Alliance Design Concepts Foreign Exchange Risk

Alliance design concepts: Foreign exchange risk

Case facts 

Alliance Design Concepts, Inc. (Alliance) offered two types of services: 

Design and installation of AV systems



Live production services



Alliance operated in Canadian market

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Equipment were sourced from US suppliers, to be paid in USD

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Problem statement

To identify a strategy for mitigating exchange rate risk in equipment procurement process

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Alternatives Available 

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Involve the customers 

Charge customers as per exchange rate on completion date



Pad the margin



Shorten the acceptance period



Internal process changes

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Foreign exchange services

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Purchase forward foreign currency exchange contracts

Decision analysis Involve the customers 



PROS: 

Fluctuation in exchange rates are passed on to the customers



Shortening the acceptance period would reduce the risk of fluctuation in exchange rate

CONS: 

This strategy might reduce sales because of following reasons: 

Price might rise as a result of padding of margins



Reduced acceptance period might be too short for the customers to make a decision



Uncertainty about final cost in the minds of customers

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Decision analysis Internal process changes 

PROS: 



This would help not only in risk management, but also improve internal processes and operations reducing the existing inefficiencies

CONS: 

Limited scope for improvement

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Decision analysis Foreign exchange services 

PROS: Risk management, plus reduction of service charges on frequent currency conversions



CONS: 

Alliance won’t be able to take the benefits of high account payables

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Decision analysis Purchase forward foreign currency exchange contracts 

PROS: 



This would allow Alliance at the at the time of proposal acceptance to lock in a known exchange rate for a future date

CONS: 

Foreign exchange contract would involve purchasing cost



Forward contracts are not standardized and are subject to counter party risks

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Alliance would not be able to reap the benefits of an appreciation in the Canadian Dollars due to fixed forward currency exchange rates

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conclusion 

The first three alternatives may impact the operations of the businesses that Alliance is involved in

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Purchasing forward currency exchange contract would provide sufficient hedging against currency risks, and at the same time it won’t impact the operations of the business

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However a futures contract is free from counter party risk and is standardized

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Hence, the best alternative for Alliance Design Concepts, Inc. for mitigating currency risk would be to purchase futures currency exchange contract

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Thank You…