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FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 1
Jamaica Producers Group
A Finance of International Trade Analysis
Sheneaqua “Ashley” Ashmead - 0505274
Novelette Johnson - 0703558
Kevin Whitehorne – 0704456
Gerron Thomas – 0601486
Karekia Brown - 0415439
Rose Bachan - 0704821
Finance of International Trade
Tutor: Gregory Linton
University of Technology
February 13, 2012
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 2
ASSIGNMENT COVER SHEET
NAME ASSIGNMENTS SIGNATURE GERRON THOMAS Development of Capital
Markets, Country’s Currency
Financial Status of JP Cost of Capital Analysis The Foreign Exchange
Market Transaction Effects Derivative Application The Sovereign Debt Crisis
NOVELETTE JOHNSON-WILLIAMS
Analysis of Jamaica Trade policy of Jamaica Trade Barriers Imposed The JDX Appreciation of the JMD
KEVIN WHITEHORN Analysis of the UK History of UK’s
Development Global Appearance The EPA Translation Effects
ROSE BACHAN Analysis of the Netherlands The Currency of the
Netherlands Trade Policy Banking Services Utilized
by JP
KAREKIA BROWN Trade Barriers Laws and Culture of
Jamaica Banking Services Utilized Financial Status
SHENEQUA “ASHLEY” ASHMEADE
Trade Liberalization The Risk Environment The EPA and its effects on
JP
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 3
Table of Contents PART 1 ......................................................................................................................................................... 6
Background Summary on Jamaica Producers Group.................................................................................... 6
Analysis of Operating Countries ................................................................................................................... 7
Netherlands ................................................................................................................................................... 7
Background ........................................................................................................................................... 7
Trade ..................................................................................................................................................... 7
Basic Economy ..................................................................................................................................... 8
Culture .................................................................................................................................................. 8
Laws ...................................................................................................................................................... 9
Jamaica .......................................................................................................................................................... 9
Background ............................................................................................................................................... 9
Trade ................................................................................................................................................... 10
Basic Economy ................................................................................................................................... 10
Culture ................................................................................................................................................ 11
Laws .................................................................................................................................................... 11
Full Summary and Analysis of the United Kingdom & its Economy ......................................................... 12
Background ............................................................................................................................................. 12
Trade ................................................................................................................................................... 12
Trade Policy ........................................................................................................................................ 13
Tariff Liberalization/laws ................................................................................................................... 13
History of the country’s Economic Development ....................................................................................... 14
Currency (The Pound Sterling) ........................................................................................................... 15
Current Economic Environment ............................................................................................................. 16
Stage of the Business Cycle and GDP ................................................................................................ 16
Monetary and Fiscal Policies .................................................................................................................. 18
Monetary Policy .................................................................................................................................. 18
Yield Curves and the UK .................................................................................................................... 18
Fiscal Policy ............................................................................................................................................ 19
Exchange Rate Volatility .................................................................................................................... 20
Potential impacts exporting and importing to the UK may pose on Jamaica Producers Group ................. 22
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 4
PART 2 ....................................................................................................................................................... 23
A full analysis of Jamaica Producers Group ............................................................................................... 23
Global Appearance .................................................................................................................................. 23
Financial Analysis ....................................................................................................................................... 24
Trend analysis of company’s performance (2007 – 2010) ...................................................................... 24
Capital Structure ..................................................................................................................................... 25
Cost of Capital Analysis ......................................................................................................................... 26
Cost of Debt (Kd)(1-tax rate) .................................................................................................................. 26
Cost of Equity (Ke) ................................................................................................................................. 27
Weighted Average Cost of Capital (WACC) .......................................................................................... 27
Risk Environment ....................................................................................................................................... 27
Financial Risks ............................................................................................................................................ 28
Currency Risks ........................................................................................................................................ 28
Credit Risks ............................................................................................................................................. 28
Interest Rate Risks .................................................................................................................................. 29
Operational Risks .................................................................................................................................... 29
Detailed Analysis of Trade Barriers ............................................................................................................ 30
Analysis of United Kingdom Trade Barriers .......................................................................................... 30
Tariff Barriers to Trade ....................................................................................................................... 30
Non – Tariff Barriers to Trade ................................................................................................................ 30
Analysis of Jamaican Trade Barriers .......................................................................................................... 31
Tariff Barriers to Trade ........................................................................................................................... 31
Non – Tariff Barriers to Trade ................................................................................................................ 32
Trade barriers, United Kingdom, Netherlands and their relation to Jamaica .............................................. 33
Benefits for Jamaica ................................................................................................................................ 34
Challenges for Jamaica ........................................................................................................................... 34
PART 3 ....................................................................................................................................................... 35
Banking Services Utilized by JP ................................................................................................................. 35
Banking Services - Bonds ....................................................................................................................... 35
Types of bonds utilized by JP ................................................................................................................. 35
Documentary Collection ......................................................................................................................... 36
Letters of Credit ...................................................................................................................................... 36
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 5
Wire Transfers ........................................................................................................................................ 36
Examination of the Foreign Exchange Market ........................................................................................... 37
Applying the concept of hedging through the use of Derivatives ............................................................... 38
Forward Contracts ................................................................................................................................... 38
Futures .................................................................................................................................................... 39
Foreign Exchange Risk ........................................................................................................................... 40
The impact of recent macro-economic phenomena on JP .......................................................................... 42
The Jamaica Debt Exchange and its impact on JP .................................................................................. 42
The Appreciation of the JMD and its impacts on JP ................................................................................... 43
The European Sovereign Debt Crisis .......................................................................................................... 43
The Economic Partnership Agreement ....................................................................................................... 44
Conclusion .................................................................................................................................................. 44
References ................................................................................................................................................... 46
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 6
PART 1
Background Summary on Jamaica Producers Group
Jamaica Producers Group (JP) is a completely Jamaican-owned company that came into
being on April 1, 1929, as a direct descendant of the Jamaica Producers Association formed in
1925 (Jamaica Producers Group, 2008).
The company, collectively with its subsidiaries, engages primarily in the production,
manufacture and sale of juice and food products. Other operations include; the cultivation,
marketing, and distribution of bananas in Jamaica; and a shipping business. JP provides door-to-
door freight consolidation, freight forwarding, and customs clearance services; produces tropical
snacks, including cassava, sweet potato, and plantain chip products; and produces smoothies.
The company offers its products under the JP, St. Mary’s, Hoogesteger, Nixx, JP RAM, and
Taste Jamaica brand name (Jamaica Producers Group, 2008).
JP operates primarily in Europe, the Caribbean, and Central America. Of its major
operations, the Shipping subsidiary is located in London, the Fresh Juice and Smoothie Company
is located in the Netherlands whilst the Tropical Snacks group operates locally in Jamaica
(Jamaica Producers Group, 2008).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 7
Analysis of Operating Countries
Netherlands
Background
The Netherlands is a one of the countries that form part of the Kingdom of the
Netherlands. Situated in northwestern Europe and borders on Germany to the east, Belgium to
the south, and the North Sea to the west and north, the name "Netherlands" means "Low Lands"
in reference to the nation's topography as an alluvial plain. Almost one-quarter of the landmass is
below sea level, protected from the encroaching sea by dikes and dunes.
