Dell Mercosur: Getting Real In Brazil, Essay Example

Dell Mercosur: Getting Real in Brazil

This article review examines the exposure management strategy of the Dell Mercosurcompany, in terms of it expanding into Brazil. The article explains how the company manages its foreign currency exposure and how it hedges exposures to minimize risks. The following are the steps to an exposure management strategy, according to (SAP, n.d.).

• Collecting and consolidating existing currency information that is already exposed
• Tracking the collection process and centrally managing information and documentation
• Analyzing risks and exposures, which includes monitoring changes and presenting data with existing hedging relationships
• Transferring exposures to