paper. Zapple do have to concern for this kind development as it may affect its ability to raise further capital , the cost of capital ,its stock price , its earnings per share and will have grater impact on its major financial ratios. Accounting for translations loss or gains due to foreign exchange translation is crucial to Zapple as it depend upon the movement of foreign-exchange rates which is seldom fixed and always varying in nature. Due to this volatility in foreign exchange rates, Zapple operating results may vary due to difference in the translation rates employed. When there is upvaluation or devaluation likely to happen, Zapple must ascertain whether it has any undesirable net exposure to exchange risk. Zapple’s main objective with such exposure is to reduce the quantum of expected loss due to exchange volatility and the cost of protection. Zapple may use hedge which is a method deployed to minimise or offset a possible loss. An arrangement that gets rid of translation risk is known as hedging that risk. A hedge may also be known as an alternative known cost of buying safeguard against foreign -exchange risk from unidentified translation loss. A balance –sheet hedge is one which involves the choice of currency in which exposed assets and liabilities are designated so that a change in the exchange rate would make the uncovered asset equal to uncovered liabilities. Zapple may use exposure netting process to minimise its risk due to exchange rate fluctuation loss. Zapple may net some exposures from US and Europe and hedge only their net exposure. If Zapple wants to use the net exposure method to mitigate its loss, it should centralise its exposure management function in one location say London through introducing EWRM. Zapple may use leading and lagging method also to minimise its risk. The process leading connotes to collect or pay early. The process lagging connotes to collect or to pay late. One another method used by the corporate to minimise the risk is the transfer pricing. This refers to the prices of goods and services sold between related parties like subsidiary and parent company. Foreign -exchange exposure loss is being avoided by adopting a pricing strategy which is different from fair market prices or arm’s length prices. Zapple can employ a variety of schemes to address with translation exposure. These devices contain of one key group of hedging devices namely balance-sheet hedging. A balance-sheet hedging typically contains the choice of currency in which uncovered assets and liabilities are designated so that exchange rate volatility would make uncovered assets equal to uncovered liabilities. Since, translation gains or losses are not incurred in reality and exist only in paper, most corporate do not use financial instruments like currency futures, forwards and options. (Kim, 2006, pp1253) 3.1 Case Study: Coca- Cola Coca Cola is a leading global manufacturer of beverages. It has operations around the globe and carries its business operations through its wholly-owned subsidiaries all over the world. Coco Cola is the best illustration of how multi national companies employ operational systems and financial instrument for management of their foreign –exchange exposures. Foreign currency changes or volatility will have a major effect on its earnings since about four-fifths of its revenues are from its foreign operations. Coca Cola controls and manages its currency exposures on a consolidation or net exposure basis. Under net exposure basis, Coca Cola’s earnings from different countries are accounted by taking full advantage of natural offsets. For instance, Coca Cola’s total British pounds receivables will offset the British pounds payable. Coca Cola also employs financial contracts to further minimise its net exposure to currency volatility. In many countries, Coca Cola purchases currency options and enters into currency forward contracts, most notably both in Japanese yen and in the euro, to hedge company’s commitment on sales. To hedge some expected future sales, Coca Cola also buys currency options. (Daniels et al, 2004, pp 620). 4. Within the last few days the credit rating of Zapple has been downgraded. Evaluate the possible reasons why this could occur. 4.1 What is credit rating? Credit rating is the assessment of company’s health carried over by independent appraising agencies. It throws light on capital structure and health of a company. Lower the rating, high will be the default chances. If the rating is B or lower, then it indicates that company is not conducive for investment or lending. A good rating by S& P and Moody’s will help Zapple to access to debt markets. Nowadays, ratings are treated as a significant tool in the communication to shareholders. 