Trade
With no significant trade or investment barriers, the Netherlands remains a receptive
market for U.S. exports and an important investment partner. The Dutch are strong proponents of
free trade and staunch associates of the U.S. in international trade forums such as the World
Trade Organization (WTO) and the Organization for Economic Cooperation and Development
(OECD). Dutch exports are divided into five main categories: chemical products, 17 percent;
agricultural products, 15 percent; machinery, 24 percent; industrial products, 12 percent and
natural or enriched fuels, 6 percent with Germany being the principal trading partner. Two-third
of Dutch exports goes to five nations: Germany, Belgium, France, the United States and the
United Kingdom which accounts for Sixty one percent (61%) of the Dutch imports. The
Netherlands is perfectly positioned as a gateway for goods imported into the EU and Dutch
goods are easily exported throughout the EU (World Trade Organization, 2011).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 8
Basic Economy
The global financial crisis hit the Netherlands hard in the fall 2008; the Dutch economy
entered recession in the fourth quarter of 2008, but annual GDP growth that year was still 1.9%.
In 2009, however, the economy shrank by 3.9% and recovered slowly in 2010 with an annual
growth rate of 1.8%. Forecasted growth of 2% was projected for 2011which is primarily due to
the increase in international trade, which is the largest engine of the Dutch economy. The Dutch
economy has recorded trade surpluses with marginal declines during the recession of the 2000’s.
In 2010, the exports increased by 12.8% and imports by 11.7%, in 2011 the forecasted figures
are 6.75% and 5.25%. The expected national budget deficit for 2012 (3.7% of GDP) and
government debt (64.1%) still are cause for concern as they exceed the limits set by the
European Growth and Stability Pact (U.S. Department of State, 2009).
Culture
The diverse Dutch culture reflects regional differences as well as the foreign influences
thanks to the merchant and exploring spirit of the Dutch and the influx of immigrants. The
people of Netherlands have played an important role for centuries as a culturally liberal and
tolerant centre, with the Dutch Golden Age regarded as the zenith. The Dutch make a distinction
between two of their major cultural subdivisions, the (Rim City) and non-Randstad cultures.
Randstad culture is distinctly urban, located in the provinces of North Holland, South Holland,
and Utrecht. Whilst non-Randstad culturers locate in the rurals of south and west Holland
(Bayer, 1993).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 9
Laws
The Netherlands is a civil law country where law is based on the French Civil Code with
influences from Roman law and traditional Dutch customary law. The primary law making body
is formed by the Dutch parliament in cooperation with the government. Trade laws
(International) are facilitated through the membership status with the EU and guidelines have
been adopted from WTO. Netherlands as a country is highly dependent on international trade,
total supports a liberalized trade environment and is advocate for the reduction of trade barriers
(National Encyclopedia, 2011).
Jamaica
Background
Jamaica, a country with a population of more than 2.5 million is located some 90 miles
south of Cuba and more than 450 miles west of Hispaniola, and is the third-largest island in the
Caribbean Sea. Since 1870 the capital has been Kingston, now with a population of more than
645,000. The island holds one of the largest and best natural harbors in the world which
facilitates international trade based on its central location and accessibility. The climate is
tropical and tourists flock to Jamaica for its beautiful beaches. Jamaica has been called the Island
of Springs, and the luxuriance of the vegetation is striking (National Encyclopedia, 2011).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 10
Trade
Over the past several decades, Jamaica has relied more and more on imports. Jamaica’s
major trading partners are the United States of America and the United Kingdom. The remaining
trading partners include European Union countries, Canada, Norway, Japan and the various
CARICOM countries. Major exports are bauxite and alumina, food, and garments assembled in
Jamaica. As Jamaica's trade with the United States increase, its trade with fellow members of
CARICOM, the Caribbean Common Market has decreased. This has resulted in the country
reporting continuous trade deficits which forces it to borrow heavily to pay for its consumption
(The Economist, 1999).
Basic Economy
Tourism, bauxite and alumina production dominated Jamaica's economy in 90’s – 2000
period, but the island's early economy was centered on the production sugar. The Jamaican
economy is heavily dependent on services, which now account for more than 60% of GDP. The
country derives most of its foreign exchange from tourism, remittances, and bauxite/alumina.
Remittances account for nearly 15% of GDP and exports of bauxite and alumina make up about
10%. Tourism revenues account for roughly 10% of GDP, and as seen marginal growth in 2010
– 2011 periods ranging between 4% and 6% respectively (Bayer, 1993) (World Trade
Organization, 2011).
Economic growth is deterred by many challenges such as high crime and corruption,
large-scale unemployment and underemployment, and a debt-to-GDP ratio of more than 120%.
Jamaica's onerous public debt burden is ranked the fourth highest in the world on a per capita
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 11
basis. In early 2010, the Jamaican government executed a Debt Exchange program (JDX) in
order to retire high-priced domestic bonds and significantly reduce annual debt servicing (The
Central Intelligence Agency, 2011).
Culture
Despite its size, Jamaican culture boasts a strong global presence. From the musical
genres reggae, ska, mento, rocksteady, dub, and, more recently, dancehall and ragga, Jamaica’s
culture is described as being very unique and has largely impacted the tourism sector. The island
is famous for jerk spices, herbs and fruits which form a popular part of Jamaican cuisine
(National Encyclopedia, 2011). Jamaica’s native language is English, but is however
distinguished by another Creole dialect, Patois, which is influenced mostly by West African
languages. Religious practices are also significant to the Jamaican culture, of global recognition
is the Rastafarian culture (U.S. Department of State, 2009).
Laws
Laws within this small native country are determined by the judiciary which is based on
the judiciary of the United Kingdom. The courts are organized at four different levels, with
additional provision for appeal to the Judicial Committee of the Privy Council in London.
Jamaica is a common law jurisdiction, in which precedents from English law and British
Commonwealth tradition may be taken into account. Trade is governed by laws under the WTO,
CSME, NAFTA, and GATS. Jamaica is actively engaged in the negotiation of multilateral,
regional and bilateral trade agreements as a means of securing its trade interests and enhancing
trade performance. In these agreements it seeks to remove tariff and non-tariff barriers on
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 12
products of interest to Jamaica in asymmetrical arrangements with trading partners (Doing
Business In Jamaica: A Country Commercial Guide for U.S. Companies, 2009).
Full Summary and Analysis of the United Kingdom & its Economy
Background
The United Kingdom is a sovereign state consisting of four countries: England, Northern
Ireland, Scotland and Wales. The governing structure takes the form of a constitutional
monarchy and a parliamentary system, with its seat of government located in the capital city of
England, London. The UK is a developed country and is regarded as the world's sixth-largest
economy based off nominal GDP indicators and seventh-largest economy based of purchasing
power parity. Historically it was the world's first industrialized country and held world power
during the 19th and early 20th centuries. It is currently one of the leading economic, cultural,
military, scientific and also most politically influential countries in the world which holds great
significance as it relates to international trade (Bayer, 1993).
