Finance and Business Perfomance Assignment 1 Coursework

Finance and Business Perfomance Assignment 1 - Coursework Example That Sales are growing does not mean this is good because the cost price of goods sold is also increasing faster than Sales. The increase in sales figures may be due to the mark-ups of Louise to the Cost price. Louise is therefore selling a lower volume of goods but at higher prices as confirmed by the - 2% figure above, even though in Year 5, sales grew by 20% after Louise dropped gross margins from 30% to 25%. The gross margin is the ratio of gross profit to Sales and is the mark-up Louise adds to the cost of her products, whilst the net margin is the ratio of net profit to Sales after expenses are deducted from gross profit. Declining (- 4%) gross profits means sales are not increasing as fast as Cost price of goods, whilst the increase (14%) in net profits only means that Louise is controlling her expenses better, as shown by the 17% Average Sales/Expenses figure. Louise can improve the management of her business by spending more on marketing to increase demand and Sales figures. This would result in higher expenses, but it would increase Sales at a faster rate than the Cost price of goods and would result in an increase in net profits. Unless Sales increase, Louise's profits will be squeezed. If the capital of 60,000 in Year 1 is assumed to be the total she invested in the business, which includes initial inventory, improvements on the premises, furnishings and equipment, the van, and working capital to pay for wages and other expenses, the drawings of 64,000 over five years represents her return on that investment which, at a net value of 4,000 over five years does not seem much of a good one (at 1.3% per year). She may be better off depositing her money in the bank for a return of 3% to 5% (Economist, 2007). Of course, Louise may derive fun from running the business or perhaps she invested much less than 60,000 of capital, in which case she may be happy with the 12,800 annual income. An added danger is that assets are growing slower than liabilities (which would include accounts payables or debt to her suppliers), so unless Louise brings down debt, she may go bankrupt. She must manage her cash better to address this. And it seems that Louise is not paying taxes, so she better watch out as the taxman soon cometh 3. By reference to the figures, give a detailed assessment of the impact of the trading and financial performance of "Louise" on the personal financial situation of Louise Walford, over the five year period. [20/200] Louise Walford is not living the high life in Derbyshire we can be sure because her annual income is only 12,800, and unless she drives up sales at the shop to increase her net profits, she risks losing everything if her liabilities continue growing faster than assets. She drew only 8,000 in Year 3, and

Traditional Media Outlets Essay Example for Free

Traditional Media Outlets Essay Introduction The presence of media as a tool of information dissemination has increased largely because of the technological innovations consistently being introduced not only in advancing the productivity rate of media organizations but also in expanding the capacity of the various media outlets to include a wider range of topics (Hudson, 1986). With this expansion, the subjects incorporated into the mass media has also been augmented (Graber, 1980) such that former topics that were once rarely untouched have now been constantly infused with unceasing publicity such as those that tackle Information and Communications Technology (ICT) . The changes made by mass media are evidently found on a series of notions due to consciousness, certain perceptions on reality and the palpable alterations of the masses’ individual lives concurrent on what had reconstituted by the mentioned technological change (Palmer Young, 2003).   Technological or digital innovation dwelled on to by human beings had been observed to have been conducting a protective bubble of fixed racial, cultural and ethnic identity resulting to a sense of detachment which lies on the physical state of the screen persona as well as with the transcends in the reality of social culture (Barker Petley, 2001). Analysis Such innovations which transcribed on media analysis in accordance with meeting customer or audience satisfaction on the lame side had been a crucial issue of competition as well as with the question of product or service advantage (Orlik, Anderson, Day, Patrick, 2007).   These media offers are considerably getting the â€Å"just† amount of credit for whatever level of service they are able to offer, thus, the viewing masses seem to be unaware of the whole gist of the surfing censure and is actually following the hoax of the concern.   What becomes evidently floating in the scene lately, are the so-called â€Å"alliance† of participating media advertisers and the respective network.    Examples of these ‘participating’ network providers which are sought to be the most persistently visited sites are Google, yahoo, and Amazon Online (Beckwith, 2003). The efficiency catered by these online information providers also power the divergence of other web pages which also serves as an upgrade in the websites’ name.   Ã‚  Consequently, the more surfers sweeping on their site, the more money they are able to generate.   Considerably, a mutual benefit from that of the web provider and the viewer are being fulfilled (Beckwith, 2003). Conclusion   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The exactness of the cost and the revenue generated by the aforementioned sites are but indefinite to be defined, for the reason that the scheme and the flow of the advertising differ dependently upon the ‘season’ or under the discretion of the contemporary society. It would seem quite hard to distinguish which of the sites are assumed to be the most significant or rather the one which is offering the best service for the majority (Beckwith, 2003).   Since that, those who are apt to surf actually depend on what they wish to find.   In addition to that, given the fact that each layer of the society hold different jobs or activity with diverse enthusiasm, it is evident that it is possible to shift sites which then give the argument abstain on conviction with regards to the matter (Seelye, 2005). References: Barker, M., Petley, J. (2001). Ill Effects: The Media/violence Debate. London: Taylor and Francis. Beckwith, S. L. (2003). Complete Publicity Plans: How to Create Publicity That Will Spark Media Exposure and Excitement. New York: Adams Media Corporation. Graber, D. A. (1980). Mass Media and American Politics. Political Science Quarterly, 95(4), 701. Hudson, H. (1986). New Communications Technologies: Policy Issues for the Developing World. International Political Science Review, 7(3), 334. Orlik, y. P., Anderson, S., Day, L. A., Patrick, W. L. (2007). Exploring Electronic Media. New York: Blackwell Publishing Limited. Palmer, E., Young, B. M. (2003). The Faces of Televisual Media: Teaching, Violence, Selling to Children. Mahwah N.J.: Lawrence Erlbaum Associates, Inc. Seelye, B. K. Q. (2005). AP plans multimedia wire aimed at younger readers (Publication. Retrieved July 14, 2007, from The New York Times: http://www.iht.com/articles/2005/09/14/business/ap.php

Suppleness in Physical Education Essay -- Papers

Suppleness in Physical Education The definition of flexibility, suppleness and mobility is the range of movement possible round a joint and this depends on the amount of stretch allowed by the ligaments, joints, tendons and muscles. Flexibility is an important component of physical fitness for all athletes as increasing your flexibility aids performance and helps to avoid unnecessary injury. It is impossible to have the same degree of flexibility around all joints as the joint structure itself limits flexibility, for example a lot of movement is possible at the shoulder joint because it is a ball and socket joint, but movement at the hinge joint of the knee is more limited. Increasing body temperature helps to improve flexibility, which is a good reason why an athlete should always warm up. Our range of movement deteriorates as we get older, due to shortening of the connective tissue and general joint degeneration caused by wear and tear. Why should a netballer do mobility exercises? The objective of mobility training is to improve the range of stretch of the antagonistic muscles. Mobility plays an important part in the preparation of netballers by developing a range of movement to allow technical development and assisting in the prevention of injury. All athletes require a basic level of general all round mobility to allow them to benefit from other forms of training. In addition, netball players will need to develop specific mobility for those joint actions involved in the techniques of their game. Netballers do not have the option to dribble the ball; therefore netball is very much a passing game. Throwing is one... ...ying netball as players have to repeatedly bend down to gather low passes or rolling balls. As I play the position of centre, a high level of stamina is vital as the centre is the player who links the defence to the attack. The centre is designated to a large area on the court so a lot of movement is required. Netball consists of the players continuously passing the ball, so endurance in the biceps brachii and triceps trachii is essential which enables players to pass the ball accurately with speed and power throughout the game. A good level of stamina will ensure that fatigue will not affect your performance. Lack of stamina is highlighted in the last quarter of many matches in which a player complains of â€Å"jelly legs.† This is usually accompanied by decreased performance in skills requiring muscular strength or power.

An Occurrence at Owl Creek Bridge by Ambrose Bierce Essay -- English L

An Occurrence at Owl Creek Bridge by Ambrose Bierce 'An Occurrence at Owl Creek Bridge' by Ambrose Bierce is a 19th Century mystery story that is set at the time of the American Civil War (1861-1865) when the Slave owning Confederate States in the South engaged in conflict with the Federal Government of the USA. The story focuses on a character called Peyton Farquhar, whom is about to be summarily hung for trespassing on the Owl Creek Bridge; his fate is to be hung from that same bridge. The story ends with a curious twist in the plot. The main part of the story is set in Farquhar's mind, though whilst reading the reader is unsure (despite careful, hidden hints placed by Bierce) of this fact. Only at the end when it is clearly stated that Farquhar is hanging lifelessly with a broken neck from the bridge that the reader will become conclusively aware of this. It is divided into three parts, which I will analyse, in detail, separately. Part I ====== 'An Occurrence at Owl Creek Bridge' 'begins powerfully by introducing a man, whom is not named until later on in the tale. This obviously adds to the mystery. It describes with detail of him in somewhat a predicament ~ " hands behind his back", " wrists bounds with a cord", "rope closely encircled his neck". Words of such like are of a lexical set of entrapment and give the impression that the man in question is in danger and is unable to break free. Next, the reader learns that "executioners" (also are soldiers from federal army) are present that show the man has committed a crime, so is a condemned man. It raises questions as to why he is there, and forces the reader to continue reading. Bierce sustains more mystery by not revealing his crime until furt... ...y~ " Ah, how beautiful she is! He springs forward with extended arms". Bierce lures the reader into thoughts of joy by remarking how beautiful the wife is. Suddenly, Bierce stops his complex illusions and proves that proves the prior Part III was not reality, set in the min of Farquhar~ "his body swung gently from side to side beneath the timbers of the Owl Creek Bridge. Conclusion ========== Bierce has a unique style to pull the reader into the story. To name a few techniques, his complex illusions keep the audience in suspense, his detailed descriptions allow the reader to picture all aspects of the story and the dividing of the story into three separate parts help them to stay focused. These all work together to provide a compelling, inspiring and powerful story. 'An Occurrence at Owl Creek Bridge' is a great example how the mind can be deceptive.

