1. Nike is an is an American multinational corporation that is engaged in the design, development, manufacturing, and worldwide marketing and sales of footwear, apparel, equipment, accessories, and services. 26% percentage of Nike's operating income are generated in Europe and only 4% of its raw materials are sourced in Europe. Being an American company, the domestic currency used for valuation is the U.S. dollar. The company wants to assess its economic exposure to changes in the EURUSD exchange rate and has forecasted the possible operating income and costs in three economic states as follows: Table 1: Economic States - Exchange rates and European operations (in millions) Scenario Bust Average Boom Probability 25% 50% 25% EURUSD 1.3581 1.1264 1.0034 Operating Income in EUR 32,781.12 38,197.41 42,558.85 Operating costs in EUR 1,113.46 2,836.41 4,725.59 3 1.1. Estimate the sensitivity of Nike's net dollar cash flows to changes in the EURUSD. (9 marks) 1.2. Discuss the different operating hedging strategies that Nike could use to reduce its economic exposure to the euro. (9 marks) The company wants to diversify its currency exposure by expanding to other non-EU countries. It is considering Russia and initial analysis of Russia, Nike has identified the following key political and financial risk factors that may influence its expansion decision. Table 2: Country Risk - Political, financial and economic risks ratings and weights Risk Factors Assigned Rating Assigned Weight Political Risk Corruption 30% Bureaucracy 2 70% Financial Risk Interest Rate 3 30% Credit Risk 5 Exchange rate 40% Economic Risk Inflation 40% Growth 3 60% Nike has assigned an overall rating of 50% to political risk, 25% to financial risk, and 25% to economic risk. It is not willing to consider Russia for investment if the country risk rating is below 3.5. 1.3. Based on the country risk analysis, assess whether Nike would consider expanding to Russia. (7 marks) 30% 2 3 (Total 25 marks)