Case study


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.) | | | | contact
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