ASSIGNMENT

Assignment



Assignment: Global Hardwood Corporation

Current Financial Practices of Global Hardwood Corporation

The finance committee of the board is responsible for fiscal oversight of the Global Hardwood Corporation. The committee reviews investment policies and monitors the funds of the organization on a regular basis. In addition, the board oversees the preparation of the annual budget. The finance committee may have responsibility for approving large operational or capital expenditures. The finance committee usually reviews the income and expenses of the organization on a regular basis, often monthly. The finance committee, led by the board members accompanied by the Group Finance Director, ensures that financial reports are complete and helps present them to other members of the board. The finance committee usually assumes the responsibility for the annual audit.

The Global Hardwood Corporation pays for its supplies of hardwood in the home currency of the supplier. Global Hardwood Corporation invoices its customers in their home currency. It has applied all these policies to its other acquisitions too. It is Global Hardwood Corporation's practice to source the local currency to pay its suppliers from its bank in the UK, as it is required. Similarly, sales revenues are converted into British Pounds and deposited with the Company's UK bank as they are received. Other costs, such as manufacturing costs, marketing costs, shipping costs and taxes are paid in British Pounds from Global Hardwood Corporation's UK bank account. (Stein 1990 98-112)

Companies face currency risk as they conduct business transactions in foreign currencies. This risk relates to the volatility of currencies on the foreign exchange market. Currency risk has completely disappeared from most European countries that have adopted the euro as currency. However, since Global Hardwood Corporation's main currency is UK pound, it is exposed to such risk. These currency fluctuations may affect your business in two ways:

Export operations and import generally involve payment terms or settlement. During these periods, the fluctuations can significantly affect the amount of bills converted into national currency. This risk is called transaction risk ;

Variation in exchange rates of a currency against a foreign currency can affect the competitiveness of your products, making them more or less expensive for foreign buyers as the country's currency devaluation or revaluation. This risk may result in loss of competitive edge. (Helleiner 1999 138-57)

It is essential that the company initially define its overall policy to cover against the risk of transaction. How much risk the company is ready to take on? She wants to cover in all circumstances and pay for it, or she will adopt a speculative attitude? Once the answers to these questions determined, the organization should do the following:

Measure the risk that it faces through the foreign exchange position

Consider the likely evolution of currency brought into play

Analyze the existing hedging techniques, and

Make a choice about the technique, with the most appropriate coverage. (Edwards 1996 159-63)

Coverage on the futures market is one of the techniques most used by companies given its ease of use. The hedging is based on an exchange of one currency ...