Trade
The United Kingdom is the world's fifth largest trading nation and is highly dependent on
foreign trade. Its imports include copper, ferrous metals, lead, zinc, rubber, and raw cotton; most
of its tin, raw wool, hides and skins, and many other raw materials; and about one-third of its
food. Chief exports include manufactured goods, food, chemicals, and fuels. Primary trading
partners are the European Union and the United States.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 13
According to the US Central Intelligence Agency (CIA), “in 2002, the purchasing power
parity of the United Kingdom's exports was $286.3 billion in comparison to its imports of $330.1
billion which results in a trade deficit of $43.8 billion”. The International Monetary Fund (IMF)
has also reports that “in 2001 the United Kingdom had exports of goods totaling $276 billion and
imports totaling $324 billion. The services credit totaled $111 billion and debit $95 billion” (The
Central Intelligence Agency, 2011).
Trade Policy
Due to its reliance on trade, the UK has a major stake in the maintenance of a vigorous
and open world trading system, and is in favor of the WTO’s launch of a new round of trade
negotiations focused on further liberalization of agriculture, industrial products and services.
Trade policies implemented by the United Kingdom are in accordance with its membership
status in the European Community. It has agreed to join with other Member States in a customs
union with common arrangements for imports from and exports to third counties. These common
arrangements are decided, discussed, agreed upon, and administered through the Community's
'Common Commercial Policy' (CCP). The United Kingdom, however, is a WTO member in its
own right and maintains 'an effective and coherent external policy' to the EU's common stance
(Hills, 2011).
Tariff Liberalization/laws
The United Kingdom favors reduced tariff levels across a broad range of sectors,
including most goods and services. It seeks the elimination of nuisance and tariff peaks; it also
favors binding tariffs at applied rates. The UK proposes duty-free market access for Least
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 14
Developed Countries and improved access commitments for all other developing nations as a
means of off-setting the considerations which were not given at the Uruguayan round of WTO
negotiations. The United Kingdom urges for more transparency and objective administration of
anti-dumping rules to prevent their abuse as a protectionist measure. It also supports stronger
rules on subsidies to minimize the trade-distorting effects of these measures (World Trade
Organization, 2011).
History of the country’s Economic Development
The UK’s economy since the early 16th century, as grown to become a leading trading
power and financial center in the world of international trade. The UK has held a partially
regulated market economy. The Bank of England is the UK's central bank and is responsible for
issuing the nation's currency, the pound sterling and maintaining and implementing the country’s
monetary policy. Her Majesty (HM) Treasury performs the major government responsibility of
developing and executing the British government's public finance policy and economic policy.
Pound sterling is the world's third-largest reserve currency (after the U.S. Dollar and the Euro
(Riley, 2012)).
Whilst industry continues to decline in importance, services, particularly banking,
insurance, and business services, account by far for the largest proportion of GDP. After
emerging from recession in 1992, Britain's economy enjoyed the longest period of expansion on
record during which time economic growth outpaced most of Western Europe and other leading
global countries. In 2008, the economy fell victim to another global financial crisis, due to the
importance of its financial sector to the global economy. This resulted in declining home prices,
high consumer debt, and a subsequent global economic slowdown which compounded Britain's
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 15
economic problems, pushing the economy into recession in the latter half of 2008 and prompting
the government to implement a number of expansionary fiscal measures to stimulate the
economy and stabilize the financial markets. These include nationalizing parts of the banking
system, cutting taxes, suspending public sector borrowing rules, and moving forward public
spending on capital projects.
Fiscal policies implemented lead to public deficits and debt levels, the government in
2010 initiated a five-year austerity program, which aimed at lowering London's budget deficit
from over 10% of GDP in 2010 to nearly 1% by 2015. In November 2011, Chancellor of the
Exchequer George OSBORNE announced additional austerity measures through 2017 because of
the slower-than-expected economic growth and the current impact of the euro-zone debt crisis.
The Bank of England through its monetary policy periodically coordinates interest rate moves
with the European Central Bank, but Britain has opted to remain outside the European Economic
and Monetary Union (EMU). The UK is one of the world's most globalised countries with its
capital London one of the world's largest financial centre alongside New York (after the United
States and France) (Bank of England, 2012).
Currency (The Pound Sterling)
The currency of the UK is the pound sterling, represented by the symbol £ and is issued
by the central bank, “The Bank of England”. The “Sterling” is the rated as the fourth most traded
currency in the foreign exchange market, ranked behind the US dollar, the euro and the Japanese
yen. As a result of Inflation concerns in the UK, the Bank of England raised interest rates in late
2006 and 2007. This caused an appreciation of the pound against other major currencies and,
with the simultaneous devaluation of US dollar; the pound hit a 15-year high against the US
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 16
dollar on 18 April 2007, reaching US$2, for the first time since 1992. There have been several
fluctuations since the global financial crisis of 2008 which saw the pound depreciating against
the dollar in 2008 and then appreciating in 2009 relative to the dollar and the euro (Bank of
England, 2012).
Current Economic Environment
Stage of the Business Cycle and GDP
The chart above depicts the annual rate of growth of national output (GDP) for the UK
economy between 1980 and 2006. The UK has experienced two recessions in the last twenty-five
years. In the early 1980s downturn there was a deep recession which represented the worst
downturn in the UK’s post-war history. From the diagram we can see the plunge into a period of
recession in 1990 and 1991 and then a recovery which was prolonged throughout the remainder
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 17
of the 1990s (Bank of England, 2012). An inspection of the International Monetary Fund
working paper “The U.K. Business Cycle, Monetary Policy and EMU Entry revealed that the
U.K. business cycle is correlated with those of the United States and Canada which shows the
degree of integration between the economies of the three named countries (International
Monetary Fund, 2000). The UK felt the effects of the most recent financial crisis of 2000’s
where total manufacturing output fell by 7% at the of end 2008. This affected sectors such as,
banks, investment firms, and other known business types. The current stage of UK’s business
cycle, a recovery is affected by the much speculated 'double dip' recession during the 2010 and
2011. GDP fell 0.5% in the 4th quarter of 2010 coupled with an increase in the rate of
unemployment up to 8.1% in August 2011 which was the highest level since 1994. For the
period ending October 2011, after 14 quarters, GDP is still 4% down from its peak at start of
recession back in 2008 (International Monetary Fund, 2000).
Fig showing the UK business cycle heading for a double dip
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 18
Monetary and Fiscal Policies
Monetary Policy
In light of the double dip recession speculations the UK Government and Central bank
have taken drastic steps towards stimulating their economy. The current Monetary Policies
implemented by the Bank of England include inflation targeting, alongside secondary targets on
‘output and employment’. The Bank of England recently injected money directly into the
economy by purchasing assets a method known as quantitative easing. This means that the
instrument used by the monetary policy is now the quantity of money provided rather than the
price at which the Bank lends or borrows money (Bank of England, 2012).
Since March 2009 the total asset purchases as authorized by the Monetary Policy
Committee amounts to £325 bn. The main purpose of the purchases was to inject money directly
into the economy in order to boost nominal demand (Bank of England, 2012).
