HANOI UNIVERSITY
FACULTY OF MANAGEMENT AND TOURISM
--------oOo-------

INTERNATIONAL FINANCE ASSIGNMENT
Spring 2022

Lecturer:
Tutor:
Group members:

Tutorial class:
Due date:

Ha Noi, May 9th 2022

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Table of Contents
PART 1.............................................................................................................................................................................. 2
1.1. Introduction...................................................................................................................................................... 2
1.2. Comparison...................................................................................................................................................... 2
i. Summary of the comparison......................................................................................................................... 2
ii. Reason for using.............................................................................................................................................. 3
iii. Similarities and dissimilarities..................................................................................................................... 4
PART 2.............................................................................................................................................................................. 6
2.1. Question (a)...................................................................................................................................................... 6
i. Reason for the maintenance of unmatched cash flow.............................................................................. 6
ii. Reason for the maintenance of manufacture.............................................................................................. 6
2.2. Question (b)..................................................................................................................................................... 8

i. Reason for Poor performance of Forward contract ................................................................................... 8
ii. Reason for hedging or not hedging............................................................................................................... 9
2.3. Question (c):.................................................................................................................................................... 9
i. Matching cash flow...................................................................................................................................... 10
ii. Back-to-back loan......................................................................................................................................... 10
iii. Risk sharing................................................................................................................................................... 10
iv. Cross currency swap..................................................................................................................................... 10

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PART 1
1.1.
Introduction
The sample of 6 MNEs are chosen randomly, including Fraser & Neave, Ltd (F&N), 3M
conglomerate corporation (3M), Samsung Electronics Co., Ltd (Samsung), PepsiCo, Inc.
(PepsiCo), Honda Motor Co., Ltd (Honda) and Johnson & Johnson corporation (J&J).
After examining annual reports in 2020, we can classify all the hedging techniques into 2 main
types that we have learned: proactive and strategic management and other techniques that we
have not learned. The reason is in practice some techniques are customized as a specific need
of the firm. Each firm is distinguished from others in operation beside sharing the common
similarities.
In proactive management, the first and the most popular type is contractual technique. The
financial instruments used are foreign currency forwards, options and foreign exchange swaps.
Second, beside the instruments introduced in the course, currency swap, J&J uses cross
currency interest rate swaps. This is the combination of cross currency and interest rate swaps.
The third one is matching cash flow. Due to cost-saving and easily-applying, some firms prefer
nature hedging beside currency switching and foreign denominated debt. In strategic
management, MNEs attempt to manage the cash flows in normal operating, financing and
investing activities by its own policies and regulations in business transactions and asset and

debt management.
We also find that net investment hedge, a novel kind of currency risk reduction, is applied by
MNEs.
To be noted that, none of six firms remain unhedged 100%. Since their cash in and out are
mainly not made up of its home currency. However, they do not hedge on all kinds of non-home
currency. The policy will depend on the liquidity and contribution of that currency in their cash
flow. Simply put, MNEs hedge selectively.
1.2.

Comparison
i.
Summary of the comparison

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Figure 1. Summary of common hedging technique

Figure 2. Comparison of hedging technique following four criteria

0

1

2

3

4


5

6

7

Figure 3. Summary the number of MNE based on three aspects
ii.
Reason for using
As a result of the economic globalization trend, there is an increasing number of multinational
corporations. For successful financial performance, financial managers must have great
management ability to identify foreign exchange rate risks and have appropriate strategies to
reduce the negative impact of exchange rate risk. Exchange

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rate exposure can affect businesses in three main ways: operating, financing, and investing.
Based on the annual reports, the operating activities of the companies are all affected. For
example, F&N, a Singapore food and beverage group, denominated transactions in foreign
currencies had an impact on the company's purchase of raw materials, equipment, and sale of
products activities. Besides F&N, Honda is affected as they regularly need to import materials
from abroad to manufacture products.
Regarding financing performance, foreign exchange rate risks have influenced the company's
capital raising activities. An example is both Pepsi and J&J have foreign currency liabilities in
their balance sheet.
In addition, some companies are also affected by investing activities, such as F&N, 3M,
Samsung and PepsiCo. It would be a challenge to control such long in tenor and huge in value
investments in overseas subsidiaries, joint ventures and associated companies.
iii.

