IFC Manufacturing

1

• IFC Manufacturing
• Finance 570 Summer 09
• Dr. Joe Greco
• California State University, Fullerton

Presented by Sue Shen Nhan Ho Phuong Nguyen
2
Synopsis
3
Industry Background

• Category Auto Parts
• Sector Consumer Goods
• Market Capitalization 35 Billion (Current)
• Performance dependent on Auto Sales

4
About us

• Headquarter at Toronto
• Specialized in auto parts production
• in North America with focus on safety
• Seating systems
• Bumper
• Safety belts
• Supplier for GM, Ford and Chrysler
• Toyota and Honda (Ontario)
• D/E77.21

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Major competitor

• Magna International Inc.
• The biggest Canada auto parts supplier
• Capabilities
• D/E69.05

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Expansion to Mexico

• Construct production facility in Mexico
• Contagion effect of the Asian market crisis in
  1997
• Marketplace volatility in underdeveloped
  countries
• Weaken Mexican peso position against Canadian
  Dollars.
• Fund requirement of 826,000,000 Mexican pesos
• Seek fund from The Manufactures Bank of NY

7
Key People

• Herve Villa
• IFCs founder and CEO
• Mexican-Canadian entrepreneur
• Ph.D in mechanical engineering
• Worked for Ford Motor Company for 6 years
• Management style give full power to his
  subordinates.

8
Key People

• John Trudel
• Former treasurer and CFO
• An astute user of financial derivatives
• Manage IFCs portfolio on his own
• Left IFC in 1997

9
Key People

• Bob Young
• Present treasury and CFO
• Joined IFC in November 1997
• Has 15 years experience in management accounting
• Has no experience in the treasury aspect

10
Time line
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Basic Issues


Low
High
Importance
Urgency
Low
High
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Immediate Issues


Low
High
Importance
Urgency
Low
High
13
Cause and Effect diagram
Financial Risk
Hedging Portfolio
Difficult in Getting the loan
Lack of Tools
Operational Practice
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Mexicos Political risk

• Macro-level Eurasia Group
• Micro-level MIGA and OPIC
• Source Journal of International Money and
  Finance 25 (2006) 308e329
• Solutions
• Local connection
• Insurance

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Exposures
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Translation exposure

• 8.5 interest rate
• More Canadian dollar Forward and call options

US Debt 78,060,863
  73,724,528
  64,171,000
  215,956,391
US Asset 62,877,000
Net translation exposure 153,079,391
Hedging 200,000,000
Overhedging rate 31
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Transaction exposure

• Net U.S. Dollar Exposure from Transactions (in
  US000s)
• U.S. Dollar Payables (in US000s)
• U.S. Dollar Receipts (in US000s)

18
Operating exposure

• IFCs revenues and expenses are affected by
  currency fluctuations.
• Long-term cost and price competitiveness
• Cdn depreciates against USD

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IFC foreign exchange portfolio
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Forward
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Forward Evaluation
1998 Outright Forward Rate Forecast Exchange Rate Millions of U.S. Dollars Forcasted Gain/Loss Acutual Gain Loss
Jan 1.37 1.3965 1.4562 -45 -1.1907375 -3.879
Feb 1.3602 1.3982 1.4236 -15 -0.57053 -0.951
Mar 1.38 1.4000 1.418 -10 -0.200098333 -0.38
Apr 1.3915 1.4018 1.4302 -10 -0.102843333 -0.387
May 1.4008 1.4036 1.4571 -5 -0.013794167 -0.2815
June   1.4053 1.4717   0 0
July   1.4071 1.5112   0 0
Aug 1.3663 1.4089 1.5745 -10 -0.425823333 -2.082
Sept 1.3588 1.4107 1.5262 -15 -0.7778525 -2.511
Oct 1.3513 1.4124 1.5432 -25 -1.528283333 -4.7975
Nov 1.3471 1.4142 1.5235 -25 -1.677645833 -4.41
Dec 1.2907 1.4160 1.5375 -5 -0.626401667 -1.234
Total         -7.11401 -20.913
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Vanilla Options
1998 Millions Canadian Calls Cost Mark-to-Market Value Forcasted Rate Actual Rate Forcasted Gain/Loss Actual Gain/Loss
Jan                
Feb                
Mar                
Apr                
May                
June                
July                
Aug 5 1.40 -0.05 0.04 1.49 1.57 -0.45 -0.8725
Sept 5 1.40 -0.07 0.05 1.41 1.53 -0.05 -0.631
Oct                
Nov                
Dec 15 1.40 -0.30 0.24 1.42 1.54 -0.24 -2.0625
Total     -0.42 0.33     -0.74 -3.57
Loss     0.42       -0.74 -3.57
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Double Barrier-Range Binary Option
T Millions of Payout Cost Mark-to-market Value Forecasted Rate Actual Rate In the Money Rates
Jan       1.3965 1.4562 1.3750 - 1.4750
Feb       1.3982 1.4236 1.3750 - 1.4750
Mar 10 1.47 2.91 1.4000 1.418 1.3750 - 1.4750
Apr            
May            
June            
July            
Aug            
Sept            
Oct            
Nov            
Dec            
Total 10 1.47 2.91      
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Single Barrier-Swing Forward
1998 Swing Forward Cost Mark-to-Market Value Forecast Real Forecasted Gain/Loss Actual Gain/Loss
Jan              
Feb              
Mar              
Apr              
May              
June              
July              
Aug              
Sept              
Oct              
Nov              
Dec -10 0 0.072 1.4160 1.5375 0 1.375
               
1.4 Cdn Put            
1.475 Cdn Call            
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Evaluation of IFCs Hedging Instruments

• Gains/Losses (in Million USD)

Forward Vanilla Option Rang Binary Swing Forward Total
Forecasted Gain/Loss -7.11 -0.74 8.53 0 0.68
Actual Gain/Loss -20.91 -3.57 8.53 1.38 -14.57
Mark-to-Market Value 0.33 2.91 0.072 3.312
Book Gain/Loss         -17.882
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Decision Criteria
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Hedging Alternatives
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Alternative 1
Spot Rate 1.4217 Sensitivity Scenario Sensitivity Scenario
Outright Forward Rate Forecast XRs Real XRs
1 month -21.2 1.4196 1.3965 1.4562
2 months -39 1.4178 1.3982 1.4236
3 months -62.25 1.4155 1.4000 1.4180
6 months -119 1.4098 1.4053 1.4717
1 year -245 1.3972 1.4160 1.5375
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Alternative 1 continued

• Preferred
• Cdn Put

Forecast Gain/Loss Real Gain/Loss
Forward Forecasted Real 68,000,000 -14,570,000

1 year 882,107 6,582,961 68,882,107 -7,987,039
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Alternative 2,3

• Alternative 2 Vanilla Options
• 1.40 Canada Put
• 1.40 USD Call
• Alternative 3 Future Contract
• -Cheapest way to hedge

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Extra Alternative

• Peso 1998

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Action Implementation Plan
Obtain Bank Loans
Mexican Dream
Manage Hedging Instruments
Make adjustment if needed
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Recommendation
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Thank You !
IFC Manufacturing