Substrat of dissertation
Long considered one of the financial risks faced by companies,
the exchange risk has become in time, and chiefly since the cancelling of
parities of exchange in 1971 by Breton Woods Institutions, crucial problem for
all States.
After the losses endured by multinationals during events in
1967-1969 due to the devaluation of British pound and the
French currency ,the revaluation of the Deutsche Mark, and the floating of
the Canadian dollar, it becomes clear and important to change empirical
hedging methods ,by all appropriate techniques ,in other words to implement a
rigorous and integrated management of exchange risk.
Nowadays it is no longer rare to see major currencies vary by
1% in a single day.
Since then, damage caused by exchange risk appears regularly
in newspapers when big companies endure important losses through exchange risk,
but what really went down in history was the British Bank
Barings apocalyptic collapse, this bank which was 239 year old,
brought down in a single night due to huge losses linked to the exchange risk.
To a lesser extent, Shell Senegal does not escape this logic
.It import 25% of its product from STASCO, a subsidiary of Shell Major and
STASCO invoices in USD.
The exchange risk is linked to interest rate currency
variations; it constitutes a major threat for enterprises which are involved in
international trade and international operations.
We can define exchange risk as the total amount of earnings
and engagements of which the value in national currency will be affected by
variations in exchange of exchange rate.
International institutions, central banks and even States do
not escape this logic.
The exchange risk is constituted by many factors which can be
assembled according to some more or less pertinent criteria, thus we make a
distinction between transactions risk and which is characterized by the short
term and balance sheet risk that concerns the long term.
Position risk is constituted by operations realized directly
by a company and likely to cause exchange losses. Many components of exchange
position risk are obvious and company can be aware of them without
difficulty.
Others are very difficult to identified, and measure. Economic
exchange risk itself constituted by possible earnings company of which the
amount or perennity will affect by modification of the currency interest
rate.
This source of the propagation and diversification of exchange
currency risk has led States to choose one or another regime of exchange in
accordance with their extent involvement international trade
currencies used.
These variations of currency interest rate are explained most
of time by media reporting spreads events which affect the exchange Market.
But nowadays, all economic theories (parity of purchasing
power, parity of interest rate, monetary approach) of exchange currency rate
which have been elaborated to analyse and to estimate the evolution currency
interest rate are becoming instead instruments for analysis and
conceptualising.
This underlies news approaches to currency exchange theory
based on erratic movements and currency exchange rate volatility.
The ingenuity of Market players faced in the difficulty of
anticipating and forecasting the evolution of currency exchange rate has been
to invent new instruments with strong leverage effect called financial
instruments or derivatives instruments.
Appearing first in the United States of America in the
1970's, these derivatives instruments of which the knowledge
and use allow better management of the currency exchange risk, was spread on
the whole international financial Market in the mid of 1980's.
Increasingly, the derivatives instruments have soared
spectacularly.
The use of derivatives instruments has become a pledge or
guarantee of good management and a source of good return for businesses which
are subjected to currency exchange risk.
Here we must make a distinction between derivatives
instruments for hedging currency exchange risk and those for hedging interest
rate only. It is the latter which interest us.
Derivatives instruments themselves are divided into two
groups: Those which can be found on organised Market: these are futures,
options of currencies and forwards.
Apart from the instruments negotiated on the organised market,
those which are on Over The
Counter market such as floors and caps have possibility to
squeeze and limit the price to pay and guarantee a maximum price for
companies.
.
However, companies in their trading relationships dispose of
many internal instruments that they can use such as: we have netting,
«termaillage», options clauses, and adaptation clause for price
proportional for floating exchange.
For a long time, Shell Senegal stayed aside and did not of use
derivatives instruments, but losses from exchange currency risk registered over
the last three years has encouraged the an exchange unit charged with managing
the risk implementation .
Definition by Shell Senegal of a strategic direction
expressly clearly for managing currency exchange risk will necessarily be
accompanied by internal reorganisation with the aim of taking better control of
currency exchange risk, interest rate risk and perhaps one day on price
risk.
Bearings in mind the politics managing that company, we do
not speculate on financial market in general nor particularly the exchange
currency market but perhaps to find local reliable counterparties with which
certain derivatives instruments could be easily used.
First of all, we invite the Managing Direction
(MD) to begin to put in , between their own company and all
banks using derivatives instruments conditionality ,We think that, it is the
first steps to use derivatives instruments in the future..
Then, we must publish clear and precise rules which direct to
serve as frame of reference for the exchange currency risk unit.
These rules must specify accurately without mistake the amount
that we must do not exceed, limits that we must not exceed, but respect, the
counterparties we use, the role of any member of exchange currency risk
management unit, their rights and their duties.
The exchange currency risk unit has an essential role in
establishing exchange positions continually in time. These positions must be
followed constantly in real time, which implies the implementation of rigorous
procedures and the collection of information.
That will result in material and organisational difficulties.
The tracking of the exchange position requires a unit which has a role to
manage exchange risk to establish information collect circuit which is tracked
in real time from all departments: commercial, procurement, invoices.
This organisation is the indispensable condition for using
exchange positions because any delay awareness of an element creates an
unforeseen exchange risk.
The circuit of information must be double: accounting for
registering operations, invoices, procurements, borrowing money, and extra
accounting to see risks advance..
Thus, this unit would establish positions and close them. It
can also to project itself into the future, that is means calculate their level
in the according to a given hypothesis.
Then, it is necessary to provide the unit with the human and
material means indispensable for better currency exchange risk management and
selections for choosing products which capable of managing currency exchange
risk.
A periodic review in term of control must be also registered
in the procedures, in order to a quarterly or semi-annual periodic evaluation
of the performances of this of exchange unit.
But the performances of this of exchange unit will not have to
be only limited to the risk management of exchange, but also and with the
adaptation and /or anticipations of the evolution of the currency exchange.
Accordingly, one of their greater tasks will be to have a
data base on a long period, a consultable base, data as interns also the market
of the prices of oil to see in which direction the future prices of the raw
materials will move and the exchange of main currencies.
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