Universal Circuits Inc. Case Study
Universal Circuits Inc. Case Study
Finance 405
After receiving a telex from the Controller of the Irish plant, who is an integral employee at Universal Circuits, we had to make a tough decision regarding his request to hedge against the US dollar depreciating. If the US dollar depreciates, manufacturing would be shifted from his Irish plant to the US plants, which in turn would negatively affect his potential bonus. We acknowledge this risk, which would be incurred to him, but also cannot afford for him to hedge against the company’s interest as a whole. The company uses the Irish plant itself as Universal’s hedge against foreign exchange risk, shifting manufacturing accordingly in order to take advantage of the lower cost of production. What we decided on was to strike a balance between putting the exchange rate risk on our employees and our shareholders. We plan to continue to follow Mr. Kriesler strategy of selective hedging, while incorporating Pierre Bourquin’s idea of dynamic strategy to reduce our economic exposure. In order to keep the Irish plant controller’s exposure to exchange rate risk at a minimum, we would like to implement a monthly valuation process to respond to a fluctuation of company sales and exchange rates. What we are aiming to do is to guarantee the Irish plant controller a small bonus if the Punt appreciates against the dollar and the manufacturing is shifted from Irish to US plants. We want to put a limited hedge on his exchange rate risk he faces, as his bonus is tied to the Irish plant’s manufacturing performance. But, we do not want to fully hedge, and reverse our company’s original hedge using the Irish plant for manufacturing. Based on our equation in appendix #1, the bonus will fluctuate (on a monthly basis) as dependent on the change in exchange rates and change in monthly sales. The greater the fluctuation in exchange rates, the larger the bonus will
Finance 405
After receiving a telex from the Controller of the Irish plant, who is an integral employee at Universal Circuits, we had to make a tough decision regarding his request to hedge against the US dollar depreciating. If the US dollar depreciates, manufacturing would be shifted from his Irish plant to the US plants, which in turn would negatively affect his potential bonus. We acknowledge this risk, which would be incurred to him, but also cannot afford for him to hedge against the company’s interest as a whole. The company uses the Irish plant itself as Universal’s hedge against foreign exchange risk, shifting manufacturing accordingly in order to take advantage of the lower cost of production. What we decided on was to strike a balance between putting the exchange rate risk on our employees and our shareholders. We plan to continue to follow Mr. Kriesler strategy of selective hedging, while incorporating Pierre Bourquin’s idea of dynamic strategy to reduce our economic exposure. In order to keep the Irish plant controller’s exposure to exchange rate risk at a minimum, we would like to implement a monthly valuation process to respond to a fluctuation of company sales and exchange rates. What we are aiming to do is to guarantee the Irish plant controller a small bonus if the Punt appreciates against the dollar and the manufacturing is shifted from Irish to US plants. We want to put a limited hedge on his exchange rate risk he faces, as his bonus is tied to the Irish plant’s manufacturing performance. But, we do not want to fully hedge, and reverse our company’s original hedge using the Irish plant for manufacturing. Based on our equation in appendix #1, the bonus will fluctuate (on a monthly basis) as dependent on the change in exchange rates and change in monthly sales. The greater the fluctuation in exchange rates, the larger the bonus will