4.2 Reasons for Downgrading by a Credit Rating Agency While rating a company, credit rating companies will be usually giving much significance to the following financial indicators. Volumes of sales or market capitalisation Coverage in expression of EBITDA or EBITA divided by interest expenses. If there is a decline in the above, credit rating agency will down grade their ratings. (Koller,2005,pp486) To decide a company’s bond rating, a rating agency will normally look into the company’s competitive environment, examine the most recent financial ratios and will have interview with senior executives of the company and the top management. Of late, default by companies on their corporate debt obligation or bond is on the increase. For bond pricing, the probability of default is very critical and professional rating agencies like Standard & Poor’s (S&P) and Moody’s will rate a company’s debt. According to breithart.com “If company reports a sharp decline in their net profit due to cut throat competition, then credit rating agency may downgrade their ratings to the company .For instance, the New York Times Co reported about 52% down in their net profit in the third quarter of 2008 mainly due to intense online competition and declining revenues from print advertising. Immediately reacting to this, S&P downgraded the Times’s credit rate to junk status or “BB-“status. Moody’s said that it would also downgrade the Times’s rating soon.” (breithart.com, 2008, pp1) 4.3 Sector Prospects in Credit Rating Due to recent global financial crisis, both banking sector and automobile sector in USA are in turmoil. Credit rating agencies will be more cautious in grading in these sectors as these sectors have been under more vigilance mainly because of chaotic economic atmosphere. 4.4 Changes of bond documentation The issuer’s financial acumen determines the quality of any bond as it guarantees that issuer has financial capability to make interest payments and is capable of making repayment at the maturity. Some third parties may insure the municipal bonds and this indicates more reliability as the insurer guarantees the payment of both interest and principal on maturity. Depending upon the financial health of an issuer, rating may vary and credit rating agencies may downgrade or upgrade the bonds. 4.5 Rating Model Error Credit rating agencies in USA have been under heavy criticism for their part in the recent sub-prime mortgage disaster. There are some contentions that they tendered their ratings that were too top supported by poor worth mortgage. There are some reports in The Financial Times that Moody witnessed a coding error which assigned a rating which is four times more than what it is worth. S&P announced during June 2008 that it had found out an error in a rating model for debt products. To set right the loopholes, now rating agency are entitled to receive their fees for services even if a business deal is yet to be finished. (Harrison ,2008). 5. It is the group's policy not to seek hedge accounting treatment under FAS 133 for its derivative positions. You are asked to prepare a report on the possible benefits and drawbacks of seeking hedge accounting treatment for those derivative positions which are effectively hedges. Please support your arguments with appropriate literature citations. 750 5.1 Introduction FASB issued in June of 1998 a “Statement of Financial Accounting Standards No. 133”, namely “Accounting for Derivative Instruments and Hedging Activities (“FAS 133”).” This innovative standard redresses the miscellaneous and sometimes contradictory accounting practices that have been formulated over the decades in respect of hedging and derivative instruments activities 5.2 What is FAS 133? FAS 133 have introduced several novel requirements for the accounting of foreign currency hedges. In the province of foreign exchange risk management, some of the chief significances of FAS 133 pertain too its accounting procedure of foreign-currency-designated firm obligations, and anticipated foreign-currency-designated transactions which includes forecasted inter-company transactions. Thus, FAS 133 amplifies the range of exposures and instruments for which hedge accounting is permitted and however with the compromise of broader and enhanced translucent revelation of these hedging activities. Under FAS 133, one of the chief prerequisites of which symbolises a noteworthy departure from present custom is that all derivative instruments must be accounted or translated at their fair market value onto their balance sheet. Any in the just rate of a derivative induced by volatility in exchange rates shall be accounted in current financial year revenue unless the derivative is denominated as and will be characterised for an acceptable hedge accounting association – net investment, cash flow fair value or in a foreign business transaction. 5.3 Foreign Currency Fair Value Hedges The general definition under FAS 133’s of a just value hedge is applicable to the accounting of a derivative instrument that is aspired to hedge market exposure developing from an existing liability, asset or unrecognised company obligation. However, as regards to foreign currency hedges, fair value hedge accounting treatment is restricted to unrecognised company obligations and available-for-sale securities. Further, present foreign-currency-denominated financial liabilities and assets are exclusively excluded from this kind of hedge accounting treatment. 