Risk Management Assessment of adidas – Salomon

transcript

MME-34 - Group 2 :AlvenDesnecmenFeraDamayantiWidyaretnaBuenastutiZakariaNurDjajadinataHalim

Corporate Risk ManagementFM: Dr.Ida Juda Widjojo

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

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

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

Market Risk

Credit Risk

Liquidity Risk

Operational Risk

Legal & Regulatory Risk

Business Risk

Strategic Risk

Reputation Risk

adidas’ Risks

Financial Risk

Risk Assessment & MappingRISK NAME RISK

DEFINITION IMPACT LIKELIHOOD RISK MITIGATION

Business Risk (Marketing Risk)

Failure on assessing of future trends and challenges.

High: lower sales and profit

Medium: Competitiveness of sporting goods industry less vulnerable

Analyze the future business intelligence on future development

Changes in economic environment

High: lower sales and profit

Low :sporting goods industry less vulnerable

Geographical diversification

Failure to build the brand image and consumer preference

High : lower sales and profit

Low :marketing campaign could not predicted in advance

•Market research•Meet Consumer Needs & Expectation by tech dev and design innovations•Working with top-tier marketing agency

DEFINITIONIMPACT LIKELIHOOD RISK

MITIGATION

Operational Risk

Inferior quality and delay delivery

High : revenue and reputation

Medium: uncontrolled quality, standard of suppliers differ, delay from manufacturer

•Employed > 100 quality control officers to monitors factory performance•Regular benchmarking of supplier•Maintained relationships with numerous and geographically diverse manufacturers

Operational Risk - IT

Natural disaster, criminal mischief or IT mismanagement

Medium: disruption in business

Medium: complex network of communication and application

Employ HW/SW expert, firewall & encryption technology and contingency plan.

MITIGATION

Reputation Risk (Social and Environment Risk)

Failure to comply with social, environment, health and safety standards

Low : less impact to the revenue and profits

Low :Existence of Company’s Standard of Engagement

Constant training, communication and consultation for its suppliers management, and its workersMonitored and trained its business partners in developing system for self-governance

MITIGATION

Legal & Regulatory Risk

Failure to formulate contracts that ensure liability, unmanaged corporate legal issues and increase of number of legal action

High : Legal action and financial consequences

Medium: Due to variety of legal and regulatory frameworks

Hiring internal and external specialists

Legal action because of defective products sold

High: Degradation of company’s reputation

Medium: High volume of Sales

Intensive quality control and insurance coverage

Protection of product innovations, patents, technologies and designs

Medium:Revenues and Company Reputation

High:Strong market position/share and brand equity

Creating significant internal resources to battle brand infringement

Financial Risk Typology

Financial Risk

Equity Price Risk

Interest Rate Risk

Forex Risk

Commodity Risk

Transaction Risk

Portfolio Concentration

Counterparty Risk

Issuer Risk

Issue Risk

Transaction Risk

Translation Risk

Market Risk

Credit Risk

Risk Assessment & Mapping

RISK NAME RISK DEFINITION

IMPACT LIKELIHOOD RISK MITIGATION

Transaction Risk

High exposure in the transaction and revenue between USD and Euro

High : Revenue High: •70-80% outsources volume in USD•sales revenue dominated by Euro

Forward contract and optionHedging: Shifted to options, previously concentrated on forward contracts

Translation Risk

Asset & liability translated into Euro at the end of transaction or balance sheet.Revenue & expenses translated at average exchange rate over the year.

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 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) 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 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 OptionOther 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 - 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 RiskImportant Exchange Rate for adidas

Currency Unit per Euro

Average rate for the year Spot Rate ending December 31 December 31 2002 2001 2002 2001USD 0.9448 0.8965 1.0487 0.8813GBP 0.6286 0.6222 0.6505 0.6085JPY 118.11 108.84 124.39 115.33ARS 2.9777 0.8954 3.526 1.4542Source: Annual Report 2002

Exchange rate for revenue and expense

Exchange rate for asset and liability

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

Interest Risk Protection to the liquidity risk (for long term) and interest rate fluctuation (for short term)

High : Revenue High: liquidity problem

Long term financing agreement

High: interest rate fluctuation

Interest rate caps for in case interest rate increase

adidas-Solomon Interest rate Effect

Interest Rate

-1%€ 11 Million (after-tax Erarning)

INTEREST RATE OPTIONSCAPS

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 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

CAP = 3.6%

REF. RATE

CAP = 3.2%

REF. RATE

2001 2002

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

Credit Risk Volatile Interest Rate

HIGH:Liability, Profit, and Cash Flow

HIGH:Variety of currency and interest rate

Arrange currency and interest hedges, and invested cash in high reputation financial institution.

Thanks

Risk Management Assessment of adidas – Salomon

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