Walmart: strategic risks and a financial strategy
1. Risks of foreign currency exposure and management of each risk.
Foreign exchange risk, are the risk that a company wealth faces as a result of the changes in exchange rates. We have transactional, translational, and economic risks. Transactional risk occurs as a change in the exchange rate that arise between the transaction and subsequent settlement dates. Most of the time this risk is linked to the imports and exchange of a corporation. Unlike transactional risks that are based on the relatively short-term effects of cash flow, economic risk also includes the aspect of change in exchange rates movements in the market and also considers the value of the company (ACCAPEDIA, n.d.). A corporation can face economic risks directly or indirectly. Direct economic risks are experienced when a company’s home currency has appreciated that those of the competitors and for that reason they gains sales at your expense since the home currency strength makes your products expensive both for home customers and those at abroad. Indirect economic risks come when a firm’s home currency does not go vis-a- vis the buyers currency, this leads to the losing of competitive position. For instance, suppose a Turkish firm is trading with an American based firm and its main competitor is a Canadian firm. If the Canadian dollar becomes weaker than the American dollar, the Turkish firm will lose some competitive advantage in the industry. Translational risks, the financial statement of a corporation of its oversea branches are translated into the home currency standards and consolidated into the corporation’s financial statement (ACCAPEDIA, n.d.). In circumstances where there has been a massive movement in the foreign exchange activities, the translation of financial states to the home currency of the corporation can be distorted.
In the analysis of Walmart sale, due to a strong USA dollar, the multinational corporation made a $680 million sales in the first quarter. This shows the corporation is at the economic risk. This competitive advantage due to the strength of the home currency led to a 2.4% increase in sells to $116.2 billion by the end of the second quarter. Despite all that success, the sale was expected to rise to $116.7 billion a 2.8 % increase but due to fluctuation in the currency exchange rates (Chan et al., 2013). Walmart sales mostly rely on the oversea branches, its international division has been linked to a 29% of its revenue that translates to a more than $33 billion. This shows it is at the risk of transactional and translational risk. All the risk can be managed, and the company will be shielded from any of their effects by the following measure. The measure involves an internal and external techniques.
Internal methods include an invoice in home currency, leading and lagging, matching. Invoicing in home currency requires that a corporation recommends customers to pay in the company’s home currency. All this will also demand that the company pays for its imports in its home currency. In this context, the foreign exchange risks will be shifted to the customers, whom upon realization will tend to seek for an alternative seller of the same product. Leading and lagging, is another internal techniques that deal with importer and exporter payment based on a specific currency (ACCAPEDIA, n.d.). If the importer perceives that the currency they want to use for the payment will depreciate soon, they may come up with a deferred payment agreement. On the other hand, the export that is due to to receive payments will tend to seek the payment sooner due to the perception that the currency will depreciate, they may offer a discount for the due payments. Matching is another strategy, when there are receipts and payment in the same currency and are a similar due date, they can be matched against each other.
The external techniques include forward contracts, money market hedges, and forex swap. Forwards markets, currencies are bought and sold at a future predetermined rate. In this context, the currencies fluctuations may not affect the transactions. Money Marketing hedging, this will require the corporation to make exchanges based on the current foreign exchanges rates and not on a predetermined ground (ACCAPEDIA, n.d.). Forex swap, the parties involved agree to swap a given amount of currency for a given duration and re-swap and the end of a designated period at a predetermined rate. Both the external and the internal strategies can be used to shield the Walmart Corporation from any risks as it conducts its business.
2. Bonds, In a bond, a business corporation give money to entities as the loan. The entity could be a government or a business organization that borrows money at a fixed interest rate for a given duration. Bonds can be bought and sold on a credit market across the globe. The credit market is referred to as debt or a fixed income market, for instance, like corporate and municipal bonds in the USA. Walmart can issue the bonds and hence finance the business or any deficits or liabilities.
Money markets, these are the market for lending and borrowing at large scale. Most corporation deposits and borrow via banks. Instead of hedging a currency over any future fluctuations of the currency by the use of forward market (“Walmart strategy drives”……,n.d). By the use of the bank to lend and borrow, the corporation can achieve the similar effect. In this system, the business will avoid the foreign exchange fluctuation risks by taking advantages of the current rate. The strategy can be used to finance Walmart’s future liabilities and shield it from the economic and transactional risks.
Equity markets are a source of finance that corporation requires for startup, development and expansion of the business activity. This is more important especially when there is a financial crisis like 2008 that had stricken America and other nations that Walmart had investment market (“Walmart strategy drives”……,n.d). These markets can be used as a source of finance especially the 3-year strategic plan that it has launched in expanding its services to other regions and improving some experiences like the e-commerce.
3. Present a financial strategy to support long-term financing of operations for possible expansion of your MNC
Portfolio management, in the 22nd annual general meeting by Walmart, a three-year strategic framed was launched that would help to raise the sales in the USA and the e-commerce platforms (Chan, Murphy,& Buckland, 2013). With this strategy, it is expected that the sales with growing at the rate of 3-4 percent translating into $45-$60 over the specified time.
Capital budgeting, in the same meeting capital investment, was estimated to be $11 billion starting from 2017 to 2019 a total of $33 billion. For the year 2016, the capital budgeting will be $12.4 billion, the difference with the subsequent years is for to the expansion of one the Walmart’s physical stores (Chan et al., 2013). For the fiscal year, 2017 will have a$1.1 billion investment in e-commerce and digital initiatives.
Foreign direct investment decisions, this should be based on an analysis of policies concerning foreign investments. Some policies are too stringent to allow a foreign corporation make profits in its country.
4. Recommendations based on the three aspects of question three
Portfolio management, In their quest to strengthen their USA and online-based customer base, it should consider the foreign exchange fluctuation that are swiping all countries across the globe and implement the necessary shield to counter economic, translation, and transaction risks that may impact negatively in a given element of its portfolio. The inflation and economic instabilities shown by the currencies of various nations it has based its business should be evaluated from time to time to know when to invest heavily to accrue more profits and when to cut back.
Capital budgeting, investing to expand business will require the expansion of the workers base. More products will be sold if the home currency is strong in the foreign country. The fluctuation in economics can be studied to show which oversea branch is operating in a weakening currency about the home currency and hence increase the capital budging to take advantage. If the home currency is weak, selling on discounts and offers could help stabilize when the home currency is totally weak. The amount of capital to be invested should be based on realistic overtime expected profits. This will ultimately help when it comes to globalization and marking new markets.
Foreign direct investment decisions, Walmart globalization, is creating employment for people in various nations, most of its sales are bases on overseas stores making it a vital part of its business. Before investing in foreign countries, it should review its foreign investment policies to ensure the profits are maximized. In countries like India, foreign investment policies are too strict and with a good strategy the corporation has high chances of making losses. The consideration of policies will help direct the amount of money to invest.
ACCAPEDIA. (n.d.). Retrieved November 25, 2015, from http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki Pages/Foreign Exchange Risk Management.aspx?mode=none
Chan, V., Murphy, L., & Buckland, K. (2013, August 19). Wal-Mart $680 Million Hit Shows Risk of Not Hedging. Retrieved November 25, 2015, from http://www.bloomberg.com/news/articles/2013-08-16/wal-mart-sees-currencies-hurting-growth-after-680-million-hitWalmart strategy drives growth and sustainable returns, Plans $20 billion share repurchase program over two years. (n.d.). Retrieved November 25, 2015, from http://news.walmart.com/news-archive/2015/10/14/walmart-strategy-drives-growth-and-sustainable-returns-plans-20-billion-share-repurchase-program-over-two-years