mme-34 - group 2 : alvendesnecmen feradamayanti widyaretnabuenastuti zakarianurdjajadinatahalim...
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Risk Management Assessment of adidas – Salomon
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
RISKS
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 LIKELIHOODRISK
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
Risk Assessment & MappingRISK NAME RISK
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.
Risk Assessment & MappingRISK NAME RISK
DEFINITIONIMPACT LIKELIHOOD RISK
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
Risk Assessment & MappingRISK NAME RISK
DEFINITIONIMPACT LIKELIHOOD RISK
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 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 - 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
Important 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 1.4542
Source: 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
Risk Assessment & Mapping
RISK NAME RISK DEFINITION
IMPACT LIKELIHOOD RISK 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%
-1%€ 11 Million (after-tax Erarning)
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 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
REF. RATE
CAP = 3.2%
REF. RATE
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
Risk Assessment & Mapping
RISK NAME RISK DEFINITION
IMPACT LIKELIHOOD RISK MITIGATION
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