Yield Curves and the UK
Despite the implementation of the Asset Purchase Program the Monetary Authority has
managed to maintain a target bank rate of 0.5%. Interest rate is one of the key monetary policy
tools used in the contraction of the supply of sterling. The yield curve below depicts the term
structure of the UK’s interest rate is currently flat and has been this way for short term securities
since March 2009. The government liability nominal yield curves are derived from UK gilt
prices and General Collateral (GC) repo rates. The real yield curves are derived from UK index-
linked bond prices
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 19
Fiscal Policy
The UK’s current demand policy is for the most part concentrated on the use of Monetary
policy as opposed to Fiscal policies due to the fact it is easier to change the interest rate than
levels of tax and spending and fiscal policy has more side effects e.g. work incentives and impact
on government borrowing. The cut in interest rates to 0.5% by the Monetary Policy Unit of the
Bank of England appeared to be ineffective in getting the economy out of a recession. The
economy according to the World Banks review was in a liquidity trap which forced the
government to a turn to fiscal policy implementation in an to further stimulate economic activity
(The Public Enquiry Unit - HM Treasury, 2011).
The UK has since officially adopted the ‘Golden Rule’ of fiscal policy which states that
over the full economic cycle, the government should borrow to invest only for future needs.
Government borrowing increased sharply due to falling tax revenues from the recession and
attempted to increase Aggregate Demand (e.g. VAT cut to 15%) (The Public Enquiry Unit - HM
Treasury, 2011).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 20
Along with the Golden Rule, the UK government follows the “Sustainable Investment
Rule”, which monitors national debt at a prudent level currently set at 40 per cent of GDP. The
UK public debt at the end of 2008 was estimated at 42 per cent, and rose to 70 per cent of GDP
by 2010, meaning that the Sustainable Investment Rule was been broken in an attempt to reach
the recovery stage of the business cycle (The Public Enquiry Unit - HM Treasury, 2011).
Exchange Rate Volatility
The UK has operated with a free-floating exchange rate system (no intervention by the
Bank of England), hence exchange rate is purely market determined since the suspension of UK
membership from the European Exchange Rate Mechanism. Exchange rate prices are expressed
in various ways including; Spot Exchange Rate, Forward Exchange Rate, Bi-lateral Exchange
Rate, Effective Exchange Rate Index (EER), and Real Exchange Rate.
Significant changes in exchange rates are typically one of the attributes of any financial
crisis. This was reflected by looking at the impacts of the recession on the British pound where
the pound is viewed statistically as one of the worst victims of the crisis in the foreign exchange
markets. The vast depreciation of the sterling can be attributed to a shocked banking sector, the
Bank of England’s program on monetary quantitative easing and general budget and current
account deficits. Although all these features of the UK economy closely mirrored the US
economy, the pound depreciated as it did not benefit from the safe haven currency status
(Stavárek, 2012).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 21
UK’s Composition of GDP and Potential GDP
Figure above displays the historical trend of gross domestic product of United Kingdom
at market prices estimated by the International Monetary Fund with figures in millions of pounds
sterling. The Gross Domestic Product (GDP) in the United Kingdom declined 0.2 percent in the
fourth quarter of 2011 over the previous quarter. Historically, from 1955 until 2011 the United
Kingdom's average quarterly GDP Growth was 0.58 percent reaching an historical high of 5.30
percent in March of 1973 and a record low of -2.50 percent in March of 1974. Services,
particularly banking, insurance, and business services, account by far for the largest proportion
of GDP while industry continues to decline in importance. Over the past two decades the
government has greatly reduced public ownership and contained the growth of social welfare
programs (Affairs, 2009).
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 22
The chart above depicts the estimated output gap for the UK economy between 1980 and
2001. The deep recession of the early 1980s left the UK economy with a substantial amount of
spare capacity. However economic recovery was realized and the strength of the consumer boom
in the late 1980s created a substantial positive output gap which subsequently leads to inflation
in 1989-90. At the end of the 1990-92 recessionary periods, actual GDP fell behind potential
GDP which indicates a negative GDP gap and pressures on inflation. This inflation was
gradually eroded during the mid late 1990s and in recent years the British economy has been
growing at or around the long term trend rate of growth (i.e., about 2.5% per year, Hence there
is currently no major inflationary of deflationary gap in the British economy (Affairs, 2009).
Potential impacts exporting and importing to the UK may pose on Jamaica Producers
Group
As a company outside of the EU, engaging in international trade with UK/European
based customers, may pose one or more of the following risks for JP; Buyer’s Insolvency/Credit
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 23
Risk, Buyer’s Acceptance Risk, Knowledge Inadequacy, Seller’s Performance Risk,
Documentation Risk, Economic Risk, Cultural Risk, Legal Risk, Foreign Exchange Risk, Interest
Rate Risk, Political/Sovereign Risk, Transit Risk. However, given the trade friendly environment
proposed by the UK, the current governance as it relates to the trade by the WTO and with the
firm establishment of the firm’s name in British markets, JP has built a brand which provides
enough incentives towards assuming some of the named risk (Affairs, 2009).
PART 2
A full analysis of Jamaica Producers Group
Global Appearance
JP is seen as the market leader in the manufacturing and production of tropical snacks in
the Caribbean. The firm is also the largest producer of fresh juice in the Netherlands which is
also the channel used to provide exports to neighboring European countries. Despite the decline
in banana exports, JP has benefited from being a company who was responsible for the
exportation of one of Jamaica’s major traded products. This has resulted in the company being
identified on the global level has a known Jamaican household brand, given its rich history and
affiliation with the production of the banana product. JP is perfectly positioned to achieve
significant benefits from using brand Jamaica as one of its flagship marketing strategy on the
global market. The company is a many time recipient of the Bureau of Standards Jamaica
National Quality Award (NQA) which includes Excellence in Manufacturing Industry and the
Top Quality Award for Commerce and Industry (Jamaica Prouducers Group, 2007 -2011).
From a financial standpoint, the firm’s stock was a recommended “Buy” with a price
20.4% above its then current price. According to JMMB’s equity research in 2010, the then
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 24
forward looking strategy, restructuring, diversification of its product offering, rebranding and
other acquisitions were positives which would impact the stock price in 2011. Our subsequent
analysis of the quarterly financials revealed increases in both the firm’s stock price and operating
profits. Major threats from a global standpoint are; the firm’s exposures to an increase in
commodity prices specific references to food and petroleum based inputs. Additionally,
exposures to the European Union the group’s largest operating division that accounts for 70% of
the groups profits. JP is also viewed from a global standpoint as being highly exposed to the risk
of natural disasters affecting the manufacturing, production of banana and other by products of
the banana crop.
Financial Analysis
Trend analysis of company’s performance (2007 – 2010)
Since the great recession of the late 2000’s, Jamaica Producers Group has realized steady
growth patterns in all its major financial indicators. An assessment of the firm’s financial
performance over the period 2006 – 2010 revealed the following results;
i. The company’s operational efficiency has improved after falling to an all time low of -
22% in 2008 (effects of the recession on its major market UK). The company has since
realized a 60.6% increase in its return on sales between 2009 and 2010.
ii. Similarly, after major loses during the great recession where shareholders realized a -
68.2% Return on Equity in 2008, this ratio improved to 4.6% in 2009 and 6.4% in 2010.
iii. After highs of 18.2% in 2006, JP realized decreases in its Return on Assets ratio down to
as low as -52% in 2008. However, 2009 saw the ROA increasing to 3.7% and a further
5.3% in 2010.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 25
iv. The firms leverage ratio fell over the review period from 15.7% in 2006 down to 2.8% in
2009 and a marginal increase in 2010 up to 3.1%.
v. The company also bettered its liquidity position indicated by improvements in its Current
Ratio over the review period.
