Alliance design concepts:

Foreign exchange risk

2Case facts Alliance Design Concepts, Inc. (Alliance) offered two

types of services: Design and installation of AV systems Live production services

Alliance operated in Canadian market Equipment were sourced from US suppliers, to be

paid in USD

3Problem statement

To identify a strategy for mitigating exchange rate risk in equipment procurement process

4Alternatives Available Involve the customers

Charge customers as per exchange rate on completion date Pad the margin Shorten the acceptance period

Internal process changes Foreign exchange services Purchase forward foreign currency exchange contracts

5Decision analysisInvolve the customers PROS:

Fluctuation in exchange rates are passed on to the customers Shortening the acceptance period would reduce the risk of

fluctuation in exchange rate

CONS: This strategy might reduce sales because of following

reasons: Price might rise as a result of padding of margins Reduced acceptance period might be too short for the customers

to make a decision Uncertainty about final cost in the minds of customers

6Decision analysis

Internal process changes PROS:

This would help not only in risk management, but also improve internal processes and operations reducing the existing inefficiencies

CONS: Limited scope for improvement

7Decision analysis

Foreign exchange services PROS:

Risk management, plus reduction of service charges on frequent currency conversions

CONS: Alliance won’t be able to take the benefits of high

account payables

8Decision analysis

Purchase forward foreign currency exchange contracts PROS:

This would allow Alliance at the at the time of proposal acceptance to lock in a known exchange rate for a future date

CONS: Foreign exchange contract would involve purchasing cost Forward contracts are not standardized and are subject

to counter party risks Alliance would not be able to reap the benefits of an

appreciation in the Canadian Dollars due to fixed forward currency exchange rates

9conclusion

The first three alternatives may impact the operations of the businesses that Alliance is involved in

Purchasing forward currency exchange contract would provide sufficient hedging against currency risks, and at the same time it won’t impact the operations of the business

However a futures contract is free from counter party risk and is standardized

Hence, the best alternative for Alliance Design Concepts, Inc. for mitigating currency risk would be to purchase futures currency exchange contract

Thank You…