Challenges Facing Public Schools Essay

The fundamental purpose of education is to gain knowledge, inculcate the forms of proper conduct and acquire technical competency, (Oak, 2010). These skills and abilities are considered important in our world so as to have socio-economic growth and development individually and in the community. Goel (2007) observes that it is because education is so important that the US Department of Education aims to promote student achievement and preparation for global competitiveness by fostering educational excellence and ensuring equal access. Thus in countries such as the US, children who may not be able to afford the cost of schooling can access education in public educational institutions subsidized by the government. Though noble, the concept of public education unfortunately has a number of fundamental challenges that must be investigated for lasting solutions. These challenges are highlighted below, their problem statements and the arising hypotheses: Problem Statement 1 One of the greatest concerns in public schools is violence. Lede (2010) notes that violence in public schools is a growing concern of parents, teachers, school administrators, politicians and community leaders. Lede (2010) continues to observe that â€Å"many communities in the United States of America are faced with the dilemma of how to protect the integrity of the education by eliminating violent behavior among the school’s constituency and the environment where learning takes place. † What are the determinants of violence in public schools? What is the effect of parental involvement and violence in public schools? Is there any relationship between poor teacher training and violence in public schools? Hypothesis Economic and social issues are affiliated with violence in public schools. Parental socialization at the home front influences students’ propensity to violence in public schools. Teacher training does not impact on the existence of violence in public schools. Importance of the statements and hypothesis in the research The statements and hypotheses in this research would assist the researcher in investigating the problem of violence in public schools and begin to explore solutions that address the root cause of the problem and not the symptoms of the problem Problem statement 2  Another one of the core challenges faced by public educational institutions is that of insufficient funds. By virtue of the fact that public schools depend on the government to meet their budgets, more often than not, the schools find themselves without enough money to carry out their activities. What is the effect of lack of sufficient funding on the quality education in public schools? What is the effect of programme prioritization on budget management in public schools? What are other sources of funding that can be explored to ensure constant funding of public schools programmes? Hypothesis Lack of sufficient funds compromises on the quality education offered in public schools. Budget rationalization can be successfully achieved through programme prioritisation of the programmes at public schools. Diversification of the sources of funding to meet budgetary needs at public schools has ensured sustainability of the schools’ programmes. Importance of the statements and hypothesis in the research A research on this issue would ensure that sustainable solutions to budgetary constraints are met that translate to operational efficiency (Maguad, 2007) and a high quality of education is constantly high in public schools. Problem statement 3 Public institutions of learning are faced by the problem of low or no parental involvement. Since many of the students in public schools come from middle and working classes in which both parents have to earn a living to sustain the families, it is rare that the parents find time to be actively involved in their children’s school life. What is the effect of parental involvement on student achievement in public schools? What is the correlation between parental aspirations and expectations for their children and student achievement in public schools? Do parents give away the right to educate their children when they place them in public schools? Hypothesis A student’s performance is influenced by his/her parents’ interest and participation in his school work. Parental aspiration and expectation for children determines the achievements of the children in school. Parents of children in public schools forfeit any right to determine what or how their children are educated. Importance of the statements and hypothesis in the research The research would find out whether parents have an active role to play in their children’s well being for assured achievement in school. The issue of parental involvement could also form the basis of understanding other challenges facing public schools such as student violence (Alliance for the Separation of School & State, 2008). In conclusion, public educational institutions experience many challenges ranging from budgetary constraints, student violence and low parental involvement. Much research needs to be done to establish why these problems exist in the first place and lasting solutions for these institutions.

Ethics in Business Ethics and Human Resources Ethics commonly refer to the rules or principles that define right and wrong conduct

Ethics in Business Ethics and Human Resources Ethics commonly refer to the rules or principles that define right and wrong conduct Ethics in BusinessEthics and Human Resources Ethics commonly refer to the rules or principles that define right and wrong conduct. In the United States, many believe we are currently suffering from an ethics crisis (Ricklets, Robbins Coulter, 1996). Behaviors that were once thought unacceptable lying, cheating, misrepresenting, and covering up mistakes have become in many people's eyes acceptable or necessary practices. Managers profit from illegal use of insider stock information and members of Congress write hundreds of bad checks. Even college students seem to have become caught up in the wave where studies show significant increases in cheating on tests (Robbins et al.). Concern over this perceived decline in ethical standards is being addressed by organizations, and companies are relying on Human Resource (HR) to build an ethical culture. Human Resource departments are creating codes of ethics, introducing ethics training programs and hiring ethics officers. Why is ethics imp ortant to Human Resources? When employees in organizations make decisions to act unethically, they affect not only the company itself, but also its shareholders, employees and customers.Journal of Business EthicsEmployees make a myriad of choices every day in businesses if unethical, they can damage a company's productivity, profits and reputation. Unethical decisions can come in many forms: the employee who conducts personal business on company time to the line worker who fails to report a product flaw just to meet a deadline, and even more serious, the manager who profits from illegal use of insider stock information. All these incidents lack ethics. In most companies today, the competitive advantage rests on the shoulders of its employees. These employees must be trusted to do the right thing, especially when no one is looking. It is up to HR to train, educate and communicate with employees on rights and wrongs...

Boleslavsky Chapter 1 review essays

Boleslavsky Chapter 1 review essays The first concept that we learn in Richard Boleslavskys Acting: The First Six Lessons is about Concentration; a technique that all actors need to focus upon in order to help create a believable presence onstage. He states that Concentration in the quality that permits us to direct all of our spiritual and intellectual forces toward one definite object and to continue as long as it pleases and to do so- sometimes for a time much longer then our physical strength can endure. (pg. 9) At first talking to a young prospective student about how theater cannot be taught. Its merely whether or not you have the talent to play that determines whether you can know theater. He then asks the student what shows she has done and asks her to speak some lines. By doing this he shows he that there is more then one way to express oneself through a set of lines, it was easier for the student to curse something then to struggle to think of how to use the same line to give it praise. He explains to her the creature, as she is called, that she did not understand theater and completely went against everything theater stands for, basically saying she cannot act. By accusing her of this, he evoked a pure, raw emotion in her of pain and sadness. He then explained to her what he had just done, showing the creature that she had just used emotion to work on something and then went into the importance of concentration, telling a small story about a fisherman who used all of his concentration to get his boat safely back to the harbor, and only then did he let his concentration done and fainted. He explains that most all professions have some sort of material concentration, but the actor has the human soul. The creature asked, But how do you start? In wish there is a reply that you use your 5 tools, your 5 senses to start at the beginning to create a character. It is only from there that you can begin to constr ...

Rise of the modern presidncy form T. roosevelt to fdr essays

Rise of the modern presidncy form T. roosevelt to fdr essays The modern presidency began to rise in about 1900 with Theodore Roosevelt. He began a theme of the 20th century of more federal power within the government and more power of the president in particular. Theodore Roosevelt was president from 1901-1909. Both government and presidency increased during his term. You can see this by the way he regulated big business. He appealed directly to the nation, increasing presidential power, since progressivism had support of America. Roosevelt had engagement in world affairs on his mind and tried to create a more stable world. The panama canal was built while he was in office. He thought it was the responsibility of a civilized nation to help stabilize others. Taft took over for the next four years and somewhat decreased both presidential strength and federal power. There was less land regulation and he chose to have much less control of congress than he could have. It was his personal opinion that it crossed over the checks and balances system of our government. Taft stepped back from foreign affairs also with much less engagement. Woodrow Wilson was in office for two terms, from 1913-1921. Americas support for progressivism allows Wilson to act as leader of government and nation increasing the role of the president. He also increased the federal governments power by putting into effect the federal reserve system. He wanted to stay out of war at first and was even using lines for his reelection with peacekeeping intentions. This comes from the strong American public opinion to stay out of the war and world affairs. He did although end up going to war and failed as a leader when he couldnt get the allied nations support. He did create the league of nations. Harding and Coolidge both decrease the effects of government and the presidency but it does not go back to zero. They serve from 1921-1929 and take a much more isolationalist approach to foreign affairs because it was now the...

Discuss some of the benefits and drawbacks of studying for a Essay

Discuss some of the benefits and drawbacks of studying for a university degree which spear to be more persuasive Refer to the - Essay Example University education not only provides expert knowledge, but also it gives individuals the practical skills needed to handle situations in the world. Thus, each university scholar has the chance to widen their viewpoint and enrich their own knowledge. An additional factor that drives the inspiration for university education is that; there exists a direct correlation between the level of schooling and the sum of income to which one is entitled. The traditional roles of universities were that of teaching and researching. University research has aided in the development of theoretical knowledge and its subsequent application in the practical field. Positions in the traditional universities were only privy to a select few. These select few were largely the cream of the community. Thus, these elite of the community busied themselves with research, which was conducted by the best students and few professors. Thus, these individuals locked themselves in ivory towers and succumbed to the pas sions of knowledge. The net effect of this was the total loss of contact with the society. This meant that the overall performance of these traditional universities took a nose dive. Performance of universities is measured by the improvement of quality of lives of the people it serves. Thus, the needs of the society should be at the center of a university’s activities. ... Additionally, there is an increasing demand for university education. Costs for educating a person are steadily rising with universities struggling to keep up with increasing demand. Critiques cite the fact that anything taught at the university can also be self taught. They reason that it is not practical to spend copious amounts of money on universities so that one can gain knowledge, which is widely available from other sources (LOVETT et al, 2004, p. 18). Critiques also state that no one professor has the divine knowledge that is injected to students once they attend the various lessons. Each student is required to put in effort so as to increase their knowledge in the respective fields. This statement is true in some sense. However, I do disagree with this half baked thought. In all endeavors of life, one cannot be sure of succeeding without the advice and counsel of a mentor. The instructor’s job is to ensure that you do not make mistakes and explain concepts that are di fficult to understand (MCMAHON 1999, p. 34). Without this vital input, a lot of time and energy is going to be spent at the said endeavor whose results cannot be guaranteed. It is with this fact in mind that a lot of individuals absorb this enormous financial cost for education. The role of the professors is to accelerate the duration of training thus saving on valuable time. Additionally, they ensure that each student has properly grasped the basic concepts lest ill-equipped individuals flood the job market (BINGLEY et al 2005, p. 71). An unfortunate scenario is when the training a person has sacrificed a lot for actually deems him or her ineligible of job position. This arises in cases of over qualification. This is when an individual is

Management Portfolio Research Paper Example | Topics and Well Written Essays - 4000 words - 2

Role of Portfolio in Civil Engineering Management - Research Paper Example Some of the critical determinants essential for full-fledged functionality of Civil Engineering the cross-functional processes adding value to the civil engineering system through effective concept and value designs. Some of the important areas of focus to enumerate the aspects of civil engineering are Each of the categories plays a pivotal role to understand the aspects of civil engineering and the relationship between civil engineering and the respective categories and functions. Finally, there is a need to devise a document control process to ensure the accuracy of the information and also research on the relevance of the same in various aspects. The entire portfolio is supported with effective case studies, schematic diagrams and data tables for better understanding and application. It is important to understand the regulatory requirements in civil engineering for better functionality of the stream. These regulatory requirements are Health and Safety, Environmental and other specific regulatory like Buildings, Railways, and Highways. In order to correlate the Health, Safety and Environmental aspect of management with the civil engineering management, there are many postulated theories explaining the need for the same. The risk involved in any health and safety is the accidents. An accident is an unplanned, uncontrolled event that resulted in personal injury, property damage and/or some other loss, or could have resulted in personal injury, property damage and/or some other loss in slightly different circumstances Methodology – A questionnaire survey was conducted on construction projects to establish the extent to which clients are involved in construction H&S.  

