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Corporate Risk Management FM: Dr.Ida Juda Widjojo. MME-34 - Group 2 : AlvenDesnecmen FeraDamayanti WidyaretnaBuenastuti ZakariaNurDjajadinataHalim. Risk Management Assessment of adidas – Salomon. Agenda . SNAP SHOT Risk Management Approach Risk Typology

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mme 34 group 2 alvendesnecmen feradamayanti widyaretnabuenastuti zakarianurdjajadinatahalim

Corporate Risk Management

FM: Dr.IdaJudaWidjojo

MME-34 - Group 2 :

AlvenDesnecmen

FeraDamayanti

WidyaretnaBuenastuti

ZakariaNurDjajadinataHalim

Risk Management Assessment of adidas – Salomon

agenda
Agenda
  • SNAP SHOT
  • Risk Management Approach
  • Risk Typology
  • Risk Assessment, Mapping and Mitigation
    • Marketing Risk
    • Operations Risk
    • Social & Environmental Risk
    • Legal Risk
    • Financial Risk
snap shot of adidas solomon
Snap Shot of adidas-Solomon
  • Background
    • Maker of sporting goods worldwide behind NIKE
    • Share profit of Business Unit adidas major than Salomon and Taylor Made adidas Golf.
  • History
    • 1926 Dassler built the factory
    • 1960 & 1970 expand globally
    • 1997 becomes adidas-Salomon
adidas risk management
adidas Risk Management
  • Approaches:
    • Fully integrating with day-to-day business function at all organization level.
    • Early to the risk identification, evaluation, effective communication and management risks.
    • Prepare and implement appropriate reporting & contingency plan
    • Participate management and employee
risk typology
Risk Typology

Market Risk

Credit Risk

Liquidity Risk

Operational Risk

RISKS

Legal & Regulatory Risk

Business Risk

Strategic Risk

adidas’ Risks

Financial Risk

Reputation Risk

financial risk typology
Financial Risk Typology

Equity Price Risk

Interest Rate Risk

Transaction Risk

Market

Risk

Forex Risk

Translation Risk

Commodity Risk

Financial

Risk

Issue Risk

Transaction Risk

Credit Risk

Issuer Risk

Portfolio

Concentration

Counterparty

Risk

forex risk management
Forex Risk Management
  • Operational Hedging
    • Currency Netting
    • Proxy Hedging
    • Foreign Currency Debt
    • Changes to purchasing/processing
    • Transfer Exchange Rate Risk
  • Asset & Liability Hedging
  • Instrumental Hedging
    • Spot Transaction
    • Forward Contract
    • Swaps
      • Forex Swaps
      • Currency Swaps
      • Closing out a swap
    • Currency Futures
    • Forex Option
    • Exotic Options
      • Forex Collars
      • Average Rate Option
      • Barrier Option (Knock In – Knock Out)
      • Compound Option
forward contracts
FORWARD CONTRACTS
  • Forward Rate : outright quotation and swap rate (% or points)
  • Forward Premium – Forward Discount (% or points)
  • Selling Forward– Buying Forward
  • Selling a forward contract vs Buying a forward contract
  • Credit line needed
foreign exchange option forward option
FOREIGN EXCHANGE OPTION (FORWARD OPTION)
  • Option Premium
  • Strike Rate
  • Option duration
  • American Option vs European Option
  • Call option vs Put option
  • Purchase of Option  hedging
  • Sell of Option  speculating
  • Over the counter vs Exchange traded
  • Option position :
    • In the money
    • At the money
    • Out of the money
managing forex risk transaction
Managing Forex Risk - Transaction
  • Instrumental Hedging
    • adidas-Solomon use two risk mitigations for Forex Risk Management, Instrumental Hedging: Forward Contract and Option
        • Shifting to options based hedging, from previously concentrated on forward contract, give adidas Solomon room to take advantage of favorable exchange rate development
    • adidas-Solomon can access several other alternatives for Forex Risk Mitigation (see previous slide ),

Main suggestion:

      • FOREX COLLARS, to enjoy flexibility with lower cost vs Option

Other alternatives, depend on situations:

      • CURRENCY SWAPS, if can find counter parties
      • CURRENCY FUTURES, for lower cost, subject to contract size and delivery date
managing forex risk transaction1
Managing Forex Risk - Transaction
  • Operational Hedging
    • adidas-Solomon use
      • Currency Netting (assumption)
      • Foreign Currency Debt, due to liability in USD
    • Other Operational Hedging adidas-Solomon can consider
      • CHANGES TO PURCHASING, change payment to Euro
translation risk
Translation Risk

Exchange rate for revenue and expense

Exchange rate for asset and liability

managing forex risk translation
Managing Forex Risk - Translation
  • Asset-Liability Hedging
    • adidas-Solomon use
      • Spot Rate for Asset & Liability Translation for Group and all monetory items in Individual Financial Statement of Group Companies
      • Average Rate for Revenues & Expenses Translation for Group
      • Hedge the balance sheet risk

This is already right mitigation

adidas solomon interest rate effect
adidas-Solomon Interest rate Effect

+1%

€ 11 Million (after-tax Erarning)

Interest Rate

-1%

interest rate options
INTEREST RATE OPTIONS
  • CAPS
    • A series of interest rate options (caplets) to protect against rising interest rates.
    • European style
    • At the expiry date of each caplets, the cap seller reimburse the cap buyer for the difference if reference rate > strike rate
interest rate options1
INTEREST RATE OPTIONS
  • FLOORS
    • A series of interest rate options (caplets) to protect against falling interest rates.
    • European style
    • At the expiry date of each caplets, the cap seller reimburse the cap buyer for the difference if reference rate < strike rate
    • Alternative of buying a cap is selling a floor
adidas sell floor buy cap
adidas: Sell Floor = Buy Cap

2001

2002

REF. RATE

REF. RATE

CAP = 3.6%

CAP = 3.2%

REF. RATE

REF. RATE

managing interest risk
Managing Interest Risk
  • Available Tools
    • Interest rate swap
    • Cross currency & Interest rate swap
    • Forward Interest Rate Swaps
    • Interest Rate Options
      • Cap
      • Floors
  • adidas-Solomon, only uses 1 tools to manage the interest risk
  • Since its liability to outsource is dominated in USD in various countries, adidas-Solomon should use the INTEREST RATE SWAP
  • The term of 5 years can be shortened to 2-3 years to reduce the uncertainty of volatility of interest rates