The latter years 2009 –2010 saw improvements in the profit position for all JP’s business
segments. The Europe division which accounts for 78% of the company’s combined revenue
improved its profitability despite volatility in commodity prices amongst other macro –
economic indicators. The company has made important strategic moves through the
restructuring of its operating divisions in two major operating arms JP Europe and JP Tropical
(inclusive of its Corporate Fixed/Equity investments). These operational improvements have led
to JP’s profitability improvements and were the resulting moves to counter the effects of the
global turndown and five consecutive hurricanes which had a catastrophic effect on JP business
structure. The company’s major restructuring move saw exits from its UK juice business and the
exportation of banana from Jamaica to the UK along with a withdrawal of JP Tropical (the
leading tropical snack producer in the Caribbean) from the Honduran market (Jamaica
Prouducers Group, 2007 -2011).
Capital Structure
JP’s balance sheet in 2010 shows the business boasting a debt to equity ratio of 20.6%.
The company is lowly leveraged and is a strategy implemented to mitigate its exposures to
interest rate risk. The 80/20 capital structure used in the financing of the company’s operations
includes a mix of fixed and variable instruments as a means of balancing its risk profile.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 26
Cost of Capital Analysis
In analyzing the entity’s cost of capital several assumptions have been made based on
information presented in the latest published annual report for year ending December 2010. We
assumed the following;
The weights used in the calculation of the firms weighted average cost of capital is
derived from the firm’s capital structure components visible on the financial statements
(financed totally by debt and equity)
The rates of interest/tax applied are taken as a percentage of the relating component ex.
Effective tax rate applied is derived from taking the tax portion as a percentage of the
before tax profits.
The dividend growth rate was derived from trends in dividends declared.
Exchange rates applied are those reflected on the entities balance sheet.
Conceptually, JP's cost of capital is an investor's opportunity cost of investing his or her
capital in the company. We made an estimate of the firm's WACC in an attempt to quantify the
average return expected by all investors in the firm: creditors of short-term and long-term
interest-bearing debt, preferred stockholders, and common stockholders.
Cost of Debt (Kd)(1-tax rate)
JP at the end of 2010 held a total debt position of $152,603,000 and a total finance cost of
$1,626,000 which represents a 1.1% marginal cost of debt financing. Using the effective tax rate
which is derived taking the taxable portion on the income statement as a percentage of the before
tax profits we arrive at 22.4% effective tax rate. The weight used is derived from the firm’s
capital structure; hence the weight of debt is 20%.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 27
Cost of Equity (Ke)
Cost of equity is derived using the dividend capitalization model; the different
components used in the formula include the dividends per share of 25c and market value of the
stock of $20 at year end December. A .15% dividend growth rate is assumed based on the
dividend policy of the company approved August 2010 to payout 15% of after tax profits as
dividends (JMMB, 2010). Therefore the Cost of Equity amounts to .1625, where Ke =
(D0/P1)+G
Weighted Average Cost of Capital (WACC)
We therefore determine the amount of interest the company has to pay for every dollar it
finances by finding the weighted average cost of capital;
WACC = (Wd)(Kd)(1-T) + (We)(Ke)
WACC=(.2)(.011)(1-.224)+(.8)(.1625)
WACC=0.13 or 13%
The company’s cost of capital reflected using 2010 figures has an example is assumable
low. This is similar to previous years and may be a reflection of the following; The firm’s capital
structure and dividend policy , Tax rates given losses incurred during the recessionary period of
2007, 2008, and 2009, The firm’s investment policy and risk appetite, Other market conditions
such as interest rate on loans denominated in depreciated currencies; euro, pound and US.
Risk Environment
Given the global operations of JP as a multinational corporation, the firm’s assets are
exposed to several risks in their day to day trade operations and may be classified distinctly as
those risks relating the firms operations i.e. operational risks and the uncertainty of a return and
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 28
or the potential for financial loss, known as financial risks. Due to several uncertainties in the
international trade environment, the most significant types of risk the firm might be exposed to
are; currency risk/exchange rate risk, credit risk and interest rate risk.
Financial Risks
Currency Risks
The diversified nature of JP’s business operations and different geographical locations
creates the situation where its assets are based in five separate currency environments. Hence, as
a multinational business, there are exposures to substantial gains and losses on both assets and
profits as a result of fluctuations in the different currency denominations. The Europe based
operations creates the major exposures to the euro along with the US dollar and pound sterling.
Despite consistent growth in trading volumes, the Europe based division recorded a decline in
Jamaican dollar denominated revenues. This arises primarily from the depreciation of the euro
and the pound sterling relative to the Jamaican dollar.
Credit Risks
Credit risk is the loss of principal or loss of a financial reward stemming from a
borrower’s failure to repay a loan or otherwise meet a contractual obligation. At JP credit risk
represents the risk of failure by a third party settling an outstanding debt to the company. JP
business level units are exposed to the risk of buyer default but have assessed these risk based on
trading environment of each business unit. Each unit or division is responsible for assessing
trading relationships and using available information to sets prudent credit limits on the amount
of exposure placed on a given customer relationship. From the corporate investment side, credit
risk is mitigated through the use of underlying security for the different assets in JP’s portfolio.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 29
Interest Rate Risks
Interest rate risk is the risk borne by an interest bearing asset, such as a floating rate loan
where future variations in the interest rate may result in adverse positions for the buyer or seller.
Therefore, JP’scash flows from financial instrument may be impacted by fluctuating interest
rates. This is however mitigated at the capital structure level where JP maintains a low debt level
relative to shareholders equity. The company’s risk bearing debt at year end 2010 shows a blend
of fixed and variable rate instruments which are used for the creation of a balanced risk profile.
The risk portfolio of JP includes majority fixed rate instruments in high risk areas and variable
rates in low risk areas. These risks are monitored by the company’s corporate division, hedged
via use of bonds, fixed income instruments or fixed for floating interest rate swaps.
Operational Risks
Operational risks are those risks inherent to JP business operations and are mitigated via
management implemented controls at the business unit level along with offsetting to more
experienced third party personnel with greater expertise in the identified area. Operational risk
types include the risk of natural disasters which has been one of the major exposures of the firm
affecting the manufacture of banana products and by products along with its other agricultural
farm based business segments. This is mitigated through use of insurance mechanisms for
continuing operations and monitoring capacity and demand based on seasonality of natural
disasters. Global commodity prices also present major challenges for the firm over the past 6
years. Outside of indirect exposures to price increases in the energy commodity, other
commodity risk include, citrus and other fresh fruits and packaging materials (glass and plastic)
for the Europe division, fertilizers, cooking oils and packaging (plastic and cardboard) for the JP
Tropical division. These risks are minimized via use of Forward Rate Agreements and long term
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 30
contracts with customers and supply networks along with continued monitoring of market prices
and ensuring sufficient working capital is maintained to leverage economies of scale.
Detailed Analysis of Trade Barriers
Trade barriers are those government induced restrictions used in international trade and can be
classified in two main categories; Tariff and Non-Tariff trade barriers.
