How can hedging reduce the risk?

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Global companies are always exposed to the risk of price changes. Whether this risk is associated with their exports and imports or with the changing prices of commodities. Hedging against foreign exchange risk is one of the most common hedging tools used. This is because companies that mostly deal with exports and imports from different areas around the world are exposed to volatile currency exchange rates. When a company deals with long-term import or export contracts, it becomes risky to make payments in a foreign currency. If the rate of that currency drops before the payment is thru, the corporation may endure a large loss.

Lets take an example of a car dealership that imports cars from Europe, Japan and South Korea. All countries deal with different currencies that rates change daily with the dollar rate. Lets say the US company imports 100 BMW cars every 3 months from Germany at a price of 40,000 euros each. This means the total net wroth of the imported cars is 4,000,000 euros. The dealership must pay the German manufacturer in Euros. However, how much should the dealership exchange dollars to euros? The price depends on euro daily prices. In order for the dealership to maintain a stable price or at least reduce the risk since it is a long term contract,  it should hedge. Hedging against foreign exchange can be done through short-term contracts “spot” or long-term contracts “derivatives”, which decreases the exposure to this type of risk.

Another example of hedging against commodity risk is fuel hedging. Fuel is a commodity that is affected generally by supply, demand, gas production levels…etc. Although we as small consumers do not feel this change, airline companies are highly affected. Large fuel consuming companies such as airline companies’, need to hedge as a protection against volatile fuel prices. As explained in the video below, Airline companies’ cost is from fuel itself. Because airlines know how many tickets they will sell in advance depending on the season and holidays they manage price risk in fuel by hedging fuel prices relative to the rates they want to charge clients.

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Will Third Party Ownership Ban by FIFA affict players prices ?

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According to a press release by FIFA, in September 24th, third party ownership is to be banned over the next period.  Allowing for a transition period to settle the ongoing contracts. Third-party ownership, also known as TPO,  refers to the ownership of a professional player’s economic rights or some percentage of it by a third party other than the player or his club such as sport management companies, player agents, or any other investment firms in order to receive a share of the value of any future transfer of that player.

Third-party ownership is most commonly used in South America where clubs struggle to finance its operations and struggle to have an adequate financial resources to meet the club’s economic needs in a highly competitive industry where most revenues for such clubs are made by selling a star player every once in a while to one of the big European football clubs.

The reason behind the ban is that third-party ownership have raised player’s prices and this is against fair sporting competition where money should not be the only motivation according to some sporting community officials who are with banning this practice.

Although third-party ownership had delivered so many benefits for financially struggling clubs in terms of training and accommodating their young players, the question remains whether this move is going to affect players prices negatively or positively on the long run. Also, what would be the effect on the clubs who are relaying on this practice as the main revenue stream of their clubs  where sponsor-ships, TV rights, and memberships are not enough to meet the economic needs of such clubs.

Valued at $1.3 billion, the already banned practice in England and France, third-party ownership will surly impact the next transfer market prices next January and will also have a long term impact in the industry.

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Can companies ensure the same prices globally?

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Global prices are affected mostly by labor, taxes, currency exchange, competition  costs of goods sold and many other factors. But it differs from industry to another and from country to another. Starbucks, McDonalds, automobile companies, cell phones… for example charge various amounts for the same product in different countries. But I always wondered why don’t they figure out a strategy that ensures consumers the same price for the same product anywhere. Why is it difficult to come up with such a strategy? Aren’t companies shifting to outsourcing these days, then the cost of production should be the same. But why do we still see this difference in prices in different countries? The answer is simple even if they outsource, they still have to deal with many factors other than production cost. In the previous blog we explained how taxes were the main affect  on iPhone prices globally, but this is not always the case.


From the video we can see many explanations on the different prices Starbucks charges. In India for example they managed to have prices low because they source there coffee beans locally. The reason companies do that is because some country wages are not high as others so they manage to lower there production cost in order to enter this market and grab a market share.

Another factor that drew my attention and many of us sometimes don’t bare it much attention  is competition.  Companies often struggle with when dealing with global pricing. Starbucks for example charges a very cheap amount for a cup of coffee in Thailand “42% less than the same cup in the US”; this is due to the high competition on lowering there prices in this industry. On the other hand, Starbucks charges a high amount for the same cup of coffee in Ireland “9% higher than the US”; this is because the company deals with an oligopolistic market. Meaning that the market has small players that set the prices they wish. From all the cases we discussed and seen in the video Starbucks and any global company cannot charge a premium amount globally. This is because if they go higher or lower they might loose their market share and net profit in this market. Although competition is only one factor and is not related to the financials, but from the previous examples we can see how it largely affected Starbucks prices.

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Why pay more for an iPhone internationally ?

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Consumers often ask why are there different prices for the same product in different countries. This is the case with the newly released iPhone 6, which was released earlier this month and made a huge buzz globally. iPhone 6 prices range from$649 to $849 in the US, According to this article
http://www.evad3rs.net/2014/07/iphone-6-price-worldwide-international.html the following list shows different prices for the iPhone internationally.

Country Price

USA $649

UK $822

Canada $749

Hong Kong $720

Australia $770

what factors made these different prices, is it taxation? cost? shipping ? or is it  just simple currency exchange rates?
In the case of apple, the cost is the same because it is manufactured in China, what could be causing this difference is mostly shipping and taxation costs.

The price of a 16g iPhone 6 in the US is around $649 where in the UK it costs around $822. Consumers often ask, is it cheaper to buy an iPhone from the US or UK? As it appears its is cheaper from the US market, however the consumer might end up paying the same price. This is because of VAT and tax customs that increase the price. However, Apple has its own pricing scheme that almost no one understands as this following video discusses.

So, let us ask the question again, Why do Apple have different prices internationally for the same product. Where most companies set their prices the same for all markets and if there was a price variation, it is not as big as the iPhone’s.

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Why international price strategy is so important?

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A good price strategy not only could let company earn a huge market share, but also could increase the entry barriers in a certain industry.

Here is a good example:

Hewlett-Packard (HP) have found a new print technology, this technology could increase the ability of its printer, and get a better print effect. HP faced a problem, which is how much it would charge? Charge a higher price based on the new technology or keep the same price as other HP printer?

The top managers analysis the situation as following:

“So far, HP’s competitors sell the same mode of printer at $150. If HP charge a higher price based on the new technology, for example, if charge $250, the profit is $100, and the gross profit rate is two times as charge $150. However, the potential entrants will see the opportunity and try to enter the same market. The competitors may input more to get an even higher print effect. Then later, there may have a price war, which could lead a mess market and hurt HP’s advantages.

Since considered this situation, HP decided to charge $185. HP only could earn $25 profit each unit, but this price could avoid the potential entrants to enter this market. If new entrants spend more to compete in this market, HP plans to lower its price to $160-$175, and make its competitors cannot get the return on investment, and even loss in this market.”

HP’s pricing strategy made itself loss some profits, but it earned the most market share, and avoids its potential competitors to get into this market.

 

Another price strategy is called psychological pricing strategy, which needs to understand customers’ felling on the price.

Here is an example:

Ms. Liu opened a store to sell clothes, and there are several clothes still cannot be sold for a long time. Then she increased the price from $20 to $60, and put them into a high level clothing store. 3 days later, her clothes were sold out. If one product looks like it is in a very high level, people may willing to buy it with a high price since they may think this product (this price) could represent their Identity.

Sometime we should understand what our customers need, and make a right pricing strategy. Sometimes, even a higher price could earn more customers.

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http://www.doc88.com/p-491278568221.html

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