Foreign Exchange Risk Case Study

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BFF week 4
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Foreign-exchange risk is the risk of an investment's value changing due to changes in currency exchange rates. And investors will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates.

In this case, the decline in the value of the U.S. dollar had reduced 2005 sales in Canadian dollar terms, post-hedging, by 7.5 cents for each U.S. dollar of sales, amounting to Cdn$8.4 million during the year. The decline in the value of pound sterling, euro and yen had a negative impact on the sales to the tune of Cdn$9.2 million. The company had thus received, on conversion of export sales into Canadian dollars, cdn$ 17.6$ million less than what would have accrued for the year 2005 had there been no appreciation in the Canadian dollar. This decrease would have been more if Clearwater did not have an active foreign exchange risk management program.

Therefore, innovation, vertical integration and diversity of species and markets were applied as the strategy for meeting the foreign exchange risk. In terms of innovation, this is obvious to develop and adopt technologies and practices enhance growth and ensure sustainability of the resource base. Integration was aimed at controlling the value chain to generate downturns in the availability and thus the quota of any one species, changes in customer markets to hedge against the value of a specific currency or changes in the demand for Clearwater’s product from a specific region.

Investment in modernized vessels and shore-based processing plants were aimed at securing a strong stewardship of aquatic resources through increased yields, enhanced product quality, reduced costs and improved environmental responsiveness.

The business risk is the potential variation in returns due to company strategy & how it places in relation to competitors, reputation.

Customers the top 10 customers contributed about 25 per cent of sales in 2005. No individual customer accounted for more than five per cent of sales. About 80 per cent of customers were doing business with Clearwater for over 10 years.

And some of leading competitors for the company exist such as American seafood’s group and eastern fisheries. The strategies were common across firms. Leveraging marketing networks, spreading the risks in terms of products and geographies and cultivating strategic relationships were some examples of common element of strategy.

The seafood business was seasonal in nature. And sales
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