Segmentation targeting positioning (STP) Essay Example | Topics and Well Written Essays - 250 words

Segmentation targeting positioning (STP) - Essay Example A company should consider that it is challenging to meet the needs of every customer. Therefore, it should fashion a product that may partly cover the needs of the customers if not all. It is somehow dodgy because many customers prefer goods or services that cover their needs wholly (Kotler, 2010). This might result in poor sales of the goods or services. Targeting markets is significant because the company is able to identify the information it had missed about the product. Through this, the company is able to identify would-be customers who would buy the product. The company is able to realize areas to improve on to realize more profit. According to Nykiel (2007), a company should guarantee that its product is distributed to places that it can endure competition. This can be achieved through intense thoughtfulness of the customers’ preferences. A company should consider that customers are influenced by different factors. There are those who are focused on taste and lifestyle while others observe their religious inclination. It is therefore indispensable for a company to choose places that will favor their products in terms of customers needs (Capon, 2009). For any company to survive antagonism in the market, it should consider apposite segmentation. This will guarantee that the company target all potential customers and maximize its proceeds. Although it is not possible to gather all the needs of every purchaser, the company should surface with strategies that will gratify the needs of every customer partly, if not

How Management Teams can have a good fight Essay

How Management Teams can have a good fight - Essay Example The authors clearly explain their view on the impact of conflicts in the organization. This paper criticizes the authors’ idea on the conflict resolution among the management and the eventual impact on the firm. According to the authors, conflicts may have both negative and positive ending. Considering that most managers regard themselves as rational decision makers, they may not effortlessly accept an opinion from any other person and they may, perhaps, deem as a personal attack from their fellows when the colleagues make some remarks. It is difficult for most managers to make a distinction between personal differences and opinion peculiarity and maintaining the spirit of working as a team. The need to work as a team is sometimes assumed by managers as personal hostility and discord takes over the teamwork spirit. Fun, openness and productivity with no or less politicking and posturing represent the only way managers can come up with a healthy decision (Eisenhardt, Kahwajy & Bourgeois 78). Managers are required to manage their conflicts democratically with a clear distinction between substantive and personal issues. In managing interpersonal conflicts, executive were prepared with information that is more detailed and multiple alternatives to enhance the quality of their debate. Availability of more data, which are objective-based, compels managers to focus on issues rather than personal matters or useless arguments rooted in ignorance. Inadequate information makes management rely mostly in guesses and baseless assumptions, which does not help the firm. Reliance on facts reduces involvement on personal issues, thus, reducing interpersonal conflicts. In addition, administrators used humor and shared a common goal in debates while maintaining a balanced power structure. Furthermore, managers should be deeply involved in creating different options thus plummeting disagreement amongst decision-making participants which, in turn, promotes teamwork. Individua l commitment in decision-making is achieved when joint effort is put in creating a number of alternatives. The authors further assert that the more the number of choices made by management, the greater the chances of coming up with more appropriate options. By creating common goals in the teamwork, managers should outline their strategic options as collaborative rather than competitive while every individual must endeavor to achieve best possible solution for the group. Common goal does not imply uniform thinking but, rather, require everyone to have a clear vision towards a particular goal. Lack of common goal makes some members of the team think that they are in competition, thus, framing decisions as reactions to threat (Eisenhardt, Kahwajy & Bourgeois 80). Using humor in decision making by the team releases tension among the management team and upholds collaborative spirit by making the business fun. The excitement while in decision making process reduces stress and brutal compe tition. Interpersonal conflicts are greatly reduced by using humor as a tool to avoid hostile and stressful environment. Humor acts as a defensive mechanism by decreasing the team temperatures and blunting the threatening edge of negative information. Humor that has very positive effect on mood may allow communication of difficult information in a more tactful manner and less threatening way. Furthermore, humor may make people more

Stakeholders Essay Example | Topics and Well Written Essays - 1500 words

Stakeholders - Essay Example This turbulence is caused by the existence and emergence of different groups of people in the business arena all of whom have interest in the business. The business is therefore endowed with the responsibility of serving the interest of the so called, â€Å"stakeholders† in equal measure. This will ensure that they are all satisfied to enable the business operate profitably (Savage 1991). In dealing with the stakeholders strategic management skills come in handy to ensure the corporate objectives are also met. This report has the obligation of finding the appropriate stakeholder approach and the decisions to be made with regards to the stakeholders for the realization of the organization’s goals. Contents Executive summary I. Introduction II. Preble six step process III. Selection and discussion of two important stakeholders IV. Freeman’s Model Approach V. Conclusion References I. Introduction To catch up with the unstable environment facing many U.S. industries and businesses, business executives are required to efficiently and effectively manage all their stakeholders. Stakeholders is a wide term which is used to refer to those individuals, groups, and other organizations who have an interest in the actions of an organization and who have the ability to influence such actions either to the benefit or detriment of the organization (Post, Preston & Sachs 2002). This integrative approach assumes that an effective organization strategy requires consensus from a plurality of key stakeholders about what it should be doing and how these things should be done for the success of the organization. The case also demonstrates that executives should use an overarching strategy to change relationships with stakeholders from less favorable categories such as non-supportive that may be dangerous to the business; to more favorable ones like the mixed blessing who the business really need (Ravindra, Moray & Tom 2003). II. Preble 6-step Stakeholder Manageme nt Process Model Step 1: Stakeholder Identification Stakeholders can broadly be categorized as either primary or secondary stakeholders. Primary stakeholders are those whose continuing participation is required if an organisation is to survive and prosper (Savage 1991). They include the Shareholders, Investors, employees, customers and suppliers. Secondary stakeholders on the other hand are those who influence or affect, or are affected by, the corporation, but are not engaged in direct transactions with it and are not essential for its survival. They include the media, students and academics, unions, socially responsible investor, special interest groups (experts from social and environmental areas relevant to Nestle) and Non-governmental organizations (NGOs), activist groups, environmental organisations, human rights group. We also have Public stakeholders who provide the firm with infrastructure and legal frameworks in which to operate: Governments, community and recipients of co rporate giving and so forth (Preble 2005). Step 2: general nature of stakeholder claims and power implications We start with ownership where; Shareholders have a financial equity stake in the firm, which gives them voting power, economic power in that they can sell their stake and political power which could be exercised at the company’s annual meeting as in the case of a dissident shareholder (Post, Preston &

How Management Teams can have a good fight Essay

How Management Teams can have a good fight - Essay Example The authors clearly explain their view on the impact of conflicts in the organization. This paper criticizes the authors’ idea on the conflict resolution among the management and the eventual impact on the firm. According to the authors, conflicts may have both negative and positive ending. Considering that most managers regard themselves as rational decision makers, they may not effortlessly accept an opinion from any other person and they may, perhaps, deem as a personal attack from their fellows when the colleagues make some remarks. It is difficult for most managers to make a distinction between personal differences and opinion peculiarity and maintaining the spirit of working as a team. The need to work as a team is sometimes assumed by managers as personal hostility and discord takes over the teamwork spirit. Fun, openness and productivity with no or less politicking and posturing represent the only way managers can come up with a healthy decision (Eisenhardt, Kahwajy & Bourgeois 78). Managers are required to manage their conflicts democratically with a clear distinction between substantive and personal issues. In managing interpersonal conflicts, executive were prepared with information that is more detailed and multiple alternatives to enhance the quality of their debate. Availability of more data, which are objective-based, compels managers to focus on issues rather than personal matters or useless arguments rooted in ignorance. Inadequate information makes management rely mostly in guesses and baseless assumptions, which does not help the firm. Reliance on facts reduces involvement on personal issues, thus, reducing interpersonal conflicts. In addition, administrators used humor and shared a common goal in debates while maintaining a balanced power structure. Furthermore, managers should be deeply involved in creating different options thus plummeting disagreement amongst decision-making participants which, in turn, promotes teamwork. Individua l commitment in decision-making is achieved when joint effort is put in creating a number of alternatives. The authors further assert that the more the number of choices made by management, the greater the chances of coming up with more appropriate options. By creating common goals in the teamwork, managers should outline their strategic options as collaborative rather than competitive while every individual must endeavor to achieve best possible solution for the group. Common goal does not imply uniform thinking but, rather, require everyone to have a clear vision towards a particular goal. Lack of common goal makes some members of the team think that they are in competition, thus, framing decisions as reactions to threat (Eisenhardt, Kahwajy & Bourgeois 80). Using humor in decision making by the team releases tension among the management team and upholds collaborative spirit by making the business fun. The excitement while in decision making process reduces stress and brutal compe tition. Interpersonal conflicts are greatly reduced by using humor as a tool to avoid hostile and stressful environment. Humor acts as a defensive mechanism by decreasing the team temperatures and blunting the threatening edge of negative information. Humor that has very positive effect on mood may allow communication of difficult information in a more tactful manner and less threatening way. Furthermore, humor may make people more

The diamonds water paradox Movie Review Example | Topics and Well Written Essays - 500 words

The diamonds water paradox - Movie Review Example This can be viewed as the reasons behind Argyle’s successful entrance into this market. The firm’s dictatorial styles is used in marketing diamonds where customers have to take what is available or leave it is under threat from Argyle (Peng 316). Argyle diamonds may be of a lesser quality as compared to those of De Beers, but are on high demand. This is because world diamond prices have reduced in the past few years. Customer tastes have changed to an increased demand for cheap, high quality diamonds supplied by Argyle. This has led to most of these customers demanding more of Argyle diamonds than those from De Beers. Thus, De Beers faces a threat as it shifts from the diamond industry monopoly to an oligopoly market type from the competitor Argyle. In this case, both companies are providing the same product. The view from De Beers’ side is that the presence of Argyle has no effect on their monopoly. The firm is believed to be the sole producer of high quality, premium diamonds. The diamond market today is not only dominated by De Beers and Argyle. Other firms from other nations such as the Russians have today made an impact in the diamond market on a global scale, thus causing De Beers to risk losing its advantages as a monopoly. However, despite the presence of other upcoming competitors such as Argyle, De Beers can still be classified as one the most enduring monopolies in the world (Kanfer 402). When the diamond industry was an oligopoly in the 20th century, there were still other substitutes for diamonds such as emeralds and rubies. However, most still believe that there is no other gem that exhibits the same characteristic, such as the diamond. This was perhaps the belief created in the advertising campaign in the late 1990s by the only diamond seller. This supposition may still be there; therefore the diamond as a unique product has no competing

