Finance

In 2008, General Motors was recorded as the third largest automaker in the Fortune 500 by revenue. The company was the largest automaker, by sales, in the United States and the third largest in the world, by sales. With production in 34 countries, GM employed 244,500 workers around the world and sold and serviced vehicles in over 140 countries worldwide.


On 1st June, 2009 filed for Chapter 11 Bankruptcy Reorganization. Not only was it the largest bankruptcy of the year for the US Retail Industry, it was also the 4th largest bankruptcy reorganization in the history of the United States commerce. The new entity has largely been purchased by the US and Canadian Governments along with some holdings for the United Automobile Workers Union and G.M. Bondholder. The companys Hummer and Saturn brands were sold and the Pontiac brand was discontinued. When a company as large as this goes into bankruptcy, not only do its thousands of workers face unemployment, it is also poses a threat to parts manufacturers, dealerships, and myriad other allied industries. The slippery slope threatens to spiral out of control and intervention becomes necessary.
After decades, the company finally brought about an innovative product in the 2011 Chevy Volt which had built an unparalleled hype. Increasing costs during the economic crisis forced GM to shut down factories thus reducing the industrys overcapacity of cars and trucks. Eventually, when a new labor agreement kicks in, the cost of producing a car will go down and GMs products can become more competitive. Despite these factors, five severe obstacles brought General Motors, a giant in the automobile industry, to its knees. This article explores those financial and economic failures (Stoll, John D).

    Economic and Financial Failures

    Demand Shift and Uncertain Energy Policy
The first shot was the dramatic rise in energy prices in the summer of 2008. That caused a rapid mix shift in vehiclesand had a major impact on profitability. GM, Ford and Chrysler have relied on SUVs and trucks for the majority of their profits. Those vehicles commanded high sticker prices and by the late nineties made up 50 percent of the U.S. car market. When demand for the big vehicles dropped quickly and customers went for smaller, less expensive, less profitable cars, auto companies had two major issues to deal with A loss of revenue and a backlog of unwanted trucks. Another big factor was the USs lack of an energy policy. They just dont have one. When things like corn-to-ethanol were done, problems were naturally bound to rise since they didnt have a base in economics or technology. Not only did this contribute to a rising food price problem, with increased demand on grains, it also teed up problems for the automobile industry. General Motors was the slowest to respond to the market trends and thus demand shifts hit hard (Terlep, Neil King Jr. and Sharon).

The Financial Meltdown
Predictions placed the annual sales for 2009 of General Motors at less than 10 million. This is the lowest figure in over a decade, dropping dramatically from an average of 15  16 million annual sales. The drop largely derives from the lack of availability of credit. The company doesnt have the credit available to squeeze out of its crunch and customers have a reduced demand due to the low credit availability. The auto industry lives on credit as do its customers, so when access to car loans or leases is limited, sales fall off a cliff.
Legacy Costs
Every car GM makes carries legacy coststhe costs of providing healthcare and pensions to scores of retired workers. For every GM worker, there are about 10 dependents, which are defined as retired workers and their families. When the international car companies came to the U.S., the move stuck the domestics with a very large disadvantage related to legacy costs. And thats 2000 a car. That two grand must be built into the sticker price of any new GM car and truck. And thats money on top of developing, producing and marketing a carcosts that Honda, Toyota and others dont have. It makes competing difficult for the domestic automakers, like playing basketball with a bowling ball, according to the Chairman of the Center for Automotive Research, David Cole. GMs per-hour labor rate for car assembly is about 75 per hour, compared to 40 to 45 for other car companies. That particular disadvantage will be gone when a new labor agreement goes into effect (Ramsey, Jeff Green and Mike).

Sub-Par Quality and Lackluster Cars
Back in the early 1980s, while GM president Roger Smith fell in love with the idea of automating workers out of car factories, Toyota and others focused on refining their production techniques and produced much higher quality cars. Customers left GMs brands en masse. The companys market share has fallen from a high of just over 50 percent in 1962 to around 23 percent in 2007. In recent times, the quality gap has narrowed considerably but perception trails reality. Getting those customers back would require a herculean effort. Vehicles like GMs very first attempt at a crossoverthe sub-par 2001 Aztecdidnt help. Cars like that left customers will little incentive to return (CNN).

Global Slowdown
GM operates in 34 countries, and if its U.S. operation has been in decades of decline, other markets have been growing, particularly in Asia. But the financial shock has spread across the globe and sales are down everywhere. In effect, GM is bleeding from several wounds. As the largest of the Big Three, GM has been the focus of the media spotlight. But Ford and Chrysler are facing similar problems. And of course, thanks to many of the same factors, even healthy car companies are feeling the pain. The domestic auto companies werent the only ones that capitalized on the U.S.s thirst for light trucks. Half of Toyotas offerings are trucks and minivans. The difference is that Toyota doesnt come into this tough period already weakened by past mistakes. General Motors is particularly hard hit by the slow down because of the above five reasons, particularly its legacy costs and its lack of innovation (Oberois, Peter).