Similarities and dissimilarities a.
Purpose:
All companies use financial instruments to hedge foreign exchange risk.
Beside that is for trading and speculating. Namely, 3M speculates derivatives to generate profit.
With Samsung, using financial instruments is not only for hedging but also trading on nonKorean currency. The leftovers do not want to trade or speculate on these derivatives.
b.
Term
All the MNEs prefer the instrument due in a short period for transaction exposure. The longest for
maximum maturity is 3 years and the shortest one is 1 year.
Maximum
maturity
1 12 months
2 12 months
3 18 months
4 24 months
5 36 months
6 36 months
Figure 4. Summary of maximum maturity for short-term hedging
For them, any cash flow that is in longer term is disabled and uneconomical to control.
However, 3M, Pepsi and J&J still have their approaches listed in the next part.


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c.
Tool
c.1 Proactive management
Forward
In general, six companies participating in short-term maturity contracts use the forward contract

tool as a principal method.
Matching cash flow
It is the next-popular approach. Samsung, 3M and Pepsi prefer natural hedging and currency
switching. For example, Pepsi keeps its account payable mainly in local currency by buying in
from domestic suppliers and negotiated foreign suppliers.
Another one that is applied in many firms is foreign denominated debt. Some of them are 3M,
J&J. This is in net investment hedge of the firm in the long run. To take an example, J&J issues
euro denominated notes in May 2016 having due dates during 2022 - 2035
Option and cross currency swap
The least popular one in six companies are cross currency swap and option. For companies that
engage in long-term contracts such as J&J and PepsiCo, using a cross currency swap is an
effective method of hedging. Cross currency swaps allow companies to manage market volatility
by fixing currency exchange rates and interest rates. Business decisions can then be made with
certainty.
Others
Cross currency interest rate swap (J&J, PepsiCo) and foreign exchange swap contract (3M) are
the remain instruments.
c.2 Strategic management
Although the policies implemented in strategic management is distinct in particular, we still
identify the similarity that they attempt to equalized the assets and liabilities in each currency.
Not only that, they keep watching the fluctuation to have more effective strategies matching with
currency demand. For instance, though local finance centers, Samsung oversees foreign
exchange rate fluctuation in major regions (United States, United Kingdom, Singapore, China,
Brazil, and Russia) and becomes an agent of foreign exchange transactions acting as an agent
of foreign exchange transactions. In addition, there is no such permission for speculating foreign
exchange transactions.
d.
Currency
We can see from the above table, most companies hedge on the US dollar, followed by Euro,
Japanese yen, Thai baht, Indian rupee, etc. The decision depends on the individual firm.

Samsung chose the major currencies exposed to foreign exchange risk like US dollar, Japanese
yen, Thai baht. 3M chooses the one at a high level of liquidity because the less liquid has
restricted alternatives for terms and costs more. Due to this, 3M uses natural hedging instead.
Other firms depend on what currency makes up

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the common proportion in their cash flow like Euro for Johnson (23% of sale), Malaysia ringgit
and Thai baht for F&N (they are two of dairies core markets).
e.
Result
In 2019, hedging did take effect, bringing additional gain for MNEs. In 2020, the pandemic
COVID-19 has distorted its positive effect., its abruption in occurrence and impact is out of the
control and anticipation. All the firms above suffer loss except F&N, J&J and PepsiCo.
Nevertheless, hedging is not always the cost for the firm.
PART 2
2.1.
Question (a)
i.
Reason for the maintenance of unmatched cash flow
The first explanation is the European euro sale (20%) has been nearly matched with European
euro cost (30%). Moreover, the position of UK in EU before benefits for Rolls-Royces (RR) .
According to Single European Act 1986, “Single market” creates the unrestricted movement of
goods, services, people and money Since that the mismatch between European euro and British
pound is not significant.
RR operates in Aerospace, Defense, Energy, Marine industry. In which, the story of market
switching is not easy for RR when US is RR’s largest consumer, notably aerospace until now
(RR, 2022). Its revenue from non-US markets where do not have the most highly-developing
aerospace industry like US would definitely drop. This is the second reason why it is unavoidable

