Having reviewed the exposures and responses of eachcompany, individually, we see that they all have some level of variability onhow they approach exchange rate risk. Both AAPL and HPQ has consistently usedforward contracts, interest rate swaps, and option contracts to offset foreigncurrency risks. Lenovo on the other hand just uses forward foreign exchangecontracts to hedge its currency exchange risk. The recommendation we have forLenovo is to diversify its hedging portfolio, including introducing ‘Options’derivative instrument to manage the company’s risk exposure should also belooked into.We also need to keep in mind the causes of suchcurrency fluctuations.
We see that majorly global economic events anduncertainty causes currencies to fluctuate and that dominos to a currencyvolatility contributing to variations in sales numbers of products and servicesin impacted geographies. For example, in the event that one or more Europeancountries were to replace the euro with another currency, sales of companiesdoing business in Europe would likely be adversely affected until stableexchange rates are established. Few examples of current events which wouldimpact currency risk for organizations doing business worldwide are: a) President Donald Trump’s tax reform opens prospectof a stronger US Dollar heading into the end of 2017, this may adversely affectforeign currency-denominated sales for AAPL, HPQ and Lenovo.b) Continuous weakening of Chinese Yuan by Chinesegovernment, may negatively impact Lenovo Group’s revenue forecast, since closeto 30% of its revenue comes China1, andlastly, c)Political unrest in Europe: Brexit – The UK prime minister’s decision totrigger the Article 50 exit clause of the EU treaty gives the UK and the EUuntil the end of March 2019 to reach an agreement. Cataloniacrisis – could damage future business forecasts for AAPL, HPQ and Lenovo.European market consists of nearly 20~25% of their revenue1Chinese YuanLooks More Like Floating Currency,www.bloomberg.com/news/articles/2017-11-16/yuan-looks-more-like-floating-currency-nowadays-fed-study-shows