Analysis of United Kingdom Trade Barriers
Tariff Barriers to Trade
Barriers to trade in the form of Tariffs implemented by the UK government are dependent
on whether the import or export is inside or outside the European Union. Tariffs are guided by
the annually published “UK Trade Tariff” which provides details relating to trade with the UK.
Most goods arriving from outside the EU are liable to; Import VAT, Excise Duty, and Customs
Duty; example, goods purchased over the internet with an intrinsic value exceeding £15, are
charged duties or VAT and include include alcohol, tobacco products, perfume or toilet waters.
Customs duty - becomes payable if the goods are over £135 in value but is waived if the amount
calculated is less than £9. Excise duty - this is charged on alcohol and tobacco products and is
additional to customs duty. The excise duty on alcohol products such as wines and spirits
Non – Tariff Barriers to Trade
Non- tariff barriers to trade include; import license, export license, import quotas
subsidies, local content requirements, embargos and currency devaluation. The UK HM
Revenue & Customs stipulate various license and enforcement for international trade. For the
importation or exportation of certain Common Agricultural Policy (CAP) commodities from or
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 31
to a country not in the European Union (EU), licenses help to monitor and control these markets
in an attempt to protect domestic industries from foreign competition. The Import Licensing
Branch (ILB) of the Department for Business, Innovation & Skills (BIS) is responsible for the
issue of licenses required for imports such as; textiles, firearms and ammunition, nuclear
materials and iron and steel from some countries. Other non-tariff trade barriers are “Embargoes”
implemented by the EU against other nations such as China (arms), Pakistan and India. This
results in the partial or complete prohibition of trade and commerce with these nations. The UK
which is a member state of the EU has allowed full duty free access without quotas to countries
on the UN’s list of least developed countries have since February 2001. The UK through the EU
has also implemented quantitative restrictions on imports such as Steel, Textiles, Potassium
Chloride, and Footwear. These import quotas allow for the import of a limited amount of these
goods at a rate of duty lower than normal (World Trade Organization, 2011).
Analysis of Jamaican Trade Barriers
Tariff Barriers to Trade
Tariff barriers for trade with the European Union member states are implemented by the
Jamaican government through its customs authority and include duties and taxes on imports
along with other cost related factors. Types of duties range from import duties/customs duties
which are normally levied on goods imported into Jamaica for example motor vehicle import
rates effective May 2011include Common External Tariff of 20%, Special Consumption Tax of
10% and General Consumption Tax of 17.5% for 1.0 c.c. engine size amounting to a total of
55% aggregate duty on individually imported cars. Postage Stamp Duties are levied for items
sent through the post with a basic requirement of J$5 affixed to receipts with a Cost Insurance
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 32
and Freight (c.i.f.) value of J$5,500 and less and receipts with values over and above this range,
J$100 worth of stamps must be affixed. Other items such as chicken, most chicken parts, pork
and some pork products, beef and some beef products; some aluminum products, alcoholic
beverages, and cigarettes attract an additional stamp duty.
Since 1991 the Jamaican government has reformed their tariff structure by replacing
several duties and taxes, e.g., Excise Duty, CARICOM Duty, Consumption Duty, Entertainment
Duty, Retail Sales Tax, Hotel Accommodation Tax and Telephone Service Tax with the recent
Special Consumption Tax and General Consumption Tax. GCT is payable on most imported
items whilst SCT is levied on alcoholic beverages, most tobacco products and some petroleum
products.
Non – Tariff Barriers to Trade
In an attempt to protect the Jamaican domestic industries from fierce competition from
imports, the government of Jamaica adheres to the signed WTO multi- lateral agreements and
has implemented several Non – tariff trade barriers. These include Import Licenses which are
issued by the Trade Board Limited authorizing the importation of the motor vehicles, plants,
plant extracts, cement, chemicals and gas. There is also the implementation of Import Quotas
on Chlorofluorocarbons an organic compound used in the production of solvents, blowing
agents, propellants and refrigerants. Only specially selected companies are granted the privilege
of importing a certain percentage of this product and are limited to an annual allocation ranging
between 6.5% and 9.3% of the total imported for the year. As a means of protecting the local
manufacturing industry, the WTO agreement with Jamaica has realized the implementation of
anti-dumping and safeguard measures to protect manufacturing activities.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 33
Trade barriers, United Kingdom, Netherlands and their relation to Jamaica
The United Kingdom and the Netherlands are two member states of the European Union
(EU). The EU nations have developed a single market with collectively implemented trade
policies to foster preferential trade agreements between member states for the benefit of
economic development. These trade policies have however been harshly criticized for being
discriminatory against African, Caribbean and Pacific Group of States nations (ACP) and are
incompatible with the World Trade Organization rules. The EU has since moved to create
reciprocity and non-discrimination in trade, through the creation of the Economic Partnership
Agreement between ACP nations. Jamaica has entered an EPA agreement with the EU by being
a part of CARIFORUM which includes other Caribbean countries along with Dominica. The
EPA is set to create preferential treatment in trade for least developed countries through the
removal of trade barriers and the implementation of a Free Trade Area between countries in the
EU and Caribbean countries including Jamaica. Through the agreement, CARIFORUM countries
such as Jamaica Market will gain access for goods and phased tariff reduction, Duty-free, quota-
free access into the European Union market inclusive of colonial states; Guadeloupe, Martinique
and French Guiana with transitional arrangements for rice and sugar.
CARIFORUM has also agreed to the following liberalization on goods; a total of 61.1%
of EU imports in value over a 10 year period; 82.7% over 15 years which represents 85.1% of
tariff lines previously set by the EU; and 86.9% over 25 years which represents another 90.7% of
tariff items. CARIFORUM has designated sensitive products that will not be considered under
liberalization and are included in an exclusion list. Some major excluded items include
agricultural and processed agricultural products (e.g. meats, poultry, vegetables, fruits, dairy
products); fish, chemicals, furniture and other industrial products.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 34
Benefits for Jamaica
Jamaica as a part of Cariforum benefits from the EPA through the receipt of duty free /
quota free access to the large EU market, conditional improvements in the access to the EU for
Jamaican services suppliers which include; entertainers, professionals, business visitors,
investors and university graduates, development support for tourism industry, development
support for private and public sector, emphasis on increasing private sector competitiveness and
possible increase in foreign direct investments and technological transfers
Challenges for Jamaica
The criteria’s named in the EPA may be challenging for Jamaica has our major trading
partner is the US who is responsible for over 54.6% of the regions exports and 38% of imports.
