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#1
08-12-2006, 05:35
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One for the money gurus
Can someone explain the jist of what is going on here. I wasnt aware that you could hedge against currency. Sure sounds like airbus is treading very deep water.
This is copied from another forum. By Ambrose Evans- Pritchard The Telegraph, London Monday, November 27, 2006 Ambrose Evans-Pritchard: Currency controls for Europe not so far-fetched | Gold Anti-Trust Action Committee "..................My hunch is that Airbus will bring matters to a head. I was told by an Airbus official last year that if the euro exchange rate went above $1.30 for long, the company was "cooked". He said the chances of this happening were almost nil. Well, "nil" may be here. While Airbus has an order backlog of 2,177 aircraft worth $220.3bn, these delivery contracts are in dollars while costs are in euros. "This is the nub of the problem," said Louis Gallois, the Airbus chief. In 2004, the group was shielded by currency hedges at an average rate of $0.98. This year the rate is $1.12, and the hedges are expiring fast. Soon Airbus will face the full violence of the spot market. The aerospace champion is so deeply tied up with Europe's sense of industrial self-worth that it will not be sacrificed lightly on the altar of free currency flows. When the French premier vowed to do whatever it takes to save Airbus"
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#2
08-12-2006, 06:01
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Currency hedging we used to use allot when I was involved in exports, it's just foward buying of currency at a set rate usually determined by the financial controller or in bigger companies they may have dedicated currency specialists.
If they think the rate is good and could drop they will buy a chunk of currency otherwise you have to take a spot rate which could be better or worse a hedge bet so to speak. In the Airbus case the US is dropping against the Euro and it looks like they are running short on forward buying so will have to take spot rate which now is considerably higher. In effect causing some mayhem on the bottomline of the company.
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#3
08-12-2006, 06:08
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K2 or LIL will give you the full answer.
However from my limited knowledge I'll have a go. A hegde is like an insurance. You can hedge against currencies, stocks and commodoties. You can make a large amount of money, out of a small investment if the price moves significantly the way that you expect it to go. These types of investments are usually options and futures. If the price does not move the way that you want it to, then you will lose everything that you put in. There is also a time limit, which is why they mention the expiry. Some time ago Airbus entered in to a deal to sell planes in $$$, so now that the dollar is low their sales are worth less when they convert to the currencies where their costs are (Euro). Incase things really bad (or to reduce their losses) they will have taken a hedge on the euro against the dollar, so that if the value of their sales fell, they would make a profit on the hedge (future market),i.e. HEDGING their bets. Hope that makes sense and that I got some of it right. Marks out of 10 for me Kevin?
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#4
08-12-2006, 06:08
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The "hedges" mentioned could well be currency options, which gives airbus the ability to sell us$ and buy euros at an agreed rate but these contracts do have a shelf life.
In essence what is being said, is that airbus have agreed contracts and will recive us$ in payment, whereas their costs are in euro which means any movements in the us$euro exchange rate will have an impact. The more the move, the bigger the impact. For example, the piece mentions an order backlog of us$220.4bn. If their costs are euro150bn and the exchange rate is 1.30 (i.e. us$1.30 = euro1.00) then the costs work out at us$195bn (150bn x 1.30) meaning a profit of us$25.4bn (us$220.4bn in contracts less us$195bn in costs). If the rate goes down to 1.20 (i.e. us$1.20 = euro1.00) then the profit rises as the costs would then work out at us$180bn (150bn x 1.20) giving a profit of us$40.4bn (us$220.4bn in contracts less us$180bn in costs). Alternatively if the rate keeps going higher then they face making less money and possibly face making a loss. The above examples are based on figures and a scenario that assumes the orders and the costs will be dealt with all at once, but obviously in reality costs are ongoing and exchange rates move everyday. Therefore, their analysts will be factoring in day to day costs and a moving exchange rate in order to give profit forecasts. Receiving money (us$) for their delivering on their orders is the easy part - the problem the CEO and the board have now is that with the us$/euro rate raising all the time, they are seeing their forecast profits diminishing. What their CEO would give to see the rate drop to 1.00 !! Hope this helps to explain it a bit.
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#7
08-12-2006, 06:20
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Thanks guys now I see. KNew about hedging on fuel and other stuff, but first time heard about currency. Really puts another light on all this international trading.
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#8
08-12-2006, 06:21
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Yea good luck with the move Diz. Was just offered a job myself in Singapore, but knocked it back.
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#9
08-12-2006, 09:08
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Humm ... interesting responses there...