to be unmatched cash inflow with outflow. Additionally, the reserve of major foreign currency
sources from its revenues. A large reserve contributes to the stability of foreign exchange rate
and the inflation. Therefore, RR is encouraged to export to US in US dollar.
The last reason, regarding to its 3-year and 6-year business cycle, RR understands that it will
incur fluctuation in cash flow. Hence, RR has its own long-term program in 2012 to minimize the
impact by using derivative such as currency forward contract. It has certainty of its future position
when locking at $1.600/pound.
ii.
Reason for the maintenance of manufacture
Actually, the operation of RR outside UK is restricted for these reasons:
Firstly, due to cybersecurity and national security issue, aerospace and defense companies like
RR are subject to the regulations in operating and exporting by the government and authorities.
To be precise, National Institute of Standards and Technology provides cybersecurity standard
focusing on aerospace and defense companies and International Traffic in Arms Regulations
prohibits the unauthorized access to “defense-related items” (Arvind, 2022). Besides that, many
RR’s products are in the controlled items list in Export Control Order 2008 of UK, counting
vehicles and their components for military (Tay 611-8 aircraft) and dual-use purpose (T56 engine)
(UK Department for International Trade, 2019).

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Secondly, Aerospace is “a world-leading industry, driving growth and prosperity across the UK”,
having “an annual turnover of £35 billion” and 2% of total UK goods exports was from RR
(GOV.UK, 2020; Philip, 2017). With the great contribution of this sector to the UK economy.
There is an enduring partnership established between UK government and this sector such as
The Aerospace Growth Partnership which “has published several strategy papers”. Means of
ascent: The Aerospace Growth Partnership's industrial strategy for UK aerospace 2016 is the
latest one. (Philip, 2017).
RR also supports its industries trade association such as Aerospace, Defense and Security

Group in form of member fee (RR, 2022).
Thirdly, recalling about RR’s industries, the consumption of the production line, especially civil
and military aircraft is strongly subsidized by the UK government. For Research and
Development (R&D), it usually requires large source of capital. The examples are a mutual
investment of £14 million between government, Rolls-Royce and Loughborough University to
cutting engine emissions project in 2017 and a total public investment up to 12.5 million pound to
R&D in Aerospace Sector deal launched in 2018. (Philip, 2017; GOV.UK, 2020). Therefore, the
location for its headquarter and R&D facilities must be in UK. Comparing to massive product,
Aerospace products contain extremely high level of intelligence and technicality content. R&D
are determinant for transiting the technologies to which. Serial trial being made needs equipment
and facilities storing oversized their assembly and supporting the launchers (Britannica, 2021).
This, obviously is under the control of human operators, RR’s proficient workers.

As discussed before, none of final process can be finished without them. RR cannot leave behind
over 23,000 workers working under the company to unemployment. After leaving, UK can no
more enjoy freedoms in moving people while UK and EU did not reach any agreements. On 29 th
March 2019, “Britain leaves the EU without a deal” (Chemical Watch, 2019). So if the movement
carries out before or after, it’s not a saying when moving that amount of worker outside UK to EU
or US.
Fourthly, RR operates in the industries where the production is not massive. The word “craft” in
aircraft and spacecraft has expressed that. Process for only aerospace final goods are complex
in nature. For example, there are approximately millions part to form a flight vehicle. When being
connected, transportation is complex for 1 product as the working and maintenance of vehicle
need the support system (Britannica, 2021) . In $224 million-defense service contract with US,
complete logistics assistance of US Marine Corps KC-130J aircraft made up $59.5 million.
Normally, RR contract consists not only 1 vehicle but also a fleet. Namely, Norway’s C-130J fleet
were agreed to deliver to US in the same contract (RR, 2015).
It becomes even more complex for its assembly. What will happen if one of them is postponed.
Storage would be built in case of unexpected lag in shipping. We do not need to image how
many facilities needed for that number of component as it is probably unacceptable.