5.4 Foreign Currency Cash Flow Hedges For foreign currency risk managers, one of the chief significances is that FAS 133 facilitates hedge accounting treatment to all stipulating hedges of estimated foreign currency transactions. Further, FAS 133 extinguishes the incompatibilities in hedge accounting treatment for anticipated transactions that have formulated for diverse instruments and in special markets. Thus, a derivative instrument, under the new approach, can be employed to hedge the exposure of foreign currency to unpredictability in the operational-currency-combining weight cash streams linked with foreign-currency-denominated anticipated transactions, together with anticipated inter-company transactions. To be eligible for the unique hedge accounting treatment permitted by the new rules, foreign currency cash flow hedges should not only cater the general cash flow hedging criterion illustrated in the statement, they must also cater the some precise needs. One of the disadvantages of FAS 133 is that difference between hedge volumes and actual projections may foster price risk and can show the way to inefficient hedges under this guideline thereby ending in market to market behaviour. Further, FAS 133 does not identify how a company should assess its effectiveness. According to FAS 133 that in order to be eligible for special hedge accounting treatment, both at beginning of the hedge and on a continuing basis, the hedging association must be extremely successful in accomplishing anticipated offsets. Thus, FAS 133 provides many positive developments for foreign currency risk managers 6. Conclusion: Giving weigh to the recent global economic recession, it is essential that Zapple to integrate its business aims and preferred risk profile with advanced technology strategy. Thus, Zapple should ensure that it has real, well-defined EWRM (Enterprise Wide Risk Management) in place so that any financial eventualities due to volatility in interest rates and foreign exchange rates are mitigated. (Sapient , 2009). I hope that I have clarified all the points referred by you and in case , if you want further information on the subject ,please feel free to revert to me. Yours Faithfully, John McCain. Financial Consultant References Collier, Paul M & Agyei-Ampomah, Sam, 2006, Risk and Control Strategy, Elsevier, pp 391 Culp, Christopher, .2002, The Risk Management Process, Business Strategy and Tactics, John Wiley and Sons, pp228 Daniels, J.D, Radebaugh L.H & Sullivan D.P,2004, International Business Environments and Operations., New Jersey, Prentice Hall,pp620 Harrison, Natalie m2008, S& P reveals error made in CPDO rating model. Retrieved on March 24, 2009 from http://www.reuters.com/article/mediaNews/idUSL1363473320080613 pp1 IMF, 2008, Global Financial Stability Report, October 2008, International Monetary Fund, pp81 Kim, Seung Hee,.2006,Global Corporate Finance: text and cases,Wiley-Blackwell,1228. Koller Tim, Goedhart Marc et al , 2005, Valuation., ohn Wiley and Sons, pp 486. Sapient, Chip Register, 2009, The Case for implementing an Enterprise-wide Risk Management Strategy, Available at www.gtnews.com , pp1 www.breitbart.com.,2008,NY Times Profits Slide : S& P Downgrade Rating, Retrieved on March 24, 2009 from http://www.breitbart.com/article.php?id=081023232610.187uwdxs&show_article=1 pp1. APPENDIX ONE SENSITIVE ANALYSIS OF RISK OF ZAPPLE PLC Risk due to foreign exchange fluctuation exposures: 1. Zapple Plc is facing risk from foreign exchange volatility .Since, its 52% of its outstanding is to be received in USD and 18% of its receivable are to be received in Euros. 2. Zapple Plc is witnessing risk from fluctuation in interest rates as it is having £ 350 m both long term and short term borrowings. 3. Non-standard pricing for the inventories stocked in US may lead to cash losses and finally losses to the company. If prices were fixed too low which even do not covers its direct and variable costs, profitability of the company may be affected. 4. Risk of decrease in profitability due to inventory valuation stocked in US mainly arising out of foreign exchange fluctuations. 5. Risk of decrease in cost of assets that is being owned in US by Zapple Plc due to foreign exchange fluctuations. Appendix Two Risk Map Likelihood of Frequency Remote Low Medium High Probable Severity of Consequence Extreme 1 High Medium 4 2 Low Negligible 3,5 Appendix Three for the Question No 2 EWRM tries to combine types of exposures and not concentrating on event-forced risk models but also across the Knightian limit since uncertainty and risk –between business risk and financial. EWRM tries to distinguish those risks in which company has been comprehended relative informative benefits from those in which the corporate senses itself as no better informed than other market participants. EWRM attempts to look the risks facing a company through some structure of common lens. EWRM also connotes the capacity for a company to dump the expressions of financial instruments.EWRM focuses on enterprise-wide risk exposure which adhere to the risk tolerance of the company’s security holders. Further, EWRM attempt to integrate the risk management process on the whole of the enterprise across internal systems, people and process. Thus, Enterprise Wide Risk Management means the quantum of integration and consolidation with which the company manages those risks. (Culp, 2002, pp228) Read More