Assessment for the Interim Assessment of International Financial Management
You are required to prepare a report of 2,500 words to the Finance Director (William Money) of QuickNourish plc supermarket chain (QN) for presentation to the Directors to address concerns raised at the recent Board Meeting.
Background
QN is a large supermarket based in the UK. The company operates mainly in Europe and the UK. About 60% of its purchases are paid for in dollars and sales are mainly in euros and pounds. Profit margins for QN are low at 3%, with an average shelf life or stock turnover of about 7 days for perishable foods and one month for longer life provisions.
The Marketing Director (Mr. Selby) commented that as matters stand QN is very exposed to changes in the value of the dollar. He noted that in May 2012 the dollar increased in value by over 5% against both the euro and the pound. He comments that: we sell something for £1 and it costs us 97 pence to buy paying in dollars. Then we find that the dollar costs more and we have to pay 97p x 1.05 = 101.85 pence or about 102 pence. So we sell for 100 pence and pay 102 pence. There then followed a discussion of the problem outlined by Mr. Selby.
At the end, William Money promised to circulate additional notes to the Directors in response to various concerns expressed at the meeting.
The concerns were as follows:
1) Mr. Brick, the Estates Director, remarked that he thought the IMF was supposed to ensure that the exchange rate did not move greatly. The purchasing Director Mr. Cheap thought that the IMF could not do this in the case of the dollar as its balance of payments on the current account was so poor. The legal secretary Mrs. Innocent thought that the other Directors were making too much of the problem observing that the price of the dollar did on occasion go up but that it also went down and that on balance there was no effect. The Finance Director promised some notes on the international management of the dollar exchange rate, the recent behaviour of the dollar and what it meant for QN.
2) Discussion turned to foreign supplies not paid for in dollars, but rather in the local currency. Mrs. Innocent, continuing her comments, observed that in cases where there was rampant inflation in the country the pricing problem observed by the Marketing Director was a real problem and we could not start increasing our prices of one product in a range merely because it was from a country with high inflation.
3) The Managing Director Mr. Bees turned to Mr. Money and suggested that QN should use "some clever finance" to solve the problems raised. Mr. Money asks you to prepare notes covering the following issues:
a. The value to QN of taking out short term derivatives
b. A comparison between futures and a forward rate
c. Whether options should be considered and a cost comparison with futures and forward strategies.