The Rising Euro Hammers Auto Parts Manufacturers
“The Rising Euro Hammers Auto Parts Manufacturers”
Case Study Solution
-Rabindra Rajbhandari
MBA 5th Trimester Sec- A, Roll no. 15
The given case highlights the importance for every global managers to clearly understand the foreign exchange market and act consciously to hedge the exchange risk from the business. The exchange rate are always volatile and failure to minimize this risk not only hampers the profitability of a company but even the survival of the firm. The similar fate has been suffered by the German manufacturer of machine tools to engineer crankshafts for cars that signed a deal in late November 2004, to supply the U.S. operations of DaimlerChrysler with $1.5 million worth of machines. When the deal was signed, Pfeiffer calculated that at the agreed price, the machines would yield a profit of € 30,000 each. Within three days that profit had declined by €8,000 due to adverse depreciations in dollar as DaimlerChrysler used to pay Elotherm in dollars. Udo Pfeiffer, the CEO of SMS Elotherm neglected this issue and fell into serious trouble and it went from bad to worse because due to intense competition, it could not charge higher prices for the tools. On the other hand, another small German supplier to U.S. automobile companies, Keiper, was faring somewhat better as it was clever enough to open a plant in London, Ontario and had a real hedge against the value of the euro.
1: Could SMS Elotherm have taken steps to avoid the position it now found itself in? What were those steps? Why do you think the company did not take these steps?
SMS Elotherm could have taken several steps to hedge their exchange risk. First, depending on the competition in the marketplace, they could have stipulated a price pegged to the exchange rate value on the day the contract was signed, thus transferring the exchange rate risk to the buyer. Perhaps competitive conditions would not allow for this. They could have hedged by buying euro forward in the futures currency market
Case Study Solution
-Rabindra Rajbhandari
MBA 5th Trimester Sec- A, Roll no. 15
The given case highlights the importance for every global managers to clearly understand the foreign exchange market and act consciously to hedge the exchange risk from the business. The exchange rate are always volatile and failure to minimize this risk not only hampers the profitability of a company but even the survival of the firm. The similar fate has been suffered by the German manufacturer of machine tools to engineer crankshafts for cars that signed a deal in late November 2004, to supply the U.S. operations of DaimlerChrysler with $1.5 million worth of machines. When the deal was signed, Pfeiffer calculated that at the agreed price, the machines would yield a profit of € 30,000 each. Within three days that profit had declined by €8,000 due to adverse depreciations in dollar as DaimlerChrysler used to pay Elotherm in dollars. Udo Pfeiffer, the CEO of SMS Elotherm neglected this issue and fell into serious trouble and it went from bad to worse because due to intense competition, it could not charge higher prices for the tools. On the other hand, another small German supplier to U.S. automobile companies, Keiper, was faring somewhat better as it was clever enough to open a plant in London, Ontario and had a real hedge against the value of the euro.
1: Could SMS Elotherm have taken steps to avoid the position it now found itself in? What were those steps? Why do you think the company did not take these steps?
SMS Elotherm could have taken several steps to hedge their exchange risk. First, depending on the competition in the marketplace, they could have stipulated a price pegged to the exchange rate value on the day the contract was signed, thus transferring the exchange rate risk to the buyer. Perhaps competitive conditions would not allow for this. They could have hedged by buying euro forward in the futures currency market