BrusivaExport company has been founded in year 2015. It is a Czech company which specializes in producing abrasive materials and is owned by 3 persons who are simultaneously employed by the company in different working positions. In the first years of its existence the company was selling its product to one relatively big customer in Poland only. These sales have always been placed in PLN. Costs used to be denominated in CZK only at the very beginning. Later on, the activities of company have been significantly widened both in terms of customers and suppliers. Amount of transaction has increased as well and company had to extend its production capacities and buy a new transport equipment. Furthermore, 20 new employees have been hired.

Nowadays, company is selling abrasive materials to Poland (30%), to Germany (50%) and on domestic market (20%). The company is paid in USD for the abrasive materials sold in Poland, in EUR for the sales in Germany and in CZK for the domestic sales. Main part of the production inputs is then imported from China and paid in USD. The ratio of inputs imported from China on total sales accounts for 40%. These costs are incurred uniformly throughout the year with the exception of July and August. In each of these two moths they equal to 5% of total input costs only.

Some of the materials (rolls) have to be specifically worked out in Germany before they can be sold to the final customer. These services are paid in EUR and their ratio on total sales amounts to 15%. Wages, depreciation, energy and transport costs are paid in CZK and amount to 30% of total sales, whereas depreciation equals 10% of these costs. Wages, energy and transport costs are paid uniformly throughout the year with the exception of July and August. In each of these two moths they equal to 5% of these costs.

Companys activities are financed by a 5-year operating loan in CZK and 3-year operating loan in EUR. Monthly interest payments equal CZK 50,000 and EUR 2,000 respectively. Financial manager of the company assumes to take similar loans at the same conditions in future when current loans would have to be paid off. The company has current accounts in CZK and USD with account balances of CZK 1,500,000 and USD 100,000.

Average maturity of invoices sent equals 60 days. Invoices received are paid in 30 days on average. Total sales measured in CZK amounted to CZK 50,000,000 in the last year whereas average exchange rates for relevant currencies were EUR/CZK 24.500 and USD/CZK 23.000.

Net earnings before taxes equal CZK 6,252,000. The company assumes to be able to keep all the sales and costs in the same amount and time structure also for the next year since the orders are made on the basis of long-term contracts.

The sales on domestic market and in Germany are spread uniformly throughout the year with the exception of July and August. In each of these two moths they equal to 5% of these sales only. Sales in Poland are realized in 4 big supplies - at the beginning of January (40%), in March (20%), June (30%) and September (10%). Special adjustments of the materials in Germany are conducted at the beginning of August when a German company provides significant discounts.

Transaction Risk Management

At the beginning of the companys existence the transaction exposure war relatively simple. Company was just selling abrasive materials in Poland for USD whereas all the costs were placed in CZK. Thus, company was long in USD. In next years, companys transactions have become much more complex. The company has found new customers and also one big supplier of key production inputs in China. Consequently, company has been exposed to new positons in EUR (long) and USD (short). The FX exposure was managed in a relatively simple way. Company was just keeping all the USD and converting all the EUR received to USD according to expected out-flows in USD in next months. As soon as cash balances on USD accounts were high enough to cover all expected future out-flows, EUR and USD received were converted directly to CZK.

High exchange rates volatility during the recent crises has significantly increased the volatility of companys cash-flows placed in a home currency. Furthermore, sometimes the companys expectations about future outflows were incorrect which resulted in additional currency conversions and additional costs. Owners of the company have, therefore, decided to hire a new financial manager with the goal to optimize companys cash-flows and to manage its transaction exposures in a way which would decrease the cash-flow volatility and overall cost.

Questions:

2. Analyze and measure (using Value at Risk methodology) companys transaction exposures for each month of next year (including cash-flows based on the orders from the previous year according to a described time structure of sales and costs).
4. Evaluate a current financial strategy of the company and propose a new one with the use of the "modern" hedging tools.
6. Find appropriate data on Internet in terms of currency derivatives prices and exchange rates predictions in order to demonstrate (using, for instance, graphs and tables in excel sheets) the effectiveness of your strategy under different scenarios of future exchange rates developments and discuss its pros and cons. Evidence based arguments are highly appreciated!