Chapter 11 Reorganization

The U.S. government and the Canadian government are providing 30 billion to the company to continue operating while in Chapter 11.
A proposal to form new entity that would be owned 60 by the U.S. government, 12 by the Canadian government, 17.5 by the United Automobile Workers union, and 10 by G.M. bondholder has been presented to the court for approval.
The U.S. government is backing GM vehicle warranties during the Chapter 11 process. The new GM is expected to assume responsibility for product liability, lemon law violations and workers compensation claims.
The company plans to sell its Hummer and Saturn brands, and discontinue the Pontiac brand.
Unable to sell the medium-duty truck production, and will discontinue operations at the end of July
Received court approval to borrow 33.3 billion from the U.S., Canadian and Ontario governments
The new GM company will launch a new stock IPO in early 2010
U.S. bankruptcy court approves GMs bankruptcy sale, leaving its most profitable assets intact and under government ownership on July 6, 2009
Emerged from bankruptcy protection on July 10, 2009 as a new company, which is majority owned by the U.S. Treasury

Analysis
With a new life, GM has the opportunity to correct several of its previous mistakes. Above all, the blame for its current meltdown falls on the company itself. Other automobile industries have suffered from the economic crisis and demand shifts just the same as General Motors but GMs massive legacy costs (GMs oldest former member is 110 years old and is still receiving retirement pensions), lack of innovation, and high priced vehicles make it impossible to compete in todays market (Motors, General). 

Financial Overview and Personal Goals
The fact that the Simpsons have started thinking about their financial well-being, begun to budget their cash inflows and outflows and are trying to make up a savings plan for their various goals is a good start and the first step to financial management. However, their cash flow statement (See Appendix A), tracking their cash inflows, and their various cash outflows, shows that the Simpsons expenses are exceeding their income by around 35 a month. This is contributing to their debt, and eating away into their meagre assets, as shown in the Assets and Liabilities columns in Appendix A, not taking into account the savings that the Simpsons wish to make in order to pay for a new car and their son Harpers education. As the Simpsons are currently exceeding their monthly income, unless they make some changes to either their income or expenses, they will not be able to save for their financial goals.

The Simpsons have a current annual income of 30,000. They have expressed three types of financial goals  short-term, intermediate and long-term ones. Their short-term goal is to save 3,000 with the aim to put a down payment on a new car for Mary. In order to be able to afford this, the Simpsons hope to save 250 per month, so that in a years time, they can replace Marys current well-worn car. As an intermediate term aim, within 10-12 years, the Simpsons want to save enough for their son Harpers education to support him through college. For this reason, they hope to save 150 per month. Assuming an interest rate of 8 annually, they will be saving 27,442 over 10 years (see Appendix B). In the long term, the Simpsons plan to save for their retirement. However, since they do not have any spare cash and are already planning to save 400 a month for their short and intermediate term goals, they have decided to postpone saving for retirement until later.
In order to evaluate these goals, it is important to know the actual amounts that are needed for each of the short, intermediate and long term goals. Assuming, for instance, that 3000 is enough for a down payment on a car, the Simpsons have not explained how they plan to include the payments for the new car within their already constricted monthly budget. As for the goal of saving for Harpers education, the actual cost of college expenses is not provided, so it is assumed that saving 27,442 is sufficient. This goal is realistic, if the Simpsons are able to save the 150 each month at the assumed interest rate, or are able to secure a higher rate of return on their investment.

The Simpsons have set a long-term goal of saving for retirement, but have not expressed a realistic timeline concerning when they can start saving for it, and how much they plan to put aside. Most financial planners like Burton Malkiel suggest starting to save for retirement as early as possible, as less money saved over time can add up quite quickly. In Appendix B, I have demonstrated the amount that the Simpsons can have at the age of 65 if they invest 50 a month starting today. The amount is a staggering 114,694. By contrast, if they save the same amount over a 15 year period, they only put away 17,301 for retirement. Financial experts typically suggest that you should hope to retire at the age of 65 with 80 of your pre-retirement income. Thus, if the Simpsons are serious about saving for retirement, they need to start thinking about it now.
Cash Flow Statements and Balance Sheet
The Simpsons current monthly income is 2,600, and their total expenses are 2,635 (Appendix A). Thus their cash outflows exceed their inflows by 35, which they are probably making up from their current account or charging to their credit card. They also have assets totalling 77,900 and liabilities totalling 61,500.

Net Worth

Their current net worth, their total assets, is less than the scope of their total liabilities. The Simpsons current net worth is 16,400 (see Appendix A). If the Simpsons pay off their credit card debt from the current account, their liabilities will reduce by 1,500, but so will their assets, leaving the net worth unchanged. If they are able to save 400 a month, their assets will go up, by at approximately 30,000 (see Appendix B).

Revised Cash Flow Statements
Their current income and expenses do not have enough room for the savings that the Simpsons are currently contemplating, let alone for saving for retirement. Whilst their goals to save are admirable, in order to make them a reality, they would need to make some changes to their cash flow statement. Assuming that their income is fixed in the short term, the changes would thus be needed on the expense side. Without knowing the details of the details of some of the Simpsons expenses, it is difficult to make recommendations for instance, I would need to know how the 600 spent on recreation and programmes for Harper is distributed, and whether some of it can be cut back. I would recommend however, that the Simpsons look closely at their expense column, and attempt to cut back on their expenses by approximately 435, which would mean that they would not be spending more than they currently earn, and they would be able to save 400 a month. They should consider cutting back on are the recreation, clothing, cable and gym expenses. Additionally, depending on the rate of interest that they are paying on their credit card balance, they could consider paying off the credit card debt with the money they have in their current account. They are not earning any interest on their current account, and they could save a lot of money on interest by paying off this debt. In case of emergencies in the future, they could charge any unforeseen payments by the credit card. In Appendix D, I have created an alternate budget for the Simpsons, which is simply one way to reallocate their income and ensure that there is still some savings, in this case, 385. Depending on what expenses are essential and what can be curtailed, the Simpsons can allocate their income in some other fashion.

