Joleen Ltd is a manufacturer of medical diagnostic devices based in Cork. Its primary customer is the
Question:
Joleen Ltd is a manufacturer of medical diagnostic devices based in Cork. Its primary customer is the National Health Service (NHS) in the UK, with whom it has an exclusive license to supply its devices. This contract accounts for approximately 90% of its turnover. The remaining 10% includes small private hospitals in Germany and France.
The NHS contract is worth £24 million and it receives equal instalments each month. These are regularly paid on the final Wednesday of each month in Sterling. The contract has recently been renewed for the next five years. Joleen manufactures most of the components for the device at its plant in Cork. There is however a significant component that Joleen has outsourced to a manufacturer in Shenzhen. This supplier provides this component to several companies, including Joleen, and can produce it at less than half the cost at which Joleen could manufacture it. It is invoiced for this component in US dollars. It pays the supplier USD 1 million at the end of every second month.
The next payment is due at the end of April. The following are the current spot and forward points for EUR/GBP and EUR/USD.
Joleen have forward contracts in place for the next 3 months of Sterling receivables at an average rate of 0.8750. The Dollar payables have not been hedged.
You are asked to advise the Finance Director on an appropriate foreign exchange risk management strategy for the nest 12 months. She explains that the business is quite profitable and the objective of any strategy should be to mitigate the damage from substantial adverse movements in exchange rates.
The Finance Director is not convinced that Joleen should do any hedging at all. She thinks that, because there is so much uncertainty and nobody can predict the future, it may be
easier and just as good for the business to trade spot each time it has FX receivables or payables.
She is also interested in whether you think there is anything the business could do to reduce the extent to which it relies on external foreign exchange hedging.