Currency hedging has been around a very long time - (you could have 'Googled It' Steve ... just kidding ... The Bretton Woods agreements (July 1944) saw the beginning of free floating exchange rate system (read here for lots of background)... Bretton Woods system - Wikipedia, the free encyclopedia Companies, supra nationals and governments oftem hedge their currncy risk, and this is done a variety of ways. FRA's (Forward Rate Agreements) - based on the interest rates of the two currencies (nations) involved at any point into the future a theroretical exchange rate can be calculated to which both parties agree to. FX Currency Options - these can be bought (or sold/written) for any maturity to cover exposure beyond a certain price level. Currency Swap - combination of interest rates and FX rate used to hedge, similar in many respects to FRA. Spot hedging - can buy or sell the FX exposure via the interbank spot FX market. Easy to follow detail here ... Types of Foreign Currency Hedging Vehicles Airbus (or EADS) could well be in very serious trouble if the USD keeps sliding (which it looks to) ... the ECB hiked rates yesterday to 3.5% and while the USD has higher rates of 5.25% the market expectation for the ECB to keep tightening and the FED to stop (or even cut rates) along with the twin (budget and trade) deficits in the US is not looking like a strong dollar is about to save Airbus (and others in similar situation) anytime soon. I did alreday point out in another thread that GBP/USD at 2.0000 will not be taken well by BoE and ECB is likely to push Eurozone into a slowdown that could be more severe than is priced in in H1 07.
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#10
08-12-2006, 09:56
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555, yes I could've but I knew that I'd get better well informed responses here.
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#11
08-12-2006, 10:22
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I find it hard to believe that a company like airbus have not hedged a large portion of thier forward order book... Insane to have these currency risks and not cover a portion of it..
Especially looking at USD trends for the last 5 years.. As a side note that GATA organisation has some great tin foil theories that have been right on the money... I have thier gold rush 21 DVD if anyone wants to borrow..
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#12
08-12-2006, 10:34
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You would have thought ... yes ... that what happens when you run a company by multilateral consensus ... I wonder why China has'nt started a rival to Boeing; this is one area of technology that has not really progressed since the late 60's ... someone needs to push the envelope. And whacky business #2 of the day ... Seminole Tride of Florida ponying up ~$1 bil for Hard Rock Cafe .... hummmmm somehow think Rank Group had the best end of that deal ... look for a mega sale of rock memorbila some point in the future .. sorry to be pessimistic but running 2 casino's does not make you capable of running a global business - wish them luck ... they'll need it!
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#13
08-12-2006, 10:54
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They are already building lots of bits for Boeings 737-787s. I think they even build 737s under licence.
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#14
08-12-2006, 10:59
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Thats good to hear ... need some Chinese innovation and would'nt if be great if we could move onto supersonic affordable flight.
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#15
08-12-2006, 11:16
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Yeah read about that yesterday and wondered myself what the brand needs to have to create value.. Have no real idea how much its hotels and assets bring to the table globally.. Another thought was how its been the American century with so much pop culture coming from there and spreading round the world enhancing the HR brand.. Now will that continue into the future ?? Or will nieche type interests (asian film, globalized music, spread via net) erode that brand advantage..
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Men have only 2 emotional states, hungry and horny.. So ladies, if you see me without an erection, make me a sandwich.
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#16
08-12-2006, 11:29
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HRC was/is best of breed of the themed cafe's ... but feel in decline as rap/hip-hop has hit rock over the last few years and the Rock scene is (unfortunately) not what it was in its 60's, 70's, 80's and 90's hayday.
Probably will survive in some form or another in best locations, but looking at Planet Hollywood and Fashion Cafe ... it is a brand that has seen its day.
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#17
08-12-2006, 14:55
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If anyone was confused, the Seminoles are INDIANS, a tribe from Florida. Quote:
Don't underestimate the Seminoles too readily! From 1814 to 1858, the US govt. brought the full force of the army, the navy, and the Marines against 5,000 Seminoles, the last remnants of a proud people that numbered 200,000 when the Spanish first set foot in Florida 300 years before(most died from white man's diseases). In 1830, the US law decreed that all remaining US Indians must move west of the Mississippi to Arkansas and Oklahoma. They then spent $40M fighting the Seminoles, and lost 2,000 soldiers in battle in the first guerilla war the US ever fought. At the beginning of the 2nd Seminole war in 1835, the great Seminole warrior, Osceola, when called to a meeting of chiefs and confronted with a treaty agreeing to move the tribes to Arkansas, responded by pulling his long knife, and throwing it through the paper, sticking it to the table, whereupon he was thrown into the brig. Later, he signed it to get out of jail, then went into the forest, assembled a war party, and attacked a column of 800 army troops, of whom only 3 lived to tell of it. Finally, after 3 years of fighting and many victories, he was lured into peace talks under a white flag of truce,and immediately imprisoned where he died of pneumonia six months later in mid-winter. His followers fought on. By 1842, many had died fighting, and 3,000 had been captured and moved West. The remaining 300 fled into the swamps, and hid there, rather than surrender their lands and freedom. In 1856, soldiers went into the swamps looking for them. Led by Billy Bowlegs, the Seminoles attacked and won another victory. They spent two years, and a great sum of money to find Bowlegs, which they did. But they never got the Seminoles to surrender. After an Army surveyor wandered into the swamps in 1908, and was shot and killed by Seminoles, the US changed its' tactics, set aside a number of small plots, and tried to convince the Seminoles to move to reservations. Remembering the trap Osceola fell into, only a few took the offer. In 1938, the government created several very large reservations, and some Seminoles moved to them, but still the majority preferred freedom in the swamps. It wasn't until 1957, when the govt. proposed to terminate all rights of the Seminoles, in effect, declaring them non-existent as a tribe, that the Seminoles finally agreed to move to the reservation lands, and set up a formal elected tribal government. Soon, thereafter, they set up business, selling duty-free goods, especially cigarettes, on their reservation, refused to pay any taxes from tribal enterprises to the state or federal govts., declaring that they were the sovereign Seminole Nation, and the US/Florida govts. have no authority to tax their businesses, nor were they obligated to collect sales taxes on behalf of the US or state govts., and they aslo made a claim on the US govt. for most of the land in Florida, claiming the govt. owed them for it. They won a large settlement on the land claim, and were largely ignored/tolerated on other matters until they opened the first gambling business on their reservation, which was against state and federal law at the time. Dragged into court, they claimed their land was sovereign, Outsied the jurisdiction of US/Florida govts., and, therefore, exempt from US or Florida law. After lengthy legal battles, they emerged unbowed and victorious once again, thereby, opening the way for all US Indian tribes to start gambling casinos. Today, they are a very prosperous tribe, with gambling casinos, an amusement park, and substantial citrus and tobacco businesses. Liek the Thai nation, the the Seminole Nation has always maintained its' independence, and never surrendered to anyone. Except, unlike the Thais, they did it the hard way, by fighting for it. I would not underestimate the Seminoles.