Another way to achieve their financial goals would be to re-evaluate the time lines for them. If they cannot cut back on their expenses quite that much, they might consider postponing buying a car by a few more months and putting aside less every month for the car. Besides, the Simpsons could save less than 150 monthly for their sons education, or start with a smaller amount now and increase it if their income goes up in a few years.

Liquidity

If the Simpsons alter their budget as recommended, they can cover their current expenses as well as a large part of their planned monthly savings. This does not take into account any future increases in income. According to the statement in Appendix D, the Simpsons can save 385 monthly. In addition to this, the Simpsons have assets of 77,900. To determine their liquidity, we can use two financial ratios to see if they have adequate cash for emergency situations.

Their current ratio is 1.2733, which is the ratio of their assets to their liabilities (see Appendix D). Their quick ratio on the other hand 0.016667, which is the ratio of the assets that are easily liquidated to the liabilities.

Savings Options

There are various saving options available for the Simpsons. It is a good idea to shop around for different rates, before deciding on a savings option. A good website, such as Bankrate.com or Moneysupermarket.com, can provide details on different options such as fixed term bonds or individual savings accounts (ISAs). Appendix E has two short-term saving options, and compares the rates between Barclays and HSBC. As is evidenced, the rates can be very different, and vary depending on the length and amount of the investment. Whilst here Barclays is obviously the superior choice, it is possible that the Simpsons prefer a savings option that is for a shorter or longer term.

Identity Theft Precautions

The Simpsons should separate their mail, and any mail that does not have any personal information like date of birth, bank account details etc, can be disposed of in the trash. Mail that has sensitive identifier information should be shredded and disposed of safely. If in doubt, shred it anyway. It is also a good precaution to check bank and credit card statements to ensure that all the charges on it are genuine.

Paying Off Credit Card Balance
The Simpsons have a current credit card debt of 1,500, on which they are simply making the minimum payments, which does not reduce the principal amount of the debt. They would be better-off using the money that they have on their savings account to pay off the debt, even though they would lose the 5 interest it brings in. In Appendix C, I show that the 5 rate brings in 75 annually on an equivalent sum of 1,500. In contrast, by paying 18 interest on their debt, they are spending 270 in interest. It is clearly in the Simpsons interest to pay off the debt with the funds in the savings account. This shows that credit card decisions, which typically carry much higher interest rates, have a very strong impact on individuals budget decisions and their financial health.

The financial sector is one of the most important industries of the world. Not just because it involves large funds and astronomical figures, but, it is this industry which drives the entire world. The financial sector is more globalised than ever and every transaction of it impacts a large population in some way or the other.
The financial sector is largely dependent on the consumer and customer service forms an integral part of it. Be it any financial organization, banks, stock broking companies, insurance providers or any investment firms, every transaction revolves around customers and their requirements.
The customer base may vary from individual to corporate however, the end result involves customer service. This is one of the reasons why most top banks have an extremely good customer services department to help in any enquiry and attend to a customer requirement.
However, customer services are not just restricted to handling out information and selling products. Customer service also involves safekeeping of funds and providing a safety net to them, in any situation. In order to provide this safe shield and ensure customer satisfaction, most financial institutions are today, bound by certain contract laws which clearly list out the responsibilities to be undertaken by them. These laws and understandings are essential for customers to invest and work in a safe environment with the security of the law.
The incorporation of these laws happened over a period of time and this changed the face of the financial sector. The details, developments, advantages and also its disadvantages is what we shall discuss in the given report.
Disputes in the Financial Sector
In any industry around the globe, problems are aplenty. There is no such industry or sector which is not plagued by problems. The financial sector being no different also has a number of issues and disputes.
These issues vary from one customer to another. The likely disputes in the financial sector are that of irregular interest rates, terms of investments, unprecedented stock price rise, unfulfilled returns promise and fund keeping. The issues of stocks failing without warning or funds being guzzled by the financial heads is a common tale. Just a couple of days back the VP Finance of a leading public listed company of the USA was arrested for frauds in the companys accounts.
The failure of huge industry houses such as Lehmann Brothers, Meryl Lynch came as a big shock to the entire world. This type of environment and risks associated with financial sectors make the customers vary of making any financial commitments. This is when the need to develop laws to safeguard the investor and his interest becomes relevant.
The need to protect every person involved in any transaction with any financial organization, be it banks or stock broking companies, is what was felt to be most essential so as to allow this industry to prosper. According to the International Monetary Fund, a resilient, well-regulated financial system is essential for macroeconomic and financial stability in a world of increased capital flows. In a world plagued with crises after crises, the stability and safeguarding of investors is of utmost importance so as to promote the finance sector and protect it from any potent dangers.

