In multinational finance operations, multinational enterprises often target debt and equity capital that is available in such large markets (Suk & Seung, 2006). There are several such sources of funds available. While most capital comes from global equity markets, and offshore financial centers, most multinational enterprises also target internal sources arising from interfirm linkages. Once secured, MNEs must have apposite hedging strategies to manage inherent foreign-exchange risks and international tax issues. They should also develop strategies for making appropriate capital budgeting decisions. By discussing conventional steps in an exposure-management process, this paper reviews Dell Mercosur's international business strategies in Brazil. In particular, the paper describes and evaluates the firm's exposure management strategy and programs towards providing it with appropriate operational hedges.
Steps in an Exposure Management Strategy
Any MNE must undertake a number of steps in managing its exposure. To protect its assets from risks arising from exchange rates, a firm must first define and measure its exposure (Daniels, Radebaugh & Sullivan, 2010). This involves forecasting the degree to which it is exposed to major currencies that it uses in its operations. A firm must then develop a uniform reporting system. Such as system is necessary to identify the accounts whose exposure it will monitor. The system is also necessary to monitor the degree of exposure by currency of every account and the various periods in consideration (Kiymaz, 2003).
The next step is the formulation of a centralized policy with which to achieve optimal effectiveness in hedging. Such a policy is often developed at top management. Most MNEs fancy the covering of exposure instead of risking huge losses or extracting huge profits in such policies (Daniels et al, 2010). The final step involves the formulation of appropriate hedging strategies. Often, MNEs consider hedging their positions by assuming financial and/or operational strategies that have both operational and cost/benefit implications.
Dell's Exposure Management Strategy
Dell Mercosur is a subsidiary of Dell Computer and is situated in South America. The firm has maintained a facility in Brazil that produces its wares. It also has a call center to serve its clients in Argentina and Brazil. The operating costs and revenues have almost entirely been denominated in reels (Daniels et al, 2010). However, about 97% of its production costs within Brazil are denominated in U.S. dollars because the company relies on U.S. imported parts. To "get real" in Brazil, Dell's handling of the exchange rate fluctuations has been aimed at reducing the effect of unfavorable fluctuations on cash flows and earnings related to changes in foreign currency exchange rates.
In regard, Dell has adopted forward and foreign currency option contracts as a way of edging its exposure on anticipated transactions (Daniels et al, 2010). The firm also employs forward contracts and purchased options contracts as its cash flow hedging management strategies. Its hedged transactions comprise foreign-currency denominated purchasing of some of the necessary components, global sales by dollar (USD) functional currency entities as well as through interfirm shipments to particular subsidiaries internationally. To hedge monetary liabilities and assets denominated in foreign currencies too, Dell uses forward contracts. Instead of attempting to haul out huge profits from its transactions, the firm has preferred to shun huge losses. Because the firm's main strategy is to hedge all its foreign-exchange risks in these endeavors, its strategy is considered quite aggressive.
Programs and/or Strategies to Provide Dell with Operational Hedges
Dell may opt to balance its local assets with its local debt to obtain operational hedges. It can achieve this by borrowing funds locally as this would help it in avoiding the foreign-exchange risk that arises from borrowing in foreign currency (Allayannis & Ofek, 2001). Alternatively, it may choose to capitalize on leads and lags in its interfirm payments. A lead strategy would mean that the firm collects foreign-currency receivables before their due date. At such times, the currency is projected to weaken. A lead strategy may also involve submitting foreign-currency payables before their due date. At such times, the currency is projected to strengthen (Suk & Seung, 2006). A lag strategy means that a firm should delay the collection of its foreign-currency receivables if there is an expectation that the currency would strengthen.
Alternatively, payment of foreign-currency payables may be delayed if a weakening of currency is expected (Suk & Seung, 2006). For the movement of huge blocks of funds, this strategy may not be very useful, nevertheless. From the foregoing, a foreign-currency option for attaining operational hedges is more flexible as compared to Dell's use of forward contracts. It accords the firm the right to buy or sell a given volume of foreign currency at a predetermined exchange rate. Such a right is not amenable to any regulatory obligation or a predetermined amount of time.