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Last edited by JayBee : 08-12-2006 at 15:17.
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#18
08-12-2006, 15:15
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Interesting background there - I did a bit of a look through their business background too, even so its ok to manage and run business outside US Federal and Florida state law where they have control over the matter - wholy different thing when you have to do this on such a grand international stage where they will have to respect laws/accounting/taxes etc. I wish them well - I saw at the deal signing one of the tribal elders saying this was a deal done to secure future for its aging population - they may well have done better letting Warren Buffet do the investing for them - I just have sad feeling they are going to get hurt on this one. I recall seeing something about a similar (smaller scale) deal that blew up with the native indians in New Mexico a while back.
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#19
08-12-2006, 15:44
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As far as I'm concerned, HRC is just a glorified, high-priced, burger joint, a hip Denny's. But they do make great burgers!  And they are well-situated, with a brand name that everyone knows. In the US, when the tourists come to the cities, they like to go to well-known places. The one in SF is always packed. The extent of their success really has nothing to do with whether rap, hip hop, rock or any other muscial genre is gaining or losing popularity. They have location, name recognition, tourist attraction status, and good food at a price that is sure to make them a nice profit. That is a winning combination now matter how you sing it. Of course, the price they paid will have a lot to do with whther their return is good, modest, or paltry. I'm in no postion to make a judgement there. But I would not consider them any less capable than any other business entity. Their track record is pretty solid, from what I have read about them. Plus, they have the cash behind them, and that is a always a big plus! It is not as if they won't hav the best lawyers, accountants, amd management workingfor them! BTW, one thing in common between the Thai nation and the Seminole nation. Both words, Thai and Seminole, mean "free." 
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#20
08-12-2006, 19:39
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The biggest problem for the company is that it takes such a long time to deliver after sealing a contract. For example if someone orders 10 new planes it will take a while before they are ready for delivery but the amount (in us$) was agreed before building started. The amount that airbus sells them at takes into account costs (in euro) valued at today's rates - after all, nobody can predict the future. Now, if it takes 5 years to build those planes, then the costs will be spread out over those 5 years. If I remember correctly, it was only about 4/5 years ago that the us$/euro rate was 0.9 !! That is to say 1 euro = 0.90 us$ (90 cents). So if they forecasts costs of euro1bn, 5 years ago that would have been the equivalent of us$900mn, but at today's rates now has an equivalent of approximately us$1.3bn - an increase of us$400mn !! I am not an expert in the fx options market but I don't think that options are quoted much over 2 years, so it would mean that airbus would have been "covering" theie costs by buying in more options as time went on and of course, as we have seen the rate has risen from 0.90 to 1.30 and this means that the cost of hedging has increased over the period as well. Year 1 costs of eur200m ex rate = 0.90 hedge for next 2 years at 0.95 Year 2 costs of eur200m ex rate now = 1.05 hedge for next 2 years at 1.10 Year 3 costs of eur200m ex rate now = 1.15 hedge for next 2 years at 1.20 Year 4 costs of eur200m ex rate now = 1.20 hedge for next 2 years at 1.25 Year 5 costs of eur200m ex rate now = 1.30 hedge for next 2 years at 1.35 As you can see from the simple example above, as time goes by the hedging becomes "more expensive" which in turn means profits drop.
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#21
08-12-2006, 19:51
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In Jan 2002 EUR/USD hit 0.8575. Can quote FX options out to 30 years with relative ease - especially in majors as there is a yeild curve availbale out that far to price them up on. (Doubt there is anyone here who is interested in options pricing modelling - so I'll resist the urge to go into detail). Airbus would have used currency swaps rather than options to hedge. Diz is right however that hedging further out does become more expensive. |