KilgoreCustom Milling is a manufacturing company of power assemblies for automobile plants that are located in Canada. Cathy and her team have been having issues dealing with managing financial risks arising from gaining new contracts. Cathy has been leading the company with Steve to ensure they have financial stability (Fraser, 2015). Steve brought Rory and Casey to share new ideas about the financial aspiration of the company, but they did not have the financial experience to turn the company around. Kilgore should have a financial risk management team that has an understanding of financial risk and currency hedging. When a company like Kilgore is doing business with foreign currencies, they need to surround themselves with an experienced team that knows what to do with currency hedging and how to prevent it from happening. (Fraser, 2015).
Initially, Kilgore did not have any concerns with currency hedging since all the sales and expenses with exclusively in the Canadian dollars (Fraser, 2015). Everything all changed in 2004 as Kilgore was experiencing low Canadian dollars. With the new contract, the company was going to take a fall with regards to the U.S dollar. All manufacturing companies in Canada will have an impact when the Canadian dollar fluctuates against foreign currencies like the U.S in which Kilgore was doing business. If the Canadian dollar goes higher relative to the U.S dollar, it will cost some fewer Canadian dollars to buy a product. If the Canadian dollar declines, it will cost more Canadian dollars to buy that same product (Asset, 2020).
The two options available to Kilgore custom milling is to stay unhedged and be currency hedged. The objective of currency hedging is to eliminate the effects of foreign exchange movements with other companies, such that Kilgore can receive a return based on the change in the value of the product without the impact of changes in currency values. Companies need to consider their desire for currency exposure before doing business with foreign investors (Asset, 2020). Kilgore can either choose to take on foreign currency risk or remain unhedged as the best course of action. Some manufacturing companies can benefit from currency unhedged than others depending on the business negotiations. Kilgore can renegotiate their contract as part of its financial risk management strategy. The concept of renegotiating contracts comes as a result of establishing an excellent business relationship with the supplier, which allows them to discuss ideas that will benefit both parties.
Cathy and her team have been discussing various strategies to solve their financial crisis, which did not seem to generate any positive results. Team members were providing different suggestions that will fix the Kilgore financial crisis. Rory, one of the team members, was proposing a currency swap to fix the exchange rate by exchanging U.S dollars for Canadian dollars throughout the cycle of the contract (Fraser, 2015). Cathy was concerned it would eliminate the opportunity for bigger profits. An alternative to a currency swap will be rolling into a short-term contract, which would benefit Kilgore if the Canadian dollar appreciates in the long-term (Fraser, 2015).
Kilgore needs to have the financial flexibility and borrowing capacity, and currency swapping will use up its borrowing capacity at the bank. They need to explore the use of future currency options, which provide the most flexibility and would allow Kilgore to benefit from the movement of the Canadian dollar (Fraser, 2015). As part of the financial risk management strategy to best handle the issues, Kilgore should hire the Financial Risk Managers (FRM), whose primary responsibilities will be to conduct financial risk management activities (Belyh, 2017). They are responsible for identifying the financial risk, determining the acceptable financial risk levels, evaluating the impacts of those risks, and formulating a plan to minimize them (Belyh, 2017).
Another financial risk management strategy to solve the problem at Kilgore will be the interest rate risk, which allows Kilgore to borrow money from the bank at a fixed interest rate to avoid fluctuations in interest expenses. The operational risk enables Kilgore to have close monitoring of budget execution to ensure the company is not overspending. The foreign exchange risk allows Kilgore to seek assistance from the bank or experts on how business can maintain its foreign currency exposure (Belyh, 2017).
1.Evaluate one pro and con above proposed description.
1. Be 2 paragraphs in length
2.Be supported by the required textbook and one additional reference
Points deducted if the submission:
Does not use the required textbook as one of the two reference sources
You CANNOT use Wikipedia, LinkedIn articles, blogs, paid vendors, certification websites, or similar sources in academic writing. You CAN use reputable industry articles from publications similar to ComputerWeekly, PCMag, Wall Street Journal, New York Times, or similar sources. Academic journals and popular industry articles are accessible in the university’s library databases and Google Scholar. All references should not have a publication date older than 2005.
Does not respond to the question(s) thoroughly meaning with more than 2 paragraphs
Primarily consists of bullet points
Uses statements such as “I have gone through your post,” “I have gone through your discussion,” “adding a few more points,” “based on my knowledge,” “according to me,” “as per my knowledge,” or similar
Contains contractual phrases, as an example “shouldn’t” “couldn’t” or “didn’t,” or similar
Uses vague words or phrases such as “proper,” “appropriate,” “adequate,” “it is obvious,” “it is clear,” “in fact,” or similar to describe a process, function, or procedure
As an example, “proper incident response plan,” “appropriate IT professional,” “adequate security,” or similar. These words are subjective because they have different meanings to different individuals.