Specialised Cells in Human Biology Essay Example for Free

Specialised Cells in Human Biology Essay â€Å"The cells in your body are tiny-a row of about forty would fit into 1mm. But although they are too small to see with the naked eye their complexity is remarkable. A single cell can be thought of as an organised chemical system, separated from its disorganised surroundings by a membrane† (Boyle et al 1999) First here is a brief summary of major eukaryotic organelles and their structures. The nucleus is the largest and most prominent organelle in the cell. It is usually spherical and about 10um in diameter. It contains the DNA and chromosomes and carries information that allows the cell to divide and carry out its cellular processes. Almost all eukaryote cells have a nucleus. The nucleolus is located in the nucleus it is 1-2 um. Its function is to manufacture ribosomes. The ribosomes are found either free in the cytoplasm or attached to the rough endoplasmic reticulum R. E. R, They are 20nm in size and their function is to synthesise the protein in the cell. The cell surface membrane controls the entry and exit of substances in and out of the cell. It is partially permeable. It separates’ the cells contents from the external environment. It is a double layer of phospholipid molecules around 7-10nm thick. Cytoplasm is a jelly like substance that fills the cell it is around 80% water. This is where cell activities occur and most chemical reactions take place. Organelles are suspended in it. The R. E. R. occurs throughout the cytoplasm, it has an extensive membrane network. Its function is to isolate and transport newly synthesised proteins. The mitochondrion is numerous in cytoplasm and there are usually up to 1000per cell. Its function is aerobic respiration and synthesises most of the A. T. P. for the cell. The smooth endoplasmic reticulum S. E. R. is found in small patches in the cytoplasm, they vary in size and their function is to synthesise lipids and steroids. The muscle cells (see figure 1) that are found in the muscles that move the bones at joints in the skeleton. These cells allow for movement like walking or running. The skeletal muscle is made up of specialised cells also referred to as muscle fibres. These cells are long and thin, these elongated cells are tubular in appearance. The cells contain several nuclei for the cell to contract and relax the muscle; the cell needs many nuclei as the nucleus contains the DNA the genetic information that carries the instructions for making each protein i. e. the first step in making proteins takes place in the nuclei. The actual building of the proteins takes place in the sarcoplasm otherwise known as the cytoplasm. There is lots of mitochondria in the cell this because it is needed foe aerobic respiration to create the A. T. P. energy that is needed for the muscle to contract and relax. It is surrounded by the cell membrane or the sarcolemma, filled with sarcoplasm. The sarcoplasm contains many thread like fibres known as myofibrils. These run along the length if the muscle fibres parallel. The sarcoplasmic retilum that is around each myofibril consists of a network of tubes that contain calcium ions these play a major role in bringing about muscle movement. The neurone is the functional unit of the nervous system. They form connections with other neurones. They can carry electrical impulses in one direction; receiving and transmitting information. The thicker the insulation the faster the electrical impulses travel. They are found in the brain or the spinal cord. They are long and thin in fact they are the longest cell in the body. They vary in shape and size depending on their position and function. The neurones running down your leg can be over one metre long. Although all neurones have a similar basic structure, see figure 2 which shows the structure of a typical motor neurone. It transmits signals to muscle fibres. The cell body contains cytoplasm, a large nucleus which is found at the end of the cell and other organelles. Coming off the cell body are as many as 200 thread like dendrites that make the area of the cell body larger, these allow many connections to be made to other neurones and one long limb called an axon. The dendrites bring impulses into the cell body while the axon brings impulses away to connect with other neurones or with effectors such as glands or muscles. A significant feature of a neurone is that their cell bodies contain nissi granules; these work to be a maintenance system that monitors the cell. They are also the site of protein synthesis in the cell. The axoplasm or the cytoplasm extends throughout the cell into the dendrites, synoptic bulbs, cell body and axon. Materials reach different parts of the neurone by axoplasmic transport. Most human cells are microscopic. The largest cell in the human body is the egg cell or the ova. This is just visible with the naked eye. It needs to be bigger than other cells as it needs the space to store food reserves. It is large in diameter at 0. 2mm and has a large cytoplasm this is packed with food reserves which allow the cell to divide before it implants in to the nucleus. It has a large nucleus (see figure 3) this is because it contains all the genetic material of the cell including all of the DNA, 23 chromosomes and all of the information necessary to make a complete human being in just nine months. .The egg cell is surrounded by several layers of cells and the complete unit is called a follicle. The production of egg cells oogenesis takes place within the ovaries of the developing female fetus. At birth a girl already has two million. These fuse with the male gametes called spermatozoa or sperm in a process known as fertilisation. The resulting cell the zygote develops inside the uterus nourished by the placenta into a new individual. The sperm (see figure 4) has a large nucleus; this is because it contains digestive enzymes it also contains the 21 chromosomes that must be delivered to the egg in order for the complete 42 chromosomes to be in the zygote, it also contains chemicals to penetrate the egg and carries genetic information. The sperm has many mitochondria this is because it needs a lot of energy for its long swim to the egg. It has a long tail called a flagellum that is a modified cilium that it uses for swimming to the egg cell. It is one of 50-200 million sperm that attempt the journey to the egg cell but only one can make it and fertilise the egg cell. When the sperm reaches the egg cell; digestive enzymes that are found on the tip of the sperm head are released when the bag splits releasing the enzymes which digest a pathway through any remaining follicle cells and the zona pellucida. Fertilisation has begun.