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Lastly, assuming that these factor above are dismissed, the budgeted cost for this strategy still
increase. There is nothing to ensure that the cost will be lower than the loss from forward and
this will be more effective than using forward. While the loss has effect in short run, the change
has effect in long run. Therefore, this demands deeper analysis and approval at higher level.
First, assembling in customer country - US cannot be completed in a flash. It is to build
infrastructure, enter into contracts, work out the global logistic from zero. Another factor is
worker. Many US firms choose to move out US to China where supplies low-cost labor. Even
though in 2018 Trump tried to shift US firms from China to US, they shift their operation to Asian
country like Vietnam (VnExpress, 2020). Not only that, labor demand of RR is highly-skilled
worker who requires well-paid salary.
Second, component production does not stand alone and heavily link with the supplier network,
assembly suppliers located nearby, labor resources. Looking at the supplier network only, Mary
Creagn, the chair of UK Environmental Audit Select Committee, affirmatively stated that it is not
just switching easily from one supplier to others in a strictly modulated industry like aerospace.
(Chemical Watch, 2019) The ideal to bring all components to US to have the finished product is
not cost-effective, making RR less competitive than before. This adjustment has significant effect
on long-standing business ecosystem.
To sum up, due the unique characters of the industry that RR is operating: the customer base,
the supply chains, the business ecosystem the suggestion of completing the final good in
customer country is theoretically possible rather than practically.
2.2.

Question (b)
i. Reason for Poor performance of Forward contract a. From
inside


The failure caused by the nature of RR’S operation. Normally, RR’s business cycles last 3 to 6
years so it hedging program by forward cannot have a shorter tenor. Any contract expired earlier
6 years is unable to fulfilled when the payment to RR have not been made. The hedging
program must be long-term.
While contractual instrument seems useless since it hedges for the something that is
uncontrollable The increasing uncertainty and risks are accumulated and go along with the
length of the time. Further, it is feasible to predict the future. It reflects in the forward rate: the
longer the time, the higher forward premium. Forward contract is not suitable for the case of RR.
RR would better to choose policies recommend in the last part.

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Looking at the part 1, in reality, MNEs see that it is unreasonable and uneconomical to care
about the foreign exchange risk for such a long term and to use the contractual agreement. The
term of contracts is limited up to 36 months (3 years). This equals only a half of the RR’s
contract.
Part b will be externally causal factors. Nevertheless, RR is over-confident and let it pass or not
consider it cautiously.
b.

From outside

Forward contact now is called forward in short. Comparing to pure hedging, forward is
characterized to be certain in delivery date and rate. Forward rate is predetermined at present.
This also means whatever the ending spot rate is RR has to use the forward rate. The beauty of
the forward contract that you do not really pay out the money until the maturity now becomes the
disadvantage for RR. It cannot end the contract at earlier time when the rate has not reach the
bottom. If RR had hedged purely, when pound started its historical-dropping period it would have
sold the US dollar without delay.

The currency hedge is performing poorly during the six-year period, the value of the British
pound was extremely low, the main reason being caused by the abruptness of referendum. RR
brought a long position hoping that the British pound would appreciate against the US dollars.
Since the pound was depreciated, the hedging program did not occur in favor of RR. Until May
2016, it expected, at least pound is at the average of $1.4400/₤. This loss would be covered. The
pound has enjoyed a long period of relative weakness against the US dollar and Euro. But the
recent referendum seems to have pushed it down to a level not seen in the past quarter-century
against the US dollar, as well as approaching the historical lows versus the Euro. Now this loss is
out of coverable capacity, equaling ₤4.4 million.
The $/₤ rate had been relatively stable in 2016. Technical analysis of in 5-first month shows that
RR has the chance of improving the profit before tax by ₤40 million pound (Telegraph, 2016).
However technical analysis did not work for the case of RR since 6/2016 marked the historical
down trend of the pound. By August, the pound had fallen by more than 12% against the dollar.
Since a weakening home currency against the dollar in late June is an advantage for exporter
RR evidenced by the increase in RR share price following the referendum and its first-half year
results, regardless its long position at high purchasing price. And that had led to a loss on its
currency hedging program.
Companies often plan for a long run. Aston Martin is a car manufacturer who is not in the same
industry but like RR it had announced “a multi-year strategy”, “to go from

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making about 3,500 sports cars a year to building up to 14,000 sports cars and SUVs annually”
in 2015 while the voting was announced in the middle of 2016. All carmakers were in the
consideration of whether continue or stop their plan (Reuter, 2019). Even in short-term, planning
now is a nightmare. (CEO of Aston Martin, as cited in Reuter, 2019).
RR did not take into account this turning event in revising the decision. RR believed that Brexit
has long-term rather than short-term impact on daily business activities. With listed positive
signal above, RR did not have to concern about its production until the nightmare happens. If it