Jamaica has had a trade deficit with all EU members except the UK and could realize; exposures
to local industries through increased competition from imports, an increase in the countries
overall trade deficit, social implications through possible displacement of vulnerable and
uncompetitive local industries, exposures to possible alterations and modifications made in world
trade, loss of revenues due to tariff reductions on imports and EPA may implicate future trade
agreements with the US and Canada
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 35
PART 3
Banking Services Utilized by JP
The two main financial institutions used by JP to facilitate international trade financing
are Scotiabank, Jamaica/UK and Citibank, Jamaica/UK. Both banks provide a range of products
and services for export and import transactions; Bonds, Documentary collection, letters of credit,
stand-by letters of credit, and wire transfers
Banking Services - Bonds
Scotiabank on behalf of JP provides a guarantee to importers through the issuance of
bonds either via the branch domiciled in the importers country or its local branch. This provides
the importer with assurance that JP Tropical will honor the agreed obligations of their export
agreement. e.g. “a bond is issued for the exportation of 500 cases of banana chips to be honored
by April 25, 2012. If this obligation is not fulfilled, JP will have to pay a percentage of the
contract value (1% to 100%) to the UK importer for compensation”
Types of bonds utilized by JP
JP currently utilize two types of bonds namely Performance Bonds where Scotiabank on
behalf of JP issues a performance bond agreeing that all requirements of the EU member states
Food Standards Agency are met with regards to quality and other accepted standards.
Additionally, Conditional Bonds (with no documentary evidence) which specify Scotiabank
must make payment to the importer in the event of default by JP without the use of documentary
evidence such as a bill of laden.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 36
Documentary Collection
Citibank Jamaica acts has the remitting bank of JP in the provision of a documentary
collection service. This allows for the transfer of export documents such as bills of exchange and
other title documents to the importers bank. Depending on the size/type customer JP’s collection
order will be prepared with instructions DP (documents against payment) where the importer
must make payment before retrieval of the collection order used for small clients and DA
(documents against acceptance) for large credit customers. Citibank UK will remit funds to
Citibank Jamaica to allow for the credit of JP’s account held locally with the bank.
Letters of Credit
Scotiabank and Citibank located in London/Amsterdam are responsible for advising and
confirming LOC on behalf of JP. In a typical arrangement, JP instructs the BNS Jamaica (issuing
bank) to issue an irrevocable credit. BNS Jamaica notifies a bank in Netherlands who then
advises the exporter of the existence of this credit. Goods are shipped by exporter Halse
Chemicals and necessary documents are obtained and presented at the agreed time to the bank in
Amsterdam. If sight drafts are called for payment is made immediately to the exporter as Scotia
Amsterdam is the drawee. Documents are shipped to Scotia Centre, exporter is paid and the
Amsterdam Scotia is reimbursed subsequently through accounts held with Scotia Centre.
Scotiabank then debits the account of JP held at the bank and release documents needed to clear
goods.
Wire Transfers
This is an electronic means of payment utilized by JP to pay creditors or receive payment
from debtors. As a creditor, JP initiates a wire transfer via BNS Jamaica. This request authorizes
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 37
BNS to wire funds from their account to an exporter’s account having provided the bank with the
beneficiary’s banking information. Other Banking Services include TRADEXPRESS elite which
is an electronic service offered by Scotia Jamaica, Private trade insurance, Short to medium term
financing for export schemes and Negotiation of bills drawn under documentary credit.
Examination of the Foreign Exchange Market
The Foreign Exchange Market is the world’s largest financial market which assists in
international trade and investment by enabling the conversion of currency where participants
such as banks, commercial companies, central banks, investment management firms and
investors are provided the opportunity of buying, selling and exchanging currencies across
different exchanges (Archer, 2010).
JP has a multinational company involved in international trade, can be seriously affected
by adverse movements in exchange rates. Thus the company faces foreign currency exposures
namely translation, transaction and economic. The company is exposed to foreign currency risk
on transactions that are denominated in currencies other than the Jamaican dollar. The main
currencies giving rise to this risk are the Pound Sterling (£), United States dollar (US$) and
Euros (€). Based on inspection of the company’s annual report 2010, JP generated a 5.6% in total
revenues of $5.91 billion relative to 2009. This reduction was heavily influenced by the impacts
of the depreciation of all three of its major foreign currencies relative to the Jamaican dollar
which are the euro, US dollar and pound sterling.
Approximately 64.3% of JP’s 2010 revenues were reported as euro denominated and
given the euro faced the most significant decline in the average 2010 rate of 5.6% compared to
the average of 2009, the company was largely exposed to the stated accounting risks, transaction
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 38
and translation. The company manages this risk via use of an internal technique for hedging
transaction exposures named a “Natural Hedge” or “Matching”. This occurs where JP
subsidiaries in Europe borrows in that foreign currency to finance its operations, despite the
expense of the foreign interest rate in comparison to the cost of Jamaican debt financing; by
matching the debt payments to expected revenues in the euro, JP Jamaica will reduce its foreign
currency exposure.
Applying the concept of hedging through the use of Derivatives
Forward Contracts
A Forward Contract is a binding agreement between a bank and its customer for purchase
or sale of a specified amount of a particular foreign currency at an agreed future date, at a rate of
exchange determined at the time the contract is made. Through its main international trade
financing institution, Citi-bank Jamaica, JP is offered two types of Forward Contracts, namely
Fixed Forward contracts and Forward Option Exchange contracts. For fixed forwards, the future
date at which the contract will be settled is fixed as opposed to option forward contracts which
allow for the settlement date to be executed any time within the contracted period. These
contracts are used to;
a) hedge payments and receipts denominated in foreign currencies and;
b) hedge the translation of foreign earnings for presentation in group consolidated financial
statements.
In the export of ripe bananas to one of JP’s large customer, US distributor Kompass
Traders, the company enters into a FRA with its main international trade bank Citibank. JP is
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 39
contracted to export the following monthly orders according to the below details; 1000 case of
Tropical Snacks April 30, 2012 @ 1,000 per case. JP wishes to eliminate the foreign exchange
exposure in this transaction therefore the Citibank client representative and the head of JP’s
export division on January 26, 2011 agree to lock into a fixed forward rate. The bank derives its
forward rate by determining a premium/discount to reduce its risk as a result of subsequent
changes in exchange rates. This is determined using the following formula p = (1 + Rf/m / 1 +
Rd/m)n*m – 1, where rf = JMD prime rate at 6.25% and rd = US prime rate at .25%. To calculate
the monthly figure, each rate is compounded monthly, where m equals the number of months and
n equals the number of years. Using this approach we illustrate the general principle that forward
rate is derived from the spot rate and interest rate differentials.
i. Premium = (1+.0625/12/1+.0025/12)*12-1 = 0.061665
ii. We then use the formula F = Spot Rate(1+p)
iii. F = $86.12(1+.061665) = $91.43
iv. Therefore the shipment of banana chips values 1000*US$1000 = US$1000, 000
Using the one month forward rate at the end of April JP will trade the US$ for JMD = $91.43 *
USD$1,000,000 = JMD$91,430, 556. If JP had not entered into the FRA and the JMD had
appreciated against the USD up to $80, then JP at the end of April would receive $80,000,000
(JMD * sales revenue)
Futures
A futures contract similar to a forward is an agreement to exchange one currency for
another at a specified date in the future at an agreed price known as the exchange rate which is
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 40
fixed on the purchase date but gives the investor the option of exiting the obligation by buying or
selling the currency prior to the contract's delivery date. These contracts could be applied to JP
has a Netherlands based business who will receive €1,000,000 on January 1, 2011. The current
exchange rate implied by the futures is $114.2/€. JP can thus lock in this exchange rate by selling
€1,000,000 worth of futures contracts expiring on January 1, 2011. In this way, the company is
guaranteed an exchange rate of $114.2/€ regardless of exchange rate fluctuations in the
meantime.