Laws for Financial Disputes
The legal infrastructure plays a pivotal role in the operation of financial markets, as well as in the efficient intermediation of capital flows and domestic savings. Banks and other financial institutions hold claims on borrowers, the value of which depends on the certainty of legal rights and the predictability and speed of their fair and impartial enforcement.
The legal framework that empowers and governs the regulator and the rules for
The regulation of the various markets forms the cornerstone of the orderly existence and development of the financial markets. In this respect, the key laws are (a) the law governing the formation and operation of the central bank and (b) the law regulating banking and financial institutions and markets.
These laws have played a very important role in safeguarding the interest of customers, whether individual or corporate, in delivering justice and providing a safe net to investors. The original laws which were formulated were based on contract laws. The basis of contract law is mutual trust and understanding. In contract law a mistake is an erroneous belief, at contracting, that certain facts are true. It may be used as grounds to invalidate the agreement. This is the foundation for the laws governing the financial sector, which is known as Finance Companies Act. The coverage of this law is very large and covers banks, insurance companies, stock broking firms and investment firms.
A lot of cases have been very historic under this act and led to landmark judgments. Some of these cases can be cited as
 Roswell State Bank v. Lawrence Walker Cotton Co.
This case made a landmark judgment by declaring that a bank, title company, document processing firm, or the like is not liable for false information provided to it, any more than a bank was liable for false information from a trusted customer turned embezzler who drew an unauthorized cashiers check.
This judgment proved to be a vital decision in a number of cases to follow.
Union Bank  Trust Co.v. Girard Trust Co.
As a judgment in this case, firm processing information in order to transfer title using information provided by customers lacked the intent to commit illegal or improper acts when the information furnished to it was wrong. It was not part of its job description to know better, and it did not know better, and charged only a nominal fee for the clerical work, clearly not including any investigation. Further, it could not be in a conspiracy with another party or several parties who knew the information was wrong but failed to inform the title firm. The title firm could not unknowingly become part of a conspiracy of which it was never informed, and from which it could derive no benefit. The attempt to enhance liability or shift blame by filtering data through an innocent party has been tried before, but where the conduit providing document preparation does not know more than its informants, and was not hired or paid to investigate, it is not liable in their place for using their bad facts without guilty knowledge. This came as a very important decision with respect to the banks knowledge about its customers and its related information.
These cases are just an example of the sort of security cover available in the framework of the law. The basic idea of these laws is to protect parties, the investor as well as the company from any mishaps and wrong doings.
As part of the new regulations a number of companies and institutions are now bound by these laws for their own as well as their customer protection.
Organizations adopting corporate laws
As a mark of quality control and assurance to its customers, a number of firms have very strong dispute resolution teams aimed at providing complete customer satisfaction and ensuring its own reputation. One such firm which is very much involved is one of the global leaders in financial auditing, Deloitte. The professional services firm has assembled a multi-national team with deep knowledge of the approaches that tax authorities in key jurisdictions are likely to take in the transfer pricing of financial services transactions.
Based on their experiences of the financial markets, one of its top executives commented that the financial service companies have struggled to develop transfer pricing policies that can be globally applied. The rules and guidance covering these sorts of transactions have not always been clear or consistent across countries. This is one of the major reasons for involving a dispute resolution team so as to be able to sort out localized as well as international affairs.
Transfer pricing is one of the most significant tax and FIN 48 compliance risks for multinational groups. Tax authorities around the world are investing heavily in developing new ways to challenge transfer pricing with more effective risk assessments, audits and litigation success. For multinationals, strong systems, up to date pricing models, access to experts and a global approach are at the heart of the best defenses in this environment. This thought process has led Delloite in appointing a large group of professionally qualified executives to resolve any issues related to financial transactions.
Apart from companies, the major regulatory board is involved in the case of stock markets. Stock markets of today are highly regulated under various bodies for its smooth functioning and to allow everyone to carry out trading activities based on actual merits of any share and not on the monopoly of stock brokers. Regulatory bodies such as the US Securities and Exchange commission defines the regulations for carrying out business in the New York and NASDAQ stock exchanges have their own well defined regulations so as to protect companies and their investors from any frauds. These regulatory boards define every step involved in carrying out transactions and have well defined rules for them. Every company that wishes to carry out trading in the secondary market needs to comply with these regulations in order to function else, it would get black listed from the index.
The international monetary fund is another organization which looks into the regulations of funds transferred on a country level and ensures that the money reaches the correct target. The IMF makes certain rules for carrying out funds transfers and they must be complied with in order to carry out a transaction. The duty of the IMF is to act as an auditor to ensure that the funds which are sanctioned are not for any private profit but for the benefit of any country or institution. In times of extreme crisis and weak financial institutions, the IMF regulations are a framework within which all the money given to a country or company must be used. Any infringement of the regulations of the IMF can lead to serious consequences and punishment.