Managing Foreign Exchange Risk in International Trade

Managing Foreign Exchange Risk in International Trade MANAGING FOREIGN EXCHANGE RISK IN INTERNATIONAL TRADE WITH A FOCUS ON EAST MIDLANDS COMPANIES Abstract The purpose of this research is to investigate how international trade companies in the East Midlands manage foreign exchange risk. This study utilises descriptive statistics in presenting and analysing data from the primary research. The findings of the research indicate that a majority of the firms used broad business strategies in managing their foreign exchange risk. The main problems the firms had with managing foreign exchange risks centred on customer retention and receiving payments on time. The results also indicate that there were a few firms which took an integrated approach to mitigating foreign exchange risk. This research is of value to firms involved in international trade and also business development agencies which seek to assist firms which are planning to enter or are already operating in foreign markets. Chapter 1 Introduction International trade involves exporting and importing of goods or services across foreign borders and, as soon as a firm engages in import and/or export it is exposed to numerous risks. As a result firms operating outside their home country, have to deal with the economic conditions of the foreign country in which it wishes to operate in. One of the key issues firms involved in import and/ or export are faced with is dealing with foreign currency as this is the only means by which the exchange of goods or services is facilitated. To this end it is import to study and understand the impact which foreign currency has on international trade. Following the demise of the Bretton Woods agreement (1971) whereby exchange rates were allowed to float freely, managing foreign exchange has become important (Heakel, 2009). Consequently the prices of currencies were determined by market forces that is, demand for and supply of money (Mastry and Salam, 2007). Due to the constant changes in demand and supply which are in turn influenced by other external factors, fluctuations arise (Czinkota et al, 2009). As a result of these fluctuations firms are exposed to foreign exchange risks also known as currency risks. Firms trading in different currencies are exposed to three types of foreign exchange risks; economic, transaction and translational risk (Czinkota et al, 2009). Firms which are involved in international trade are exposed to economic and transaction risks as they both pose potential threats to the firms cash flow over time (Czinkota et al, 2009). Studies have shown that foreign exchange fluctuations can affect the value of a fi rms cash flow over time (Aretz, Bartram and Dufey, 2007, Judge, 2004, Bradley and Moles 2002, Allayannis and Ofek 1998, Chowdhry, 1995, Damant, 2002 and Wong 2001). More so, domestic firms although not dealing with foreign currency are also affected by foreign exchange fluctuations as the price of the commodity they trade in are also affected (Abor, 2005). Most of the extant literatures have focused on corporate risk management for financial firms and as such financial hedging with derivatives has been the central theme of currency risk management. On the other hand there has been evidence to show alternative methods exist for firms involved in international trade, these methods of managing foreign exchange risks involve strategic and operational risk management. However most of these studies have been carried out in isolation; financial hedging techniques carried out in isolation of strategic and operational hedging methods and vice versa. Little has been done to provide an integrated perspective, on utilising both techniques of managing foreign exchange risks with regards to international trade firms. This is the area in which the present study intends to explore thereby contributing to the overall literature Purpose of the Research Due to the nature of international trade which expose the firm to foreign exchange movements, thus subjecting the firm to currency risks, the purpose of this research is to explore how international trade firms deal with foreign exchange risk. The research focuses how import and export firms in the East Midlands manage their foreign exchange risk. This study also aims to explore the problems involved in managing those risks. Research Questions Consequently the research hopes to answer the following questions: Do import and export firms in the East Midlands actually manage their foreign exchange rate risks? How import and export companies in the East Midlands manage their foreign exchange risks? What problems they encounter with managing these risks? Definition of Key Terms Hedge A hedge can be defined as â€Å"making an investment to reduce the risk of adverse price movements in an asset. Investors use this strategy when they are unsure of what the market will do† (Investopedia, 2010). Derivatives Derivatives are instruments whose performance is derived from an underlying asset (Arnold, 2002) Spot Rate The spot rate is defined as the rate of exchange quoted immediately if buying or selling currency (Watson and Head) International Trade This involves the flow of goods and services between nations; it involves import and/ export of goods and services (Harrison et al, 2000) The subsequent section provides a break down of how rest of the research is set out. Chapter 2: Literature Review; this chapter provides an overview of the research topic by mapping out the key areas; theories within the risk management and finance literature are identified, explored and analysed. The concept of risk and risk management is explored. A broad classification is made on the types of risks and this is then narrowed down to include foreign exchange risk. The chapter proceeds by exploring the concept of foreign exchange and foreign exchange risks; which include the types of foreign exchange exposures. The common techniques for managing foreign exchange risks are explored. This is followed by a review of relevant literature in the key areas of the research topic. Chapter 3: Research Methodology; in this chapter the research design and strategy are discussed. Chapter 4: Research Findings and Analysis; this chapter presents the findings of the research which were obtained from the questionnaire. The findings are presented using tables, graphs and charts, to enable the reader gain a clearer understanding. An analysis of the findings is carried out by cross-tabulating the responses of the respondent in order to observe for any commonalities and/or differences. Chapter 5: Conclusion and Recommendation; this chapter concludes the research and recommendations are made. Chapter 2: Literature Review 2.1 Risk Management- Risk is an intrinsic part of any business, due to unpredictability of the forces which govern business transactions such as political, economic and social conditions; risk is a factor which cannot be completely eliminated (Watson and Head, 2007). Arnold (2002) describes risk as a situation where there is more than just one possible outcome, but a range of potential returns. It can also be defined as the chance that the actual return from an investment will be different than expected (Lamb, 2008). From the above definitions, risk does not necessarily spell doom or does not necessarily have a negative connotation. Markowitz was one of the earliest academics to point this out, by establishing a link between risks and return (risk-return trade-off). Essentially the theory; Modern Portfolio Theory (MPT) involves expected return and the degree of accompanying risk for an investment (Yorke and Droussiotis, 1994). A central theme of this theory is that the greater risk an investor accepts th e higher the potential for increased returns (Yorke and Droussiotis, 1994). While MPT purports a positive correlation between risk and return, the fact that an investment can have a range of possible outcomes is an uncertainty which can be very costly. As a result risk management is also a part and parcel of business. Risk management can be defined as â€Å"the performance of activities designed to minimize the negative impact (cost) of uncertainty (risk) regarding possible losses† (Abor, p.307, 2005). The objectives of risk management are to minimize potential losses, reduce volatility of cash flow thereby protecting earnings (Abor, 2005). While the objective for risk management is to protect companies against financial loss thereby protecting the value of the firm, traditional finance theory such as that proposed by Modigliani and Miller suggests that the market value of a firm is determined by it earning power (Arnold, 2002). The basic assumption of Modigliani and Miller theorem is that in an efficient market; with the absence of taxation, bankrupt cy costs and information asymmetry, the value of the firm is unaffected by its capital structure (Arnold, 2002). However empirical research (list authors) has shown the existence of capital market imperfections, such as taxes, agency problems and financial distress exists thus justifying risk management (Chowdhry, 1995). Furthermore, MPT also suggests that the risk and volatility of an investment portfolio can be reduced, and the gains can be enhanced, all by diversifying the portfolio among several non-correlated assets (Pearce Financial, 2008). That is, investors can maximise their expected return for a given level of risk by diversifying their investments across a range of assets ((McClure, 2006). MPT involves risk management through diversification of investments. In a simplified expression, MPT is based on the idea of not ‘putting all of ones eggs into one basket. 2.2 Types of Risk There are two broad classification of risks; Unsystematic and Systematic (Rossi and Laham, 208) Systematic risks refers to risks which affect the entire market due to events such as; exchange rate movements, changes in the price of commodities, war, recession and interest rates, however Unsystematic risks are risks which are specific to individual companies (reference). These distinctions were made by Sharpe (1960) in addition to Markowitz Modern Portfolio theory (MPT), the rationale behind it was that despite risk management practise through diversification, there were still underlying factors which affected the return potential of an investment portfolio. Chesnay Jondeau (2001) clearly point out that the correlation of assets which Markowitz talks about depends on other underlying factors and that the relationships are dynamic. They further found that major events such as general adverse movements in markets can significantly change the correlations between assets (Chesnay Jondeau, 2001). Empirical studies show that in financial crisis, assets tends to act the same, that is they are more likely to more become positively correlated, moving down at the same time (Ardelean, Brandt and Malik, 2009). Essentially, severe market crises will have a spill over effect and cause investments in several different asset classes or markets to succumb to sudden liquidation (Vocke and Wilde, 2000, Pearce Financial, 2008). However findings from Xing and Howe (2003) are contradictory, their findings show that the failure of previous studies to find a positive risk-return relationship may be as a result of model misspecification. Essentially they found that there was no agreement on the risk-return relationship amongst previous studies which had used data from one market (Xing and Howe, 2003). Thus they argued that the world market should be taken into consideration in assessing risk return-relationship in a partially integrated market (Xing and Howe, 2003). But then it only stands to reason that if markets are integrated partially or wholly, a catastrophic economic cycle such as financial crises would have an adverse effect on the world market. Thus clearly it does not matter how much one diversifies unsystematic risk, the underlying systematic risk is a problematic factor which has to be dealt with. 2.3 Foreign Exchange rate as a Systematic Risk Background Foreign Exchange rate can be defined as the â€Å"price of one currency expressed in terms of another† (Arnold, p.973, 2002). For example, if the exchange rate exchange rate between the European Euro and the Pound is â‚ ¬1.3 =  £ 1.00, this means that  £1 is equivalent to â‚ ¬1.3. Foreign Exchange (Forex) is traded on the foreign exchange market, the purpose of which is to facilitate trade and the exchange of currencies between countries (Czinkota et al, 2009). The Forex market is an informal market which does not have a central trading place (Czinkota et al, 2009). Trade is carried out it is a 24 hour market as it involves financial institutions from around the globe, as trade moves from one financial centre to another (Arnold, 2002). Thus as one market closes in one region or continent another opens in a different place (Arnold, 2002). The major trading centres are in Tokyo, Singapore, London and New York (Waston and Head, 2007). The buyers and sellers of foreign c urrencies included exporters/importers; tourists; fund managers; governments; central banks; speculators and commercial banks (Arnold, 2002). However large commercial banks account for a larger percentage of Forex trading in the currency markets, as they deal currencies on behalf of customers (Arnold, 2002). They also undertake transactions of their own in an attempt to make a profit by speculating on future movements of exchange rates (Arnold, 2002). Foreign Exchange Risk After the demise of the Bretton woods conference (1973) exchange rates were allowed to float freely; exchange rates were no longer fixed and currencies were allowed to float freely in value to each other (Czinkota et al, 2009). However freely floating exchange rate poses problems for investors and firms alike who deal with different currencies as the uncertainty of exchange rate movements can have a positive or negative impact on an investment (Czinkota et al, 2009). Foreign exchange risk also known as currency risk is the â€Å"risk that an entity will be required to pay more (or less) than expected as a result of fluctuations in the exchange rate between its currency and the foreign currency in which payment must be made† (Abor, p.3, 2005). Thus considering the potential variability of Forex and the impact it can have on international investments and international business, irrespective of the business sector, it is clear that Foreign exchange risks can be classed as systematic risks. Forex risk is an un-diversifiable risk as it affects the entire market. Having established the relationship between Forex and systematic risk and understanding that it cannot be diversified the question which presents itself is, what can be done about it? Theory states that the only way out is to hedge this risk (Bartram, 2007), the decision to hedge will be examined in Section 2.7 2.4 Types of Foreign Exchange Exposure There are three types of foreign exchange risks or exposures; Economic exposure, Transaction exposure and Translational exposure (Maurer and Valiani, 2002). Transaction exposure is the risk that arises as a result of an existing contractual agreement involving a commitment in foreign currency, this sort of risk is primarily associated with import or exports (Arnold, 2002). For example a firm which exports goods from the UK to the US; will have an agreement (contract) that the US firm buying the goods will pay for the goods at a later date (could be 30, 60 or 90 days), however changes in the exchange rates to either currency (whether an appreciation or depreciation) will either positive or negative consequences for either firms. Transaction risks also come as a result of firms making foreign investments such as opening subsidiary branches (Arnold, 2002). These risks arise in the form of payment costs associated with constructing