Foreign Exchange Risk
Derivatives such as FRA’s and futures are used in the financial market as a means of
hedging against various financial risks such as foreign currency exposures and interest rate risk.
Without the use of such derivatives, the company suffers translation and transactional risk related
effects where Translation effects are the effects of fluctuations in exchange rates and their
impacts on the consolidated accounts of a company that has businesses that report in different
currencies.
Translation exposures arise from the revaluation of balance sheet items using the quoted
rate of exchange at a balance sheet date. If exchange rates change since the prior reporting
period, translation of JP’s assets/liabilities, revenues/expenses that are denominated in foreign
currencies such as the euro and pound sterling will result in the entity reporting a foreign
exchange gain or loss. In JP’s case, the firm suffered translation losses as a result of the
appreciation of the JMD (Brear, 1977).
Transaction Exposure on the other hand arises out of normal international trading
activities. JP has an exporter to Europe invoices in both the sterling and euro; hence un-hedged
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 41
contracts will be exposed to devaluation/appreciation of these currencies. A typical transaction
exposure will result from transactions that give rise to the realization of contractually binding
future foreign currency denominated revenues. Thus, the volatility of exchange rates between the
purchase and settlement date of the contract will similarly impact the value of the associated
foreign currency cash flows, leading to currency gains and losses. For example, JP’s accounts
receivable associated with a sale denominated in Euros or the obligation to repay a UK pound
sterling debt was exposed to the appreciation of Jamaican currency. The JP Annual Report 2010
indicated that at the end of 2009, financial statements were translated using UK£139.80 as
opposed to 2010 that was translated using UK£130.81. Therefore the book value of fixed assets
for JP foreign subsidiaries would be reported at a lower Jamaican dollar value in the groups
consolidated accounts at the end of 2010. Additionally the act of invoicing in the foreign
currency will also be impacted as contracts at their maturity date will be worth less than
originally slated and hence invoiced amounts will fall (averaged) to the value of the exchange
rate as of the income statement reporting date (Brear, 1977).
Another type of exposure considered under the foreign exchange market is Economic
exposures. This relates to the impact of unanticipated changes and fluctuations in exchange rates
on the firms cash flows, earnings and foreign investments. Companies like JP who hold
operations in more than one currency are exposed to this type of risk which is hedged with the
use of holding positions in the forex market.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 42
The impact of recent macro-economic phenomena on JP
The Jamaica Debt Exchange and its impact on JP
The JDX was implemented in 2010 by the government of Jamaica in an attempt to reduce
the general level of public debt interest payments. The initiative required an exchange of high
interest, short maturity debt instruments for lower interest, longer maturity coupons. Domestic
holders of government securities such as JP would therefore be impacted as the present value of
projected earnings from interest income would be less than expected. Given the assumption that
government securities are the most secure form of investment, JP and other companies make
strategic plans with the expectation of the return from these investments. These plans would now
be adversely impacted as the present value of projected earnings would be reduced. To assess
possible impacts of the JDX on JP we observe the results of changes in the specific terms of the
government’s policy with regards to holders of GOJ bonds. Using the formula below we
calculate the change in the yield to maturity on a GOJ bond held by JP as a result of the JDX
requirements. YTM = 1+(M-P0)/n / (M+ P0)/2 where YTM is the yield to maturity on a bond, I is
the interest or coupon rate, M is the face value of the bond, Po is Price of bond and N is Years to
maturity. Given the following assumption; the price of a bond before JDX was $920 with a face
value of $1000 and that the annual coupons are $100 or 10% coupon rate with 10 years
remaining until maturity. Using the formula the YTD before JDX would be 11.38% After JDX
the coupon rate is adjusted to 8% and the years to maturity adjusted to 15 years the new YTD
would be 8.99% with annual coupon payments of $80 instead of $100 hence reducing expected
interest income by $20.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 43
The Appreciation of the JMD and its impacts on JP
Appreciation of the JMD occurs when it takes less Jamaican dollars to purchase foreign
currencies such as the USD, GBP and the Euro e.g. in JP’s case 2009 versus 2010 UK£1 to J$.
This led to a reduction in operational cost as a result of cheaper imports, an increase in the cost
of exports could lead to a reduction in the demand for JP exported products and hence reduction
in revenues. Another effect relates to the Translation exposures impacting the company’s
financial statement such as a gain on the net liabilities position and a loss on the net asset
position. In addition, Transaction effects between the foreign currencies value on the date of the
commercial contract versus the date of conversion of the receivables into Jamaican equivalent
hence a loss on exports and a gain on imports (Affairs, 2009).
The European Sovereign Debt Crisis
The European Sovereign Debt Crisis is an ongoing financial crisis caused by rising
government debt levels, trade imbalances, monetary infleility and general loss of confidence in
the Euro zone which includes countries such as Greece, Spain, Portugal and Italy. The crisis if
not handled well will have rippling domino effects on other members of the European Union
such as Netherlands and UK. The afore mentioned countries constitute over 60% of revenues
reported by JP and as such the consequences of a collapse of the euro zone may lead to failure of
JPs business due to the high market concentration in Europe. JP could be impacted from both a
fall in customer demand as a result of a European economic downturn and weakened confidence
in the European economy. This would result in a devaluation of the Euro against the JMD which
will result in the before mentioned effects of an appreciation of the Jamaican currency. In
addition, the inability to realize possible investment income from positions held in European
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 44
securities as a result of country risk, interest rate risk, credit risks and default risks (United
Overseas Bank Limited, 2010).
The Economic Partnership Agreement
The EPA is set to create preferential treatment in trade for least developed countries
through the removal of trade barriers and the implementation of a Free Trade Area between
countries in the EU and Caribbean countries including Jamaica. Therefore the benefits accrued to
JP includes but is not limited to; increased opportunities for joint ventures and co-production
with EU firms, expanded market access in the EU for CARIFORUM goods and services,
enhanced competitiveness with the adoption of higher standards, diversification of exports and
increased value added and duty free / quota free access to large EU Markets. The EPA may also
adversely affect Jamaica as a country in general and JP subsequently as several challenges may
be experienced due to; increased competition for banana related exports and other items
produced from competitors in Latin American countries, inability of JP’s products to meet
international recommended standards due to technological advanced production techniques of
which JP is unable to conform to and increased foreign transaction exposures related to credit
customers.
Conclusion
As a multi-national entity involved in international trade, Jamaica Producers Group forms
a part of the global business environment. This creates opportunities as well as challenges which
must be monitored by management in an attempt to remain competitive. In this review,
international trade concepts have been applied to JP and the effects of various facets of the
literature has been examined to identify the practical relations of the theories learnt.
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 45
Jamaica Producers in this regard is both exposed to various types of risks related to the financial
market as well as opportunities created by the various bodies in international trade such as the
WTO. International trade and business is now more open as a result of Trade liberalization,
globalization, advanced transportation and increases in technology. Jamaica Producers Group
participates in international trade involving the 6th and 7th largest international trading countries
in UK and the Netherlands and also locally exports to regional Caricom countries. There exists
cost and benefit factors which can be carefully measured in determining the position of the
company with regards to business feasibility and this project will highlight the application of
international trade within the context of Jamaica Producers Group
FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 46
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