Advantages of Dispute Resolution
Now that we have seen the functioning of the financial sector, its associated disputes and also a detailed assessment of the contract laws involved, the issue in contention is that why do we need these contract laws Is there any use of having these laws and has there been any advantage of this The answer to this question is yes. The formulation and implementation of contract laws have seen a large number of benefits vetted out to both the investors as well as financial institutions. These laws have given a well defined framework for companies to work and implement its policies. The presence of these laws has not just made the customer more aware but has also given them a support to fall back on, in case of any fallout with their respective company.
A good example of the implementation of these laws was the conviction of the top management of the top power company Enron for embezzling huge funds from a public listed company. This conviction was only due to the existence of the company finance act which enable justice to be delivered to all those found guilty. This conviction wouldnt have been possible but for these laws which provided a security net for those investors who trusted the company.
This is one of the many cases where the corporate governance and laws played a pivotal role in delivering justice to the investors and customers of the company. The success of these cases instilled a sense of confidence in the investors and customers of financial organizations, thereby, increasing the demand for more such laws for mutual benefits.
Development of Financial Dispute Resolution Laws
With the financial markets struggling against the backdrop of huge crises and more and more globalized economy, the need for more regulations and detailed provisions of dispute resolution laws are required. This is the reason for the development of Dispute resolution laws in the UK, Japan, Singapore and other economies. With the increase in the number of financial institutions and investors and with globalization, the need for protective laws is much more. Right from contracts to trading to transfer of funds, every aspect of finance can get into severe complications. These can result from location issues, country regulations or taxation problems. In all cases there is immense need for better and stronger dispute resolution acts.
Even institutions such as IMF have come up with stringent regulations for money that is sent out to different countries for development purposes. The role of the IMF is very important because a sound financial system is therefore essential for supporting economic growth. Problems in financial systems can reduce the effectiveness of monetary policy, deepen or prolong economic downturns, and, in case of large scale problems, trigger capital flight or create large fiscal costs related to rescuing troubled financial institutions. Moreover, ample international financial and trade links imply that financial weaknesses in one country can rapidly spill over across national borders. Hence the soundness of a countrys financial system is important both for the domestic economy, as well as for its trading partners and countries with which it has financial linkages. This responsibility can only be carried out by an international regulatory committee.
Even the regulatory committees like the Securities and Exchange board, governing the NASDAQ regulations has been requested to provide more detailed laws for protection of investors.

Disadvantages of corporate laws
The corporate laws are like any other thing in this world, with both pros and cons. However much we would find it beneficial for both companies as well as investors, yet there are certain drawbacks of this.
One of the main issues is the inconsistent nature of dispute resolution laws. Every country has its own financial laws and their terms and conditions vary. This can be an arduous task for any committee which tries such a case in an international market. A law which governs financial transactions in USA may vary greatly with the laws of the UK. In such a case there is need for an attorney to understand both legalities and also understand which country to file the case so as to ensure justice is delivered to the complainant.
Also, in some cases the parties tend to take advantage of the loopholes in various contract laws, which can lead to injustice being done to either party. In order to prevent this it is important for the regulatory committee to maintain a strict vigilance and ensure justice is delivered.
There are no straight disadvantages of having corporate laws, but it is essential to be careful while accepting any such contract because sometimes things can be implied but not clearly mentioned which may lead to misunderstanding on both sides. This is one of the main errors which need to be avoided while getting into any contract law in financial transactions.

Personal Opinion
In accordance with the requirement of this report, I would like to include a point of view of my own on this issue of corporate laws in the financial sector.
As an individual investor I certainly feel very safe when I enter into any transaction which has a legal backing and also when I know that I can approach the justice system in case my trust is betrayed. There is no better security for me than a legal aid especially when money and financial matters are involved.
I feel it is one of the best things to happen to the financial world. Making a company commit to its promises legally ensures proper discharge of duties. This instills a sense of confidence and security in the investor and helps the industry to grow exponentially.
Even from the point of view of a financial institution, a legal contract ensures the customers and investors stick to their promises and this helps in developing a mutual relationship. This legal contract definitely ensures a smooth functioning of the financial sector and removes possibilities of any frauds.
However, there is a possibility of either the investor or the company taking advantage of these contracts by implying a number of conditions not explicitly explained. This is one case which one needs to be wary and decide accordingly. It is essential to be able to communicate well with the institution or investor before entering into any contract. Also, the other drawback is that companies can sometimes be falsely implicated by investors even though they are innocent. This is where the law and its implementers have to be very vigilant and judicious in their decision, to decide who is right and not.