or establishing new branches (Arnold, 2002). In order to make the necessary payments, the home-based firm would exchange its home currency for foreign currency, thereby giving rise to potential transaction risk (A rnold, 2002) Translational exposure relates to a firms earnings; it involves a firms accounting practises (Waston and Head, 2007). This risk â€Å"arises from the legal requirement that all firms consolidate their financial statement (balance sheet and income statement) of all worldwide operations annually† (Czinkota et al, p. 334, 2009). This implies that, as firms translate and consolidate foreign assets, liabilities and profits into domestic currency, there is the possibility of the firm experiencing a loss or gain (Waston and Head, 2007). This is mainly an accounting risk and as such give a real indication of the impact of exchange rate fluctuations on the value of a firm (Watson and Head, 2007). Economic exposure impacts a firms long-term cash flow, positively or negatively (Czinkota et al, 2009). This kind of risk not only affects firms involved in international trade but also has an impact on domestic firms as it can also affect the price of commodities sold (Czinkota et al, 2009). Furthermore, this sort of risk also undermines the competitiveness of a firm (Arnold, 2002). It can affect the firms competitive position directly if the home currency appreciates and foreign competitors are able to offer a much cheaper price, compared to the firms products which have become expensive as a result of the currency appreciation (Arnold, 2002). Economic risk can also affect a firms competitive position indirectly even if a firms home currency does not experience adverse movements (Arnold, 2002). For example Arnold (2002) illustrate that a South African firm selling in Hong Kong with a New Zealand firm as its main competitor can lose competitive edge if the New Zealand dollar weakens against the Hong dollar. Thus the products or commodity on offer by the New Zealand firm would be cheaper than that of the South African firm assuming both currencies (South African Rand and New Zealand Dollar) had a similar exchange rate against Hong Kong Dollar. Economic and transaction risk are more related to businesses involved in international trade, translational exposure more to do with accounting practises (Waston and Head, 2007). Consequently these are the foreign exchange exposure that will be focused on. 2.5 Foreign Exchange Risk and Natural Hedging The idea of applying natural hedging strategies as tools to hedge foreign exchange exposure is one that has received a lot of attention in recent times, as the concept focuses on using non-financial methods to mitigate the volatility of future cash flows and possibly add value to the firm (Kim et al, 2006). The various natural hedging strategies are explained below. Netting This technique relates to multi-nationals which have foreign subsidiaries, it involves reducing funds transferred by netting off the transaction between the parent company and the subsidiary firm (Watson and Head, 2007). For example â€Å"if a UK parent owed a subsidiary in Canada and sold C$2.2m of goods to the subsidiary on credit while the Canadian subsidiary is owed C$1.5m by the UK company, instead of transferring a total of C$3.7m the intra-group transfer is the net amount of C$700,00† (Arnold, p. 982, 2002). This implies that rather than both the parent and subsidiary firm managing their exposure separately they opt for a centralised management system to reduce the size of the currency flows. Consequently transaction costs and the cost of purchasing foreign exchange are mitigated (Arnold, 2002). Leading and Lagging This technique involves either settling foreign accounts by either postponing payments (lagging) till the end of the credit period allowed or prepayment (leading) at the beginning of the transaction (Watson and Head, 2007). It functions based on the anticipation a firm has that future exchange rates will either appreciate or depreciate (Czinkota, 2009). Thus if a firm anticipated a depreciation in its home currency, it lead its payments conversely if the firm anticipated an appreciation in exchange rate it would lag its payments. Invoicing in the Domestic Currency This method involves invoicing foreign customers in the firms domestic currency rather than in the foreign currency (Arnold, 2002). What this does is that it shifts the burden of risk to the foreign firm (buyer). Operational and Strategic Methods There is no one singular acceptable definition of operational hedging as it varies according to the context it is been used. Boyabatli and Toktay (2004) in their work, review and discuss a diverse cross section of views on operational hedging, they delve into the similarities in application methods of operational hedging across different academic fields. They discovered that although there were some differences in meaning in various academic fields; operations management, finance, strategy and international business, there were basic characteristics which were similar across all fields. On this basis operational hedging can be described according to its functionality. Bradley and Moles describe it as the decisions firms take in regards to the â€Å"location of their production facilities, sourcing of inputs, the nature and scope of products, strategic financial decisions such as the currency denomination of debt, the firms choice of markets and market segments† (Bradley and Mo les p.29, 2002). It involves the use of non-financial methods to mitigate the volatility of future cash flows and possibly add value to the firm (Kim et al, 2006). The objective is geared towards reducing long-term economic exposures. Operational hedging can be said to be based on the principle of real options. Real options are â€Å"opportunities to delay and adjust investments and operating decisions over time in response to resolution of uncertainty† (Triantis 2000 cited in Boyabatli and Toktay p.6, 2004). 2.6 Hedging with Financial Derivatives The different types of financial derivatives are: Forwards and Futures, Foreign currency Options and Currency Swaps. Forward contract: This enables the business to protect itself from adverse movements in exchange rates by locking in an agreed exchange rate until the agreed date of payment (Brealey, Myers and Allen, 2006). The example given by Horcher and Karen (p.95, 2005) illustrate the concept further; â€Å"a company requires 100 million Japanese yen in three months to pay for imported products. The current spot exchange rate is 115.00 yen per U.S. dollar, and the forward rate is 114.50. The company books a forward contract to buy yen (sell U.S. dollars) in three months time at a price of 114.50 and orders its merchandise. In three months time, the company will use the contract to buy yen at 114.50. At that time, if yen is trading at 117.00 per U.S. dollar, the company will have locked in a price that, with the benefit of hindsight, is worse than current market prices. If three months later yen is at 112.00 per U.S. dollar, the company will have successfully protected itself against a more exp ensive yen. Regardless of price changes, the company has locked in its yen purchase price at the forward rate of 114.50, enabling it to budget its costs with certainty†. Futures Contract: A futures contract refers to an â€Å"agreement to buy or sell a standard quantity of specified financial instrument or foreign currency at a future date at a price agreed between two parties† (Watson and Head, 2007). Although it bears some similarities to the forward contract in that it also locks in the exchange rate, however one major difference is that a forward contract can be used in a wide range of currencies while the futures contract is applicable to a limited number of currencies (Brealey, Myers and Allen, 2006). Foreign currency Options: This gives holders the right to purchase or sell foreign currency under an agreement that allows for the right but not the obligation to undertake the transaction at the agreed future date (Brealey, Myers and Allen, 2006). One key advantage of this method of hedging is that it gives holders the opportunity to take advantage of favourable exchange rate movements (Watson and Head, 2007). However a non-refundable fee on the option known as an option premium is required (Watson and Head, 2007). Currency Swaps: A currency swap is â€Å"an agreement between two parties to exchange principal and interest payments in different currencies over a stated time period† (Watson and Hedge, p. 382, 2007). Basically what this implies is that a firm can gain the use of foreign currency but avoid exchange rate risk which may arise from servicing payments (Watson and Head, 2007). 2.7 A review of Literature on hedging This section critically examines the rationale for hedging foreign exchange risk. The rationale which has been put forward for hedging risk in the existing literature (Judge, 2004) is that it maximises shareholder value. The idea behind hedging any kind of risk in general is that once a firm takes on the responsibility of actively managing risk, shareholder value is increased, thereby increasing the overall value of the firm (Judge, 2004). However finance theory proposes that shareholders are diversified and thus are not willing to pay a premium to firms for adopting hedging policies (Rossi and Laham, 2008). So in that vein, theory proposes that what is actually being maximized is the managers private utility (Tekavcic, Sernic and Spricic, 2008). Essentially finance theory states that shareholders are diversified while managers of firms are not, so in a bid to protect their income and personal asset, which are linked to the firm, they hedge against uncertainty (Baranoff and Brockett, 2008). Within this theory shareholders are willing to take on risk in exchange for greater returns (risk-return trade off) and so they invest in companies which they believe can provide such high returns. Thus managers hedging risks can be said to lead to underinvestment, which then flaws the theory of risk-return trade off (Baranoff and Brockett, 2008). This theory is based on the premise that financial markets are efficient and as such hedging activities of firm would not add value to the firm (Rossi and Laham). In addition to the complexities of the above theory, when the concept of hedging is put into the context of foreign exchange movements; the Law of one price (LOP)/ purchasing power parity (PPP) suggests that identical goods are not affected by exchange rate variations (Hyrina and Serletis, 2008). The law of one price is the foundation of the theory of PPP which posits that similar goods should have identical prices across countries once expressed in a common currency (Hyrina and Serletis, 2008, Czinkota et al, 2009). Numerous studies have been carried out to test whether or not the theory holds, however there is no general consensus as to whether or not the theory is valid. Hyrina and Serletis (2009), Glen (1992), Choi, Laibson and Madrian (2006) found that there are some flaws within the theory as the real exchange rate is not stationary. Engel and Rogers (1996) examines the impact distance has on goods sold and whether the presence of national borders separating locations were these goods are sold, also have any impact on the law of one price. Empirical evidence from the research shows distance and border have significant role to play on the differences in price of goods (Engel and Rogers, 1996). More so, that market segmentation also leads to price differentiation (Engel and Rogers, 1996). This theory just like the first are both based on the principle that the market is efficient and as such inconsistencies such as movements in exchange rate even out in time (Zanna, 2009). Without attempting to disparage the above theories, in regards to the first theory, whether or not hedging is done to propagate the interests of managers, the fact is that, the basis of the theory (Efficient Market) is flawed as there are numerous empirical evidence (Nobile, 2007; Bartram, 2007, Allayannis and Ofek, 2003, Tekavcic et al 2008, Mastry, 2003) to suggest that there are imperfections in the financial market such as high interests rates, inflation, tax and of course foreign exchange movements which can affect a firm. Thus shareholders cannot afford not to be concerned about hedging as these imperfections in the market can affect the cash flow, profit and ultimately the overall value of the firm. Thus in the same vain PPP should not hold. In regards to PPP it is necessary to indicate that there are other factors which affect the price of goods sold across national borders. Bradley (2005) states that the prices of goods for each firm are influenced by numerous factors such as; Government policies, high inflation rates and corporate income tax and thus such prices of goods cannot be the same across different borders. So to state clearly the financial market is not efficient due to market imperfections. Thus movements in foreign exchange can affect the cash flow and overall value of the firm. Consequently it is necessary for firms to focus on how to manage this risk. 2.8 Review of literature on financial derivatives and operational Strategies The extant literatures on hedging exchange rate risks with financial derivatives have focused on corporate risk management. The main thrust of literatures from authors such as Mastry (2003), Bartram et al (2003) and Galum and Roth (1993) have carried out studies which are aimed at finding the optimal financial derivative. However there is no general consensus as to an optimal financial hedging position. The reason for this can related to basic financial theory which suggests that derivative instruments should be chosen based on the degree of exposure of the firm and the payoff that can be gotten from the instrument (Bartram, 2006). Essentially what this implies instruments with linear characteristics such as forwards, futures and swaps should be used for linear exposures, while instruments with nonlinear profiles such as currency options are suitable to hedging nonlinear exposure (Stulz, 2003). Put simply the theory suggests that after firms assess the nature of its exposure, all tha t needs to be done is choose a derivative which matches that exposure. However, contrary to financial theory Bartram (2006), Ianieri (2009) found that as a result of the flexible nature of options, options can be used to hedge various types of exposures and not just nonlinear exposures. Despite these findings, merely identifying the nature of exposure and matching it with a derivative is not enough. There are other factors which influence the decision on what derivatives to use besides the nature of exposure. For instance while an option is flexible and can be adapted to suit various types of exposures, it is also be a highly complex technical method to use. The problem with currency options is that they require highly skilled individuals who can understand and use it effectively. Ianieri (2009) states that even brokers who should know how to use this method have had bad experiences with it. In an alternative view, Masry and Salam (2007) in an attempt to understand the rationale for using financial derivatives found that the size of the firm impacts on a firms decision to use financial derivatives. A study conducted by Judge (2004) shows that there is a positive relationship between the size of the firm and the foreign currency hedging decision. The general idea is that large firms have numerous resources available to them; in terms of personnel and information, and as such they are more likely to hedge using financial derivatives (Judge, 2004). So in essence the transaction costs which accompany the use of derivatives would discourage small firms from opting to hedge with financial derivatives. On the other hand Kim and Sung (2005), Managing Foreign Exchange Risk in International Trade Managing Foreign Exchange Risk in International Trade MANAGING FOREIGN EXCHANGE RISK IN INTERNATIONAL TRADE WITH A FOCUS ON EAST MIDLANDS COMPANIES Abstract The purpose of this research is to investigate how international trade companies in the East Midlands manage foreign exchange risk. This study utilises descriptive statistics in presenting and analysing data from the primary research. The findings of the research indicate that a majority of the firms used broad business strategies in managing their foreign exchange risk. The main problems the firms had with managing foreign exchange risks centred on customer retention and receiving payments on time. The results also indicate that there were a few firms which took an integrated approach to mitigating foreign exchange risk. This research is of value to firms involved in international trade and also business development agencies which seek to assist firms which are planning to enter or are already operating in foreign markets. Chapter 1 Introduction International trade involves exporting and importing of goods or services across foreign borders and, as soon as a firm engages in import and/or export it is exposed to numerous risks. As a result firms operating outside their home country, have to deal with the economic conditions of the foreign country in which it wishes to operate in. One of the key issues firms involved in import and/ or export are faced with is dealing with foreign currency as this is the only means by which the exchange of goods or services is facilitated. To this end it is import to study and understand the impact which foreign currency has on international trade. Following the demise of the Bretton Woods agreement (1971) whereby exchange rates were allowed to float freely, managing foreign exchange has become important (Heakel, 2009). Consequently the prices of currencies were determined by market forces that is, demand for and supply of money (Mastry and Salam, 2007). Due to the constant changes in demand and supply which are in turn influenced by other external factors, fluctuations arise (Czinkota et al, 2009). As a result of these fluctuations firms are exposed to foreign exchange risks also known as currency risks. Firms trading in different currencies are exposed to three types of foreign exchange risks; economic, transaction and translational risk (Czinkota et al, 2009). Firms which are involved in international trade are exposed to economic and transaction risks as they both pose potential threats to the firms cash flow over time (Czinkota et al, 2009). Studies have shown that foreign exchange fluctuations can affect the value of a fi rms cash flow over time (Aretz, Bartram and Dufey, 2007, Judge, 2004, Bradley and Moles 2002, Allayannis and Ofek 1998, Chowdhry, 1995, Damant, 2002 and Wong 2001). More so, domestic firms although not dealing with foreign currency are also affected by foreign exchange fluctuations as the price of the commodity they trade in are also affected (Abor, 2005). Most of the extant literatures have focused on corporate risk management for financial firms and as such financial hedging with derivatives has been the central theme of currency risk management. On the other hand there has been evidence to show alternative methods exist for firms involved in international trade, these methods of managing foreign exchange risks involve strategic and operational risk management. However most of these studies have been carried out in isolation; financial hedging techniques carried out in isolation of strategic and operational hedging methods and vice versa. Little has been done to provide an integrated perspective, on utilising both techniques of managing foreign exchange risks with regards to international trade firms. This is the area in which the present study intends to explore thereby contributing to the overall literature Purpose of the Research Due to the nature of international trade which expose the firm to foreign exchange movements, thus subjecting the firm to currency risks, the purpose of this research is to explore how international trade firms deal with foreign exchange risk. The research focuses how import and export firms in the East Midlands manage their foreign exchange risk. This study also aims to explore the problems involved in managing those risks. Research Questions Consequently the research hopes to answer the following questions: Do import and export firms in the East Midlands actually manage their foreign exchange rate risks? How import and export companies in the East Midlands manage their foreign exchange risks? What problems they encounter with managing these risks? Definition of Key Terms Hedge A hedge can be defined as â€Å"making an investment to reduce the risk of adverse price movements in an asset. Investors use this strategy when they are unsure of what the market will do† (Investopedia, 2010). Derivatives Derivatives are instruments whose performance is derived from an underlying asset (Arnold, 2002) Spot Rate The spot rate is defined as the rate of exchange quoted immediately if buying or selling currency (Watson and Head) International Trade This involves the flow of goods and services between nations; it involves import and/ export of goods and services (Harrison et al, 2000) The subsequent section provides a break down of how rest of the research is set out. Chapter 2: Literature Review; this chapter provides an overview of the research topic by mapping out the key areas; theories within the risk management and finance literature are identified, explored and analysed. The concept of risk and risk management is explored. A broad classification is made on the types of risks and this is then narrowed down to include foreign exchange risk. The chapter proceeds by exploring the concept of foreign exchange and foreign exchange risks; which include the types of foreign exchange exposures. The common techniques for managing foreign exchange risks are explored. This is followed by a review of relevant literature in the key areas of the research topic. Chapter 3: Research Methodology; in this chapter the research design and strategy are discussed. Chapter 4: Research Findings and Analysis; this chapter presents the findings of the research which were obtained from the questionnaire. The findings are presented using tables, graphs and charts, to enable the reader gain a clearer understanding. An analysis of the findings is carried out by cross-tabulating the responses of the respondent in order to observe for any commonalities and/or differences. Chapter 5: Conclusion and Recommendation; this chapter concludes the research and recommendations are made. Chapter 2: Literature Review 2.1 Risk Management- Risk is an intrinsic part of any business, due to unpredictability of the forces which govern business transactions such as political, economic and social conditions; risk is a factor which cannot be completely eliminated (Watson and Head, 2007). Arnold (2002) describes risk as a situation where there is more than just one possible outcome, but a range of potential returns. It can also be defined as the chance that the actual return from an investment will be different than expected (Lamb, 2008). From the above definitions, risk does not necessarily spell doom or does not necessarily have a negative connotation. Markowitz was one of the earliest academics to point this out, by establishing a link between risks and return (risk-return trade-off). Essentially the theory; Modern Portfolio Theory (MPT) involves expected return and the degree of accompanying risk for an investment (Yorke and Droussiotis, 1994). A central theme of this theory is that the greater risk an investor accepts th e higher the potential for increased returns (Yorke and Droussiotis, 1994). While MPT purports a positive correlation between risk and return, the fact that an investment can have a range of possible outcomes is an uncertainty which can be very costly. As a result risk management is also a part and parcel of business. Risk management can be defined as â€Å"the performance of activities designed to minimize the negative impact (cost) of uncertainty (risk) regarding possible losses† (Abor, p.307, 2005). The objectives of risk management are to minimize potential losses, reduce volatility of cash flow thereby protecting earnings (Abor, 2005). While the objective for risk management is to protect companies against financial loss thereby protecting the value of the firm, traditional finance theory such as that proposed by Modigliani and Miller suggests that the market value of a firm is determined by it earning power (Arnold, 2002). The basic assumption of Modigliani and Miller theorem is that in an efficient market; with the absence of taxation, bankrupt cy costs and information asymmetry, the value of the firm is unaffected by its capital structure (Arnold, 2002). However empirical research (list authors) has shown the existence of capital market imperfections, such as taxes, agency problems and financial distress exists thus justifying risk management (Chowdhry, 1995). Furthermore, MPT also suggests that the risk and volatility of an investment portfolio can be reduced, and the gains can be enhanced, all by diversifying the portfolio among several non-correlated assets (Pearce Financial, 2008). That is, investors can maximise their expected return for a given level of risk by diversifying their investments across a range of assets ((McClure, 2006). MPT involves risk management through diversification of investments. In a simplified expression, MPT is based on the idea of not ‘putting all of ones eggs into one basket. 2.2 Types of Risk There are two broad classification of risks; Unsystematic and Systematic (Rossi and Laham, 208) Systematic risks refers to risks which affect the entire market due to events such as; exchange rate movements, changes in the price of commodities, war, recession and interest rates, however Unsystematic risks are risks which are specific to individual companies (reference). These distinctions were made by Sharpe (1960) in addition to Markowitz Modern Portfolio theory (MPT), the rationale behind it was that despite risk management practise through diversification, there were still underlying factors which affected the return potential of an investment portfolio. Chesnay Jondeau (2001) clearly point out that the correlation of assets which Markowitz talks about depends on other underlying factors and that the relationships are dynamic. They further found that major events such as general adverse movements in markets can significantly change the correlations between assets (Chesnay Jondeau, 2001). Empirical studies show that in financial crisis, assets tends to act the same, that is they are more likely to more become positively correlated, moving down at the same time (Ardelean, Brandt and Malik, 2009). Essentially, severe market crises will have a spill over effect and cause investments in several different asset classes or markets to succumb to sudden liquidation (Vocke and Wilde, 2000, Pearce Financial, 2008). However findings from Xing and Howe (2003) are contradictory, their findings show that the failure of previous studies to find a positive risk-return relationship may be as a result of model misspecification. Essentially they found that there was no agreement on the risk-return relationship amongst previous studies which had used data from one market (Xing and Howe, 2003). Thus they argued that the world market should be taken into consideration in assessing risk return-relationship in a partially integrated market (Xing and Howe, 2003). But then it only stands to reason that if markets are integrated partially or wholly, a catastrophic economic cycle such as financial crises would have an adverse effect on the world market. Thus clearly it does not matter how much one diversifies unsystematic risk, the underlying systematic risk is a problematic factor which has to be dealt with. 2.3 Foreign Exchange rate as a Systematic Risk Background Foreign Exchange rate can be defined as the â€Å"price of one currency expressed in terms of another† (Arnold, p.973, 2002). For example, if the exchange rate exchange rate between the European Euro and the Pound is â‚ ¬1.3 =  £ 1.00, this means that  £1 is equivalent to â‚ ¬1.3. Foreign Exchange (Forex) is traded on the foreign exchange market, the purpose of which is to facilitate trade and the exchange of currencies between countries (Czinkota et al, 2009). The Forex market is an informal market which does not have a central trading place (Czinkota et al, 2009). Trade is carried out it is a 24 hour market as it involves financial institutions from around the globe, as trade moves from one financial centre to another (Arnold, 2002). Thus as one market closes in one region or continent another opens in a different place (Arnold, 2002). The major trading centres are in Tokyo, Singapore, London and New York (Waston and Head, 2007). The buyers and sellers of foreign c urrencies included exporters/importers; tourists; fund managers; governments; central banks; speculators and commercial banks (Arnold, 2002). However large commercial banks account for a larger percentage of Forex trading in the currency markets, as they deal currencies on behalf of customers (Arnold, 2002). They also undertake transactions of their own in an attempt to make a profit by speculating on future movements of exchange rates (Arnold, 2002). Foreign Exchange Risk After the demise of the Bretton woods conference (1973) exchange rates were allowed to float freely; exchange rates were no longer fixed and currencies were allowed to float freely in value to each other (Czinkota et al, 2009). However freely floating exchange rate poses problems for investors and firms alike who deal with different currencies as the uncertainty of exchange rate movements can have a positive or negative impact on an investment (Czinkota et al, 2009). Foreign exchange risk also known as currency risk is the â€Å"risk that an entity will be required to pay more (or less) than expected as a result of fluctuations in the exchange rate between its currency and the foreign currency in which payment must be made† (Abor, p.3, 2005). Thus considering the potential variability of Forex and the impact it can have on international investments and international business, irrespective of the business sector, it is clear that Foreign exchange risks can be classed as systematic risks. Forex risk is an un-diversifiable risk as it affects the entire market. Having established the relationship between Forex and systematic risk and understanding that it cannot be diversified the question which presents itself is, what can be done about it? Theory states that the only way out is to hedge this risk (Bartram, 2007), the decision to hedge will be examined in Section 2.7 2.4 Types of Foreign Exchange Exposure There are three types of foreign exchange risks or exposures; Economic exposure, Transaction exposure and Translational exposure (Maurer and Valiani, 2002). Transaction exposure is the risk that arises as a result of an existing contractual agreement involving a commitment in foreign currency, this sort of risk is primarily associated with import or exports (Arnold, 2002). For example a firm which exports goods from the UK to the US; will have an agreement (contract) that the US firm buying the goods will pay for the goods at a later date (could be 30, 60 or 90 days), however changes in the exchange rates to either currency (whether an appreciation or depreciation) will either positive or negative consequences for either firms. Transaction risks also come as a result of firms making foreign investments such as opening subsidiary branches (Arnold, 2002). These risks arise in the form of payment costs associated with constructing