had considered the event less brightly than it did, there would have been some immediate
solutions to offset the loss. One of them is setting up an opposite position. Existing position is to
sell US dollar and buy pound at $1.600/₤. The opposite one is a short forward where RR sells
pound at the forward rate which might be somewhere lower than $1.600/₤ but still higher than
the ending spot rate. The gain from which would partially compensate for the loss.
One year after that, in 2017, RR had to admit to Reuter that Brexit did threat it supply chain with
bound check, leading to lag in shipping and hard to approach with human resources from EU.
ii.
Reason for hedging or not hedging
The hedge should protect the company's sales and earnings against exchange rate movements
which were successfully completed. However, the influence of Brexit which caused the pound to
lose a fifth of its value against the dollar. Before making decision, first we would analyze the
possible outcome for two alternatives:
(1) If RR does not hedge, they can confidently increase or decrease the value of the
company. In this situation, remaining unhedged still a good alternative, adding the value
for the firm. However, RR cannot see the future of 2016 when it built the program since
2012. A potential gain or huge loss the outcome is not known until 2016. The gain of this
case is not the consistent outcome.
(2) If the company hedges, there are two alternatives.
If we still use contractual we can choose option in which we can exercise at strike price or ending
spot whichever that profit RR or money market hedge (MMH) in which we use the current spot
rate in 2012, being careless about whatever the ending spot rate is. However, they are available
for short-term, especially MMH. We would recommend
RR to use the approach that fit its business cycle and be mentioned in the next part. In contrast
to the first decision, there would be no added value no the firm.
The last technique is selective hedging. It means that the company can hedge a part of the cash
flow so that they would not loss all. The expected loss is lowered as well as the gain. Regarding
the unhedged part, RR would raise a part of firm value from which instead of leaving it
unchanged or hurt more than expectation. Because Brexit has broadened the variance of the
actual value around the expected value.


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2.3.
Question (c):
The below are durable alternatives we will consider before giving the suggestion:
i.
Matching cash flow
As discussed in 2.1, matching operating cash flow or natural hedging is hard for RR to do. The
same for currency switching, RR’s supply chain has been built and nearly impossible to adjust in
aerospace industry. The reason has been mentioned in part 2.1.i and 2.1.ii
Luckily, we can refer to net investment hedge where the debt is denominated in customer’s
currency, US dollar. The sale will automatically be the payment for the principle and interest at
the time of receiving. Hence, RR stays care-free to the depreciation of pound after matching the
financing cash-out with operating cash-in. This is close to the first alternative in part 12.4
Matching currency cash flow chapter 12 (Multinational Business Finance 15 th edition). A
drawback is RR may pay more for the interest comparing to cross currency swap.
ii.
Back-to-back loan
The first is back-to-back loan. Some drawbacks are RR now have to find a MNE based in US
has subsidies in UK. Additionally, their currency needs are same in amount and term. It is difficult
for two parties with 9500-kilometer distance to know clearly about each other. This asymmetric
information causes higher level of counterparty risk and credit risk wile partnership must be
enduring.
iii.
Risk sharing
Risk sharing agreement is ineffective when the pound value would be out of the risk-sharing
boundaries. Although it had been in the zone, the gap after sharing would be still too large in this
case.

iv.
Cross currency swap
RR can use the Cross currency swap method, which is a more prevalent option today. The
advantage is the mechanism by which this method works. RR is already a recognized firm so it
can make the loan at lower in UK. Then it finds the party having lower borrowing cost in US that
need pound with the help of swap dealer. Dealers are
major central banks in the world so this has acceptable level of counterparty risk Like foreign
denominated debt, foreign exchange rate exposure will disappear when converting process is at
the 2012 spot rate. Additionally, it makes sense to use this method because maturity is extended
for a long while, normally up to 30 years.
Many of firm in part 1 choose this instrument for its long-term cash flow. J&J even combines with
interest rate swap to enjoy the most favorable interest rate.
Overall, it can be realized that foreign denominated debt and cross currency swaps are the most
appropriate for RR.

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APPENDIXES
1. giới thiệu sơ qua 6 công ty như mẫu bên dưới ít nhất bao gồm: quốc gia, ngành nghề

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REFERENCE
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Rolls-Royce. (2015). Rolls-Royce receives US defence service contracts valued at up to

$224
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Everything You Need to Know About Aerospace
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Philip Brien Chris Rhodes. Retrieved from: www.parliament.uk

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Rolls-Royce. (2022). Home page. Retrieved from: Telegraph.
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/>
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