When companies undertake global business, they take a risk since their business operations and investments are likely to be adversely effected by alterations in the exchange rates for dissimilar currencies. This type of risk is referred to as exchange rate risk. Increasingly, a number of business companies are scrambling for a share of international market, especially in third world countries, and putting funds in foreign stocks. However, all economies including the most developed, experience downturns once in a while. In the case of third world countries, currencies and economies may be moderately volatile due to factors, such as political turmoil as well as oil prices, thereby creating unstable environment for global market. These factors can greatly affect the cash flow, earnings, and balance sheet of several multinational companies in such developing nations. This report presents a wide definition and major types of exchange rate risk, discusses the measurement approaches used to measure the risk. It concludes by identifying that economic or operating exposure is likely to be most important in the long run.
Exchange rate risk refers to a risk which a firms performance will be affected due to exchange rate engagements. For instance, an international firm incurs direct and indirect loss when the host countrys exchange rate depreciates. Alternatively, this firm is able to do profit when the host countrys exchange rate appreciates. International companies need to intimately monitor their monetary operations as away of determining how they are exposed to the different types of exchange rate risk. Thus, financial managers ought to comprehend how to measure and manage their companys exposure to fluctuations in the exchange rate. This will assist them to determine whether or how to shield their multinational companies from a particular exposure. Firms could avoid exchange rate risk by exclusively doing business in their home countries, though for enormous businesses this stands out to be a difficult pragmatic proposition. Another realistic and practical alternative is to persist on utilizing ones own currency for each and every transaction. However, requesting or asking every customer to use Euro (for instance) is quite inflexible, a tall order, and forces the customers to take all the business risks, which may not go down well. A more logical, pragmatic, and rational way is for multinational companies managers to understand the basics of exchange rate risk in an attempt to reduce its adverse effect. Its a complicated issue, but its worth for companys management personnel to learn about the issue in order to act prudently on advice.
The major indicators of exchange rate risk are the relationships between inflation, exchange rates, and interest rates. The most substantial relationships are described as follows Purchasing power parity, in this particular concept it is assumed that in a stable market place, the relationships between exchange rates of dissimilar nations ought to be in similar ratio as the price of a fixed services and goods.  This implies that there is existing parity between exchange rates and the currencies purchasing power. There are several ways of expressing this concept, but most frequently  is that disparity in the rate of inflation is equivalent to the rate of alteration of exchange rate. Furthermore, the theory of international fisher effect suggests that disparities in interest rates between nations are anticipated to be offset by prospect alterations in exchange rates. For instance, if an investor earns an elevated interest rate in another nation, any benefits are offset by adverse exchange rate and this relationship is expressed as the interest rate differential is equivalent to the anticipated rate of alteration of exchange rate. Besides, unbiased forward rate theory proposes that forward exchange rate remains the most precise, accurate, and correct measure of anticipated prospect exchange rates. This is expressed in trouble-free terms as the forward exchange rate being equivalent to the anticipated exchange rate.
These exchange rate risk indicators aside, shielding a multinational company against exchange rate risk largely relies on vigilant monitoring. Factors, such as inflation, politics, consumer confidence, capital flow, and state of export and import markets together with several other social-economic conditions affect currency exchange rates. Furthermore, individual states or governments frequently take action in controlling the instability of currencies. These factors lead in exposure to 3 major exchange rate risk of transaction, translation, and economic. Translation risk (exposure) is a risk where changes in exchange rate will weaken a firms assets, income, liability, and equity. Therefore denomination of this risk is substantial, though experts suppose that actual assets are not easily affected by currency movement in any way. To protect the company against this risk, firm managers ought to undertake hedging technique in order to keep a close watch on any significant change on exchange rate. This sophisticated technique as well assists the fund managers in diversification of a firms holdings in dissimilar currencies.
Transaction exposure is another exchange rate risk, and refers to cash flows changes which emanates from accessible contractual obligations. This particular exchange rate risk in concerned with prospect cash flows following a contract agreement is a problem that often experienced by multinational firms in the international markets. Its not typically rational or logical to insist on advance payment from consumers and thus a technique referred to as factoring is normally utilized to reduce transaction risk. The technique comprises selling off firms international accounts receivable to a factoring value that then assumes on the responsibility for collections and credits. Factoring houses usually buy foreign accounts receivable at 90 to 95 percent of their original value, though the discount may be more than anticipated. Multinational companies frequently recover their losses via product price adjustment.
Apart from translation and transaction risks, there is economic risk (operating risk) that companies experience when dealing with international business and investments. It is a type of risk to unpredictable exchange rates that adversely impacts on a firms cash flow, foreign investments, and earnings. The degree to how a multinational firm is affected by economic risk is highly reliant on business and the nature of the firm. However, a number of companies frequently hedge against this type of exchange rate risk via foreign exchange market. Additionally, in economic exposure, international firms profits or gains will be wrinkled by changes in exchange rate as result of escalating costs. Many companies are much narrowed in actions to take in protecting themselves in this kind of circumstance. This risk is normally practical to the present value of prospect cash flow operations of a companys parent firm as well as overseas affiliates. Recognition of different kinds of exchange rate risk, together with their measurement, is imperative to strategic development and management of risks in a multinational company.
Measurement of Exchange Rate Risk
After definition of various kinds of exchange rate risk which multinational companies are exposed to, a critical aspect of these firms remains how to measure these risks. The process is quite complicated and may perhaps prove difficult, especially with regards to economic and translation risk. Currently, the most utilized risk measurement method is the model of Value at Risk (VaR). Generally, VaR is referred to as the utmost loss for a specified risk over a specified time scope with z percent confidence. The Value at Risk calculation can be utilized in measuring a range of risks and thus assisting companies in risk management. However, this particular risk measuring model never defines what transpires to the exposure for (100-z) percent point of confidence, for instance in the worst case situation. Since the methodology never defines the utmost loss with 100 percent confidence. Thus, companies are frequently forced to come up with operational limits like stop loss orders or nominal amounts to complement VaR limits. In so doing firms are capable of reaching the highest probable risk measurement coverage.
Value at Risk calculation is mainly used by companies in estimation of foreign exchange riskiness resulting from a companys activities. This comprises foreign exchange position of companys assets, over a specified period of time under usual conditions. The calculation or measurement of risk by VaR model largely depends on three major parameters Holding period, which is the period of time over which the position of foreign exchange is planned to be held. The normal holding period is one day. The next parameter which Value at Risk rely on is the confidence level at which the anticipated estimation is planned to be made. The typical confidence levels range between 95 and 99 percent. The final parameter is the currency unit to be utilized for the purpose of Value at Risk denomination. Assuming a confidence level of x percent and a holding period of y days, the Value at Risk measures what will be at utmost loss (for instance, a market value decrease of a foreign exchange position) over y-days. If y days time period are not one of (100-x)  y-days, then these periods are the worst under usual conditions. Therefore, when a foreign exchange position contains one day Value at Risk of US20 million at 99 percent confidence level, the company ought to anticipate that, with a likelihood of 99 percent, the value of this position is likely to diminish by no more than US20 million in one day, given that normal conditions will exist during that one day. This implies that, a firm must anticipate that its foreign exchange rate position value will diminish by no more than US20 million of 99 confidence level out of 100 normal trading days.
To calculate Value at Risk, there exists a range of models. Among these models, the widely used ones include historian simulation which suggests that currency returns on a companys foreign exchange position will encompass the similar distribution as they had in the earlier period. Variance- covariance is yet another model that is widely used in VaR calculation. This mode suggests that currency returns on a companys foreign exchange position are always normally distributed and that the alteration in foreign exchange position value is linearly reliant on each and every current return of the company. Monte Carlo simulation being among the widely used model suggests or proposes that prospect currency returns will be distributed randomly.
Historical simulation is known to be the simplest Value at Risk model of calculation. This model comprises running the companys foreign exchange position across a set past, historical, or chronological exchange rate changes in order to capitulate loss distribution in foreign exchange position value. The significant benefit or advantage of this model is that it never suppose a normal distribution of firms currency returns, as it is properly documented that these currency returns are not typical but rather leptokurtic. The major setback historical simulation model is that Value at Risk calculation needs a huge database and thus computationally intensive. On other hand, a variance covariance model supposes that the change in firms foreign exchange position value is a linear amalgamation of every change in the values of foreign exchange positions. This therefore, implies that the entire currency return is linearly reliant on the individual currency returns. Another assumption of this VaR calculation model is that total currency returns are jointly normally distributed and thus for a 99 percent confidence interval, the value at risk can be measured or calculate as VaR (2.33 SP  MP) VP.
Where VP is the original value of the firms foreign exchange position. MP is an average of currency return on the companys total foreign exchange position that is a weighted mean of foreign exchange positions. SP is a standard deviation of currency return on the companys entire foreign exchange position, is a standard deviation of weighted change of variance covariance matrix of foreign exchange positions.
While variance covariance model permits a quick calculation of value at risk, its setbacks comprise restrictive postulations of a normal distribution of currency returns as well as a linear amalgamation of the total foreign exchange position. It should be noted, however, that this normality postulation could be relaxed.  Use of non normal distribution in place of normal distribution would increase the computational cost as a result of confidence interval estimation for any loss beyond the VaR. Monte Carlo simulation model normally shares the principal components with variance covariance calculation model along with random simulation components. Its main benefit is the capacity to handle all underlying distributions and more precisely evaluate the Value at Risk when non linear currency factors exist in firms foreign exchange position. Its serious disadvantage is the computationally rigorous process.
Economic Exposure Measurement
In measuring this risk an individual requires a workable and logical approach. Thus some of the practical approaches used in economic exposure measurement include regression analysis and regression equation. In regression analysis independent and dependent variable are involved in measuring the risk. Independent variable comprises of transformation in parent firms cash flow whereas dependent variable comprises mean nominal exchange rate change. Alternatively, regression equation approach of measurement is based on operational definition of economic risk and other risks experienced by a parent firm or its affiliates. For instance, a multinational company experiences exchange rate risk to an extent that variations in dollar value of cash flow unit is correlated with variations in nominal exchange rate.
CFt  a EXCHt  t. Where CFt is equal to CFt -CFt-1, and is the value of dollar of entire or total parent firm (affiliate) cash flow in t period. EXCHt  EXCHt - EXCHt-1, and is equal to the mean nominal exchange rate throughout period t,  stands for a random error term.
The output of this regression equation measure in that  coefficient measures the correlation of transformations in cash flows to changes in exchange rates. Therefore, a higher beta value indicates that there is greater economic exposure, since there is a higher  transformation of cash flow to exchange rate changes.
The concentration of most fund managers or accounting professions on the balance sheet impact of currency transformations has resulted into ignoring the imperative effect on prospect cash flows. International firms experiencing costs as well as selling products in overseas countries, their net impact of currency alterations may be less substantial in the long run. Finally, in order to measure the exchange rate risk appropriately, an individual ought to concentrate on inflation adjusted exchange rates rather than nominal exchange rates. The type of exposure that is likely to be most important in the long run is the operating exposure. Its also referred to as economic exposure and is mainly associated with the latent effect of exchange rate changes on the prospect firms cash flow.