or establishing new branches (Arnold, 2002). In order to make the necessary payments, the home-based firm would exchange its home currency for foreign currency, thereby giving rise to potential transaction risk (A rnold, 2002) Translational exposure relates to a firms earnings; it involves a firms accounting practises (Waston and Head, 2007). This risk â€Å"arises from the legal requirement that all firms consolidate their financial statement (balance sheet and income statement) of all worldwide operations annually† (Czinkota et al, p. 334, 2009). This implies that, as firms translate and consolidate foreign assets, liabilities and profits into domestic currency, there is the possibility of the firm experiencing a loss or gain (Waston and Head, 2007). This is mainly an accounting risk and as such give a real indication of the impact of exchange rate fluctuations on the value of a firm (Watson and Head, 2007). Economic exposure impacts a firms long-term cash flow, positively or negatively (Czinkota et al, 2009). This kind of risk not only affects firms involved in international trade but also has an impact on domestic firms as it can also affect the price of commodities sold (Czinkota et al, 2009). Furthermore, this sort of risk also undermines the competitiveness of a firm (Arnold, 2002). It can affect the firms competitive position directly if the home currency appreciates and foreign competitors are able to offer a much cheaper price, compared to the firms products which have become expensive as a result of the currency appreciation (Arnold, 2002). Economic risk can also affect a firms competitive position indirectly even if a firms home currency does not experience adverse movements (Arnold, 2002). For example Arnold (2002) illustrate that a South African firm selling in Hong Kong with a New Zealand firm as its main competitor can lose competitive edge if the New Zealand dollar weakens against the Hong dollar. Thus the products or commodity on offer by the New Zealand firm would be cheaper than that of the South African firm assuming both currencies (South African Rand and New Zealand Dollar) had a similar exchange rate against Hong Kong Dollar. Economic and transaction risk are more related to businesses involved in international trade, translational exposure more to do with accounting practises (Waston and Head, 2007). Consequently these are the foreign exchange exposure that will be focused on. 2.5 Foreign Exchange Risk and Natural Hedging The idea of applying natural hedging strategies as tools to hedge foreign exchange exposure is one that has received a lot of attention in recent times, as the concept focuses on using non-financial methods to mitigate the volatility of future cash flows and possibly add value to the firm (Kim et al, 2006). The various natural hedging strategies are explained below. Netting This technique relates to multi-nationals which have foreign subsidiaries, it involves reducing funds transferred by netting off the transaction between the parent company and the subsidiary firm (Watson and Head, 2007). For example â€Å"if a UK parent owed a subsidiary in Canada and sold C$2.2m of goods to the subsidiary on credit while the Canadian subsidiary is owed C$1.5m by the UK company, instead of transferring a total of C$3.7m the intra-group transfer is the net amount of C$700,00† (Arnold, p. 982, 2002). This implies that rather than both the parent and subsidiary firm managing their exposure separately they opt for a centralised management system to reduce the size of the currency flows. Consequently transaction costs and the cost of purchasing foreign exchange are mitigated (Arnold, 2002). Leading and Lagging This technique involves either settling foreign accounts by either postponing payments (lagging) till the end of the credit period allowed or prepayment (leading) at the beginning of the transaction (Watson and Head, 2007). It functions based on the anticipation a firm has that future exchange rates will either appreciate or depreciate (Czinkota, 2009). Thus if a firm anticipated a depreciation in its home currency, it lead its payments conversely if the firm anticipated an appreciation in exchange rate it would lag its payments. Invoicing in the Domestic Currency This method involves invoicing foreign customers in the firms domestic currency rather than in the foreign currency (Arnold, 2002). What this does is that it shifts the burden of risk to the foreign firm (buyer). Operational and Strategic Methods There is no one singular acceptable definition of operational hedging as it varies according to the context it is been used. Boyabatli and Toktay (2004) in their work, review and discuss a diverse cross section of views on operational hedging, they delve into the similarities in application methods of operational hedging across different academic fields. They discovered that although there were some differences in meaning in various academic fields; operations management, finance, strategy and international business, there were basic characteristics which were similar across all fields. On this basis operational hedging can be described according to its functionality. Bradley and Moles describe it as the decisions firms take in regards to the â€Å"location of their production facilities, sourcing of inputs, the nature and scope of products, strategic financial decisions such as the currency denomination of debt, the firms choice of markets and market segments† (Bradley and Mo les p.29, 2002). It involves the use of non-financial methods to mitigate the volatility of future cash flows and possibly add value to the firm (Kim et al, 2006). The objective is geared towards reducing long-term economic exposures. Operational hedging can be said to be based on the principle of real options. Real options are â€Å"opportunities to delay and adjust investments and operating decisions over time in response to resolution of uncertainty† (Triantis 2000 cited in Boyabatli and Toktay p.6, 2004). 2.6 Hedging with Financial Derivatives The different types of financial derivatives are: Forwards and Futures, Foreign currency Options and Currency Swaps. Forward contract: This enables the business to protect itself from adverse movements in exchange rates by locking in an agreed exchange rate until the agreed date of payment (Brealey, Myers and Allen, 2006). The example given by Horcher and Karen (p.95, 2005) illustrate the concept further; â€Å"a company requires 100 million Japanese yen in three months to pay for imported products. The current spot exchange rate is 115.00 yen per U.S. dollar, and the forward rate is 114.50. The company books a forward contract to buy yen (sell U.S. dollars) in three months time at a price of 114.50 and orders its merchandise. In three months time, the company will use the contract to buy yen at 114.50. At that time, if yen is trading at 117.00 per U.S. dollar, the company will have locked in a price that, with the benefit of hindsight, is worse than current market prices. If three months later yen is at 112.00 per U.S. dollar, the company will have successfully protected itself against a more exp ensive yen. Regardless of price changes, the company has locked in its yen purchase price at the forward rate of 114.50, enabling it to budget its costs with certainty†. Futures Contract: A futures contract refers to an â€Å"agreement to buy or sell a standard quantity of specified financial instrument or foreign currency at a future date at a price agreed between two parties† (Watson and Head, 2007). Although it bears some similarities to the forward contract in that it also locks in the exchange rate, however one major difference is that a forward contract can be used in a wide range of currencies while the futures contract is applicable to a limited number of currencies (Brealey, Myers and Allen, 2006). Foreign currency Options: This gives holders the right to purchase or sell foreign currency under an agreement that allows for the right but not the obligation to undertake the transaction at the agreed future date (Brealey, Myers and Allen, 2006). One key advantage of this method of hedging is that it gives holders the opportunity to take advantage of favourable exchange rate movements (Watson and Head, 2007). However a non-refundable fee on the option known as an option premium is required (Watson and Head, 2007). Currency Swaps: A currency swap is â€Å"an agreement between two parties to exchange principal and interest payments in different currencies over a stated time period† (Watson and Hedge, p. 382, 2007). Basically what this implies is that a firm can gain the use of foreign currency but avoid exchange rate risk which may arise from servicing payments (Watson and Head, 2007). 2.7 A review of Literature on hedging This section critically examines the rationale for hedging foreign exchange risk. The rationale which has been put forward for hedging risk in the existing literature (Judge, 2004) is that it maximises shareholder value. The idea behind hedging any kind of risk in general is that once a firm takes on the responsibility of actively managing risk, shareholder value is increased, thereby increasing the overall value of the firm (Judge, 2004). However finance theory proposes that shareholders are diversified and thus are not willing to pay a premium to firms for adopting hedging policies (Rossi and Laham, 2008). So in that vein, theory proposes that what is actually being maximized is the managers private utility (Tekavcic, Sernic and Spricic, 2008). Essentially finance theory states that shareholders are diversified while managers of firms are not, so in a bid to protect their income and personal asset, which are linked to the firm, they hedge against uncertainty (Baranoff and Brockett, 2008). Within this theory shareholders are willing to take on risk in exchange for greater returns (risk-return trade off) and so they invest in companies which they believe can provide such high returns. Thus managers hedging risks can be said to lead to underinvestment, which then flaws the theory of risk-return trade off (Baranoff and Brockett, 2008). This theory is based on the premise that financial markets are efficient and as such hedging activities of firm would not add value to the firm (Rossi and Laham). In addition to the complexities of the above theory, when the concept of hedging is put into the context of foreign exchange movements; the Law of one price (LOP)/ purchasing power parity (PPP) suggests that identical goods are not affected by exchange rate variations (Hyrina and Serletis, 2008). The law of one price is the foundation of the theory of PPP which posits that similar goods should have identical prices across countries once expressed in a common currency (Hyrina and Serletis, 2008, Czinkota et al, 2009). Numerous studies have been carried out to test whether or not the theory holds, however there is no general consensus as to whether or not the theory is valid. Hyrina and Serletis (2009), Glen (1992), Choi, Laibson and Madrian (2006) found that there are some flaws within the theory as the real exchange rate is not stationary. Engel and Rogers (1996) examines the impact distance has on goods sold and whether the presence of national borders separating locations were these goods are sold, also have any impact on the law of one price. Empirical evidence from the research shows distance and border have significant role to play on the differences in price of goods (Engel and Rogers, 1996). More so, that market segmentation also leads to price differentiation (Engel and Rogers, 1996). This theory just like the first are both based on the principle that the market is efficient and as such inconsistencies such as movements in exchange rate even out in time (Zanna, 2009). Without attempting to disparage the above theories, in regards to the first theory, whether or not hedging is done to propagate the interests of managers, the fact is that, the basis of the theory (Efficient Market) is flawed as there are numerous empirical evidence (Nobile, 2007; Bartram, 2007, Allayannis and Ofek, 2003, Tekavcic et al 2008, Mastry, 2003) to suggest that there are imperfections in the financial market such as high interests rates, inflation, tax and of course foreign exchange movements which can affect a firm. Thus shareholders cannot afford not to be concerned about hedging as these imperfections in the market can affect the cash flow, profit and ultimately the overall value of the firm. Thus in the same vain PPP should not hold. In regards to PPP it is necessary to indicate that there are other factors which affect the price of goods sold across national borders. Bradley (2005) states that the prices of goods for each firm are influenced by numerous factors such as; Government policies, high inflation rates and corporate income tax and thus such prices of goods cannot be the same across different borders. So to state clearly the financial market is not efficient due to market imperfections. Thus movements in foreign exchange can affect the cash flow and overall value of the firm. Consequently it is necessary for firms to focus on how to manage this risk. 2.8 Review of literature on financial derivatives and operational Strategies The extant literatures on hedging exchange rate risks with financial derivatives have focused on corporate risk management. The main thrust of literatures from authors such as Mastry (2003), Bartram et al (2003) and Galum and Roth (1993) have carried out studies which are aimed at finding the optimal financial derivative. However there is no general consensus as to an optimal financial hedging position. The reason for this can related to basic financial theory which suggests that derivative instruments should be chosen based on the degree of exposure of the firm and the payoff that can be gotten from the instrument (Bartram, 2006). Essentially what this implies instruments with linear characteristics such as forwards, futures and swaps should be used for linear exposures, while instruments with nonlinear profiles such as currency options are suitable to hedging nonlinear exposure (Stulz, 2003). Put simply the theory suggests that after firms assess the nature of its exposure, all tha t needs to be done is choose a derivative which matches that exposure. However, contrary to financial theory Bartram (2006), Ianieri (2009) found that as a result of the flexible nature of options, options can be used to hedge various types of exposures and not just nonlinear exposures. Despite these findings, merely identifying the nature of exposure and matching it with a derivative is not enough. There are other factors which influence the decision on what derivatives to use besides the nature of exposure. For instance while an option is flexible and can be adapted to suit various types of exposures, it is also be a highly complex technical method to use. The problem with currency options is that they require highly skilled individuals who can understand and use it effectively. Ianieri (2009) states that even brokers who should know how to use this method have had bad experiences with it. In an alternative view, Masry and Salam (2007) in an attempt to understand the rationale for using financial derivatives found that the size of the firm impacts on a firms decision to use financial derivatives. A study conducted by Judge (2004) shows that there is a positive relationship between the size of the firm and the foreign currency hedging decision. The general idea is that large firms have numerous resources available to them; in terms of personnel and information, and as such they are more likely to hedge using financial derivatives (Judge, 2004). So in essence the transaction costs which accompany the use of derivatives would discourage small firms from opting to hedge with financial derivatives. On the other hand Kim and Sung (2005),