ACME knows that sales are denominated in local currencies and hopes to be able to sell its
Question:
ACME knows that sales are denominated in local currencies and hopes to be able to sell its products in the country where the potential acquisition is located. Thus, ACME will be directly affected by exchange rate fluctuations. Costs are incurred partly in the U.S. dollar for basic manufacturing and research, and partly in terms of local currency for finishing, marketing, distribution, and so on. In its preliminary research, ACME found that costs and revenues were not matched in individual currencies mainly because of the concentration of research, manufacturing, and headquarters operations in the U.S.
To reduce the currency mismatch, ACME first considered the possibility of redeploying resources in order to shift dollar costs to other currencies. The company, however, decided that relocating employees and manufacturing and research sites was not a practical and cost-effective way of dealing with exchange exposure. Having decided that operational hedging was not appropriate, ACME considered the alternative of financial hedging and developed a five-step procedure for financial hedging:
Exchange Forecasting
Assessing Strategic Plan Impact
Hedging Rationale
Financial Instruments
Hedging Program
Using this approach, develop appropriate risk mitigation techniques for ACME to use in the integration and restructuring of an international acquisition target?
Evaluate the trade-off between risk and return in investment management, and analyze strategic opportunities for international operations?
Accounting Principles
ISBN: 978-0470533475
9th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso