Wal-Mart Stores Inc. also known as Wal-Mart is a multinational retailer corporation based in America. The corporation runs massive stores discount departments and warehouse stores chain. The corporation is listed to be the third largest public corporation in the world by Fortune magazine. With over two million employees around the world it makes the corporation to be the biggest private employer. Sam Walton was the founder of Wal-Mart in 1962 and the corporation has remain a family tradition business which the Walton family own 48% stake in Wal-Mart and they have traded publicly on the New York stock exchange. Due to corporation to be the biggest grocery retailer in America with $258 billion dollar sales in 2009, it is one of the world most valuable companies. Wal-Mart operates with 55 different names in 15 different countries and they are Wal-Mart in America and 50 others in Puerto Rico, Walmex in Mexico, Asda in United Kingdom, Seiyu in Japan and Best Price in India. They have got wholly own operations in Brazil, Argentina, and Canada and have joint ventures in Germany and South Korea. Unfortunately the joint ventures were unsuccessful.
This analysis will examine how changes in foreign exchange rates affect the settlement of its contracts, cash flows and market value of Walmart in details.
The ability of exposure to the foreign exchange can measure the profits of a company, cash flow, and the value of the market. In every company, there is a finance manager that is in charge of the company’s finance to expand their profits to the maximum. So in this case when the company traded publicly in the foreign exchange, the finance manager has to measure the effects of the company exposure to the foreign exchange, so they could expand the profits to the maximum, the value of the market and cash flow of the company.
There are 3 types of exposure to the foreign exchange and that are transaction, translation, and exposure of the economics. Transaction is the way to measure the value of the market and potential risk that a company will have to face when trading internationally due to the currency exchange to be involved and will determine the result according to the changing of exchange rates that changes every minutes. Translation also known as accounting exposure is to measure the potential risk of the company’s consolidated financial statements that are changing and result from the foreign exchange rates. The last but not least is the economic exposure, it is to measure potential risk that could affect the cash flow of the company due to the fluctuation of the exchanging rates.
In this discussion I will be using Wal-Mart, as it is the best example to understand the operation exposure risk by using the two phenomena that were faced by Wal-Mart in 2010. The fist phenomena is when china faced the high pressure of the re-valuation of US dollar resulted to be 6.8 CN¥ to 1 U$D. The second phenomenon was the short term, which was 12 months debt of $2 trillion that US treasury had to refinance and additional problem of that time was foreign creditor such as Russia and India would rather interested in gold rather than US dollar. The US government was forced to monetize the debts which caused of the US dollar to drop.
This will explain the background of the first phenomena. About $9 billion and $1.2 billion USD of Wal-Mart sources of goods are from China and India. If the appreciate of RMB would occur, Chinese supplier for Wal-Mart would have to face the negative operating risk of CN¥ revaluation in the foreign exchange as also their cash flow and profits will be on the thread. For Wal-Mart, they would rather go for India since getting the source from China is not as attractive compared to India. Thus, Indian supplier would get a lot more orders from Wal-Mart as they would expected. For example one of Wal-Mart suppliers from India that supplies terry towels invested $75 million U$D to...
Please join StudyMode to read the full document