ERM
jill_loose
ITS835_Spring_1G_2019_Week4.pptxITS 835 Enterprise Risk Management
Week 4: risk management special cases
1
Week 4 – ITS 835- Midterm Week
Read the following chapters
Chapter 18, “BlueWood Chocolates”
Chapter 19, “Kilgore Custom Milling”
Submit Midterm Research Paper no later than Monday Feb 04 end of day
Details for the midterm research paper posted in week 4 content folder in blackboard
Chapter 18, “BlueWood Chocolates”
Facilitate discussion of the implementation of ERM framework, corporate governance issues and commodity risk management
Fictional company
Lack of internal governance and risk management structures
Illustrates commodity and foreign currency exposures
Sally Holton – new CFO
Newly appointed Chief Financial Officer
Brought in as an outsider to the company
Quarterly results of the company had been variable and unpredictable
Tasked to present the latest quarterly results to the board at the end of her first month
Initial Initiatives
Discussions with various managers, stakeholders
Review of company performance
Little ongoing communication between departments
Units functioning as islands
Disagreement with business strategy and objectives
Sally felt the need for an ERM approach
The Company
Midsize producer of bulk chocolate
Grown to be a midsize international company
Growth has been unsteady
75 percent of sales domestic
All production carried out at the company’s two plants in Illinois and Indiana
Privately owned by the founder (20 percent), senior employees (5 percent), pension fund (20 percent), three private equity funds (15 percent each), private investors (10 percent)
Market Overview
Chocolate market has experienced steady growth in recent years
Strong growth in BRIC countries
Relatively recession proof
Brand loyalty strong
Season Demand
Major Competitive Forces
Large Producers
Barriers to entry high
Brand recognition and reputation important
Plight of cocoa farmers
Cocoa prices depend on demand and supply
Cocoa Prices
Sugar Market Overview
Blue Wood Financial Performance
All of the company's profitability measures were worse than of Hershey and Rocky Mountain
Sales growth sluggish and gross margin lower
Main problem identified was on the production side
Long term depth
Significant balance of investments- $56 million
No company policy regarding management monitoring of investments
Foreign Exchange Rates
Foreign exchange futures transacted by previous CFO to hedge his estimate of 50 percent of exposure to Canadian dollars , euros and pounds
Summary of Issues
Business was underperforming
Pressure from the banks
Disagreement among senior executives and board members
Risk factors were not clear
No oversight of the hedging process
Little effective internal communication and coordination between departments
ERM
An ERM framework seemed appropriate
Needed to obtain overall view of the corporate objectives
Need buy-in from top management, board
Develop a proposal incorporating objectives, strategy and ERM outline framework
Chapter 19- Kilgore Custom Milling
Illustrates the myriad of issues that arise when hedging foreign exchange risk
Kilgore Custom Milling (fictional) company needs to develop hedging strategy to manage FX risk for a new contract
How the company’s financial risk management fits in the overall ERM process
Context of Case Study
Small private manufacturer of power windows based in Ontario Canada
Seek our contracts to supply plants in US
Final stages of contract for a Japanese car auto manufacturer
in US
Kilgore facing challenges in delivering profitability especially with the Canadian dollar being in par with the US dollar
Exchange rate volatility had caused Kilgore to stop supplying to the US 25 years ago
Competitive Factors
Ready access to labor
Low cost of manufacturing
Quality
Philosophy of sticking to its knitting
Utilized local suppliers for its products
The Company
Private company 100 percent ownership by Steve MacLinden
Main focus has always been cash flow management
Appeared to be short of cash during critical times of need
The new contract held the risk of increasing cash flow concerns
Addition of accounting and control systems had helped
However uncertainty of FX fluctuations could cause things to be out of balance
New Contract
Increase existing sales and also in to next five years of more than 100 percent
Contract had provisions that benefited Kilgore
Low operational risk
The challenge was financial and the need to manage financial risk
All proceed to Kilgore was to be in dollars
Had several built in options that would benefit the car manufacturer
Concern surrounded profitability for Kilgore in the contract
Inflation differentials between Canada and US
USD/CAD Exchange Rate
Financial Risk Management
Risk of Canadian dollar appreciating
Hedging Strategy
Currency Swap
Short term contracts
Currency Options
Reasonable to not hedge at
Conclusions
A lot of questions
The need for financial risk management process
In essence an enterprise risk management framework
This week
Ensure to complete the midterm research paper no later than end of day Monday Feb 04
The details for the midterm research paper are posted in the week 4 content folder in blackboard
