Case study

Farmco

by Professor Ian H. Giddy
New York University

Farmco is one of the world's largest agricultural equipment manufacturers, with $6 billion in sales in 1994. In December 1994 the Treasury department at Farmco's Atlanta headquarters was concerned about a report from the audit department that showed an exposure to potential foreign exchange losses. The positions were reported to be as follows (in local currencies)

*CURRENCY*	Exposures, in local currency
AUD	15,829,000
BEF	464,168,000
CAD	(191,692,000)
DKK	119,902,000
FRF	(216,646,000)
DEM	175,614,000
ITL	145,383,718,000
JPY	1,518,001,000
NLG	102,247,000
ESP	6,389,009,000
SEK	(16,363,000)
CHF	(194,108,000)
GBP	(11,523,000)

Treasury argued that the net exposure was trivial and that it would be too costly to hedge everything. Although the net amount as reported looked small, management was concerned with knowing how much could be lost on these positions before the end-of-December reporting date, and what could be done to reduce potential losses to a level that would be considered "not material" by the company's external auditors (about $5 million). As a start, they wanted to consider a 50%-hedging strategy.

Use the Value at Risk demo software to provide Farmco with a report on their exposure to the risk of market rate and price movements, and a proposed hedging strategy. (No “overhedging,” and no forward contracts in krone or pesetas.)