Global Finance Hedging Methods
Executive summary:
After conducting proper and adequate research and identifying the possible hedging instruments to be used in the foreign exchange market for WestJet to mitigate its exposure to the risk, and to reduce costs for the company that may be incurred due to fluctuation in the exchange rate market. The key decision criterions were the amount of exposure to risk, the number of items, commodities or products to be hedged and the total cost that may be incurred to hedge the products and exchange rates. The best option was to enter into a foreign exchange forward contract with the combination of swap. Looking into all the above said criterions the combination of these two hedge instruments would avoid considerable amount of risk for rising prices and fluctuation in the exchange rate and the cost that would be incurred would be considerable. This combination would allow the company to continue achieving new heights and increased profits while mitigating its risks.
Contents
Introduction:
Analysis of the WestJet’s operations:
The size of its exposure to the foreign market:
The major market to which it is exposed:
Relationship between company’s share and the country’s exchange rate to the Canadian dollar:
Hedging instruments:
Foreign exchange forward currency contract:
Swap:
Option hedge:
Qualitative analysis:
Foreign exchange forward currency contract:
Pros
Cons:
Swaps
Pros:
Cons:
Options:
Pros:
Cons:
Quantitative analysis:
Decision matrix:
Conclusion:
Bibliography:
Appendix:
Introduction:
This report contains an analysis of WestJet Airlines operations in relation to the international 1financial context. It give a through explanations of the company’s size of exposure to the foreign market and the risks associated with it in the foreign market. The report further goes on to establish a relationship between the company’s stock and the foreign exchange rate (mainly US dollar, as WestJet conducts most of its business there) to the Canadian dollar. It is important to state the relationship between the stock price and exchange rate as it can bring about significant changes in the financial condition of the company.
To determine and mitigate the risk in the foreign exchange market, financial hedging instruments were used to minimize the risk and manage it effectively. Based on the hedge instrument, the report includes a qualitative analysis focusing on the pros and cons of the hedging instruments. It further throws light on the quantitative analysis of these instruments. The finding for the company and based on the instruments, decisions and recommendations were made as to which hedging instruments is appropriate and fits best for the company’s future operations in the international market. The report in then concluded with a conclusion stating the most suitable recommendations and decisions.
Analysis of the WestJet’s operations:
WestJet airlines is one of Canada’s most chosen airlines for air travel. It is well known across the continent for its cheap air fares. The company takes pride is being recognized as one of the top employer in the country. It operates mainly across North America, Central America, the Caribbean and Europe. It provides close to 90 destinations across these countries. However WestJet partners with other major airlines such as American Airlines, Delta Airlines, Cathay Pacific, British Airlines, KLM, Air France and others across major regions of the world to provide its customers with more than 120 destinations in 20 different countries (WestJet, 2014 October 24, para 7)