The management of Sports Products, Inc. must be cautious and concerned with the reaction of their employees andor stockholders. The management of Sports Products, Inc. must work towards a goal of striking a balance between earning profits and having adequate beneficial corporate governance. A corporation whether it be stock or non-stock must never forget about the duties that it has both to its stockholders and to the society in general. The management has been elected or chosen by their stockholders based on the trust and capability that the latter perceives in them. Thus, these managers or officers must meet these expectations and work towards achieving the goal of bringing in profits to the company while being mindful of the ethical considerations that they have to comply with.
The firm appears to have an agency problem. This is for the reason that the employees and stockholders are having doubts about the objectives of their officers. The employees are entertaining suspicions of possible conflict of interests between the managers and the stockholders. The managers are occupying a position of trust and they have both a duty and an obligation to make sure that they are not working for their own advantage. The managers have a responsibility to its people. It is very perilous to the stability of the company if the investors or the stockholders would begin to entertain thoughts about their officers or managers being unfaithful. This might result to a possible slump in the prices of stock.
The expense being spent on pollution control is in the best interest of the company despite the seemingly adverse effects that it has because if these would not be given attention to, there would be bigger problems later on. There might be charges filed against the company for failure to accede to environmental compliance laws which would necessitate expenses for costs of litigation. If there would be victims later on who would be affected by the pollution that the company brings, this would also amount to further expenses on their part. Thus, even if there is a bad effect on profits, this is nothing compared to the long term problem that pollution might pose in the future. It would be best to prevent the problem at an early stage than to try to solve it when pollution issues gets out of control.
No, the firm does not have an effective corporate governance structure. For one, it seems that the stockholders are at a disadvantage in this scenario. There has been no distribution of dividends for the past 20 years without offering any explanation for this action. Although the right to declare dividends rests solely on the discretion of the directors, this authority cannot be abused by them. There must be adequate steps taken to ensure that the interests of the stockholders are protected above the interests of those who have control of their investments. The management of a corporation must be mindful of the position that they occupy and their actions must not be questionable or doubtful. The managers do not have an effective leadership style which might jeopardize the company.
The firm must address the issues raised by the employees. The managers must call a meeting in order to apprise the stockholders and employees as to what is really going on in the company. There must be transparency as to matters of which the stockholders have the right to know. It would be best if the officers of the corporation would be given access to the financials of the corporation to gauge the real status of its investments. If it would be impossible to meet these stockholders then there should at least be a memorandum or letter given to them to inform them of the real situation of the corporation.

By definition, Multinational entities (MNEs) are entities that produce in more then one country. This normally involves a direct presence in a country outside the country of origin which may take the shape of either a subsidiary or a joint venture. HSBC is an example of a multinational corporation with headquarters in London and Hong Kong and a presence in over 85 countries with 9500 offices providing financial services to a wide spectrum of clients in Europe, the Asia Pacific Region, and the Middle East  Africa.

The vast nature of global operations with a local focus in the financial services industry makes it necessary for this company to have a strong local as well as central treasury function as the same is required to
Local Cash Management Needs Banks are always dealing in cash and hence the treasury function has to be alert on how everyday requirements on the asset and liability side can be met, that is, asset and liability mismatches do not occur in the short and long term. This also has implications for the statutory requirements on Cash Reserve Requirement (CRR) and Statutory Liquid Reserve (SLR) in the different economies that HSBC operates in as the local treasury function in each country has to ensure compliance with relevant regulatory requirements on these and other requirements on deposits that the respective central bank may impose. Failure to meet these requirements leads to penalization while an asset liability mismatch can cause a severe dent in profitability and reputation (BPP, 2009). 
Liquidity Management From a local and international perspective, respective treasuries of the group will have to collude to ensure that liquidity concerns within the group are addressed. Often we see that different economies will have varying levels of liquidity and investment opportunities. The trick from a group perspective is to use excess liquidity where available and invest in opportunities wherever they might be. This ultimately leads to value creation (FTC, 2007).
Exchange Rate Risk Management The treasury function, by nature of the operating core of the business, is heavily involved in mitigating transaction exposure for clients and for the company itself when intra group transactions take place for example, when remitting dividends back to head office or head office grants being received. Similarly, regional treasury functions, for example of HSBC Middle East, are looking at mitigating the effect of potential translation exposure through hedging derivatives. These risk management exercises ensure that value of the business is preserved and that uncertainty is removed in own and client transactions. (Schweser, 2009).
Interest Rate Risk Management  Treasuries also act as signals to the business generation function of a bank on a local as well a central level on the deposit intake that should be undertaken and the cost that should accompany the deposit given the opportunities for higher spread lending to corporate, SME and consumer clients and the expectations from the treasury function to place any excess funds in money market instruments. At the same time, adverse interest rate movement coverage may be sought by the local treasury to cover any exposure to interest volatility on funds borrowed from other members of the group treasury or from head office  or even from clients through investing appropriately and seeking out coverage where necessary to preserve value and reduce uncertainty (CFA Institute, 2008).

In essence, for HSBC to be a successful enterprise, a good treasury function will be required to adequately manage cash that is generated each day across 86 countries with a local cash management and regulatory focus as well as and a group liquidity focus. At the same time, exchange rate risk management and interest rate risk management on every level of the treasury function preserves value for clients and the company itself. Essentially, the treasury function is the back bone of any Bank and when you talk about a bank the size of HSBC, the role of the treasury function in managing hundreds of billions of dollars of cash in different currencies and in different regulatory and market environments, not to mention the ease or lack of it by which funds can invested  divested locally or internationally is in essence a formidable task on which the smooth operation, value preservation and value creation of the whole bank is dependent.

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I have recognized that the economic problems that are plaguing the world economy at the present are numerous to say the least.  Since the collapse of the Housing market, economies around the world have experienced what some have come to call an economic recession.  While it remains to be seen if the global market is really undergoing a recession at this point in time, this situation can be used as a great opportunity for anyone looking to establish an excellent career in finance to take advantage of.
In the short term, I see myself gaining valuable experience from the top firms in Europe.  I feel that joining a global investment bank in Londons Financial District as a financial analyst will allow me to acquire experience in the assessment of capital budgeting projects, mergers and acquisitions, and the methods by which firms raise capital, as well as gaining cross-cultural experience.  I understand that the lessons I can gain here will provide me with an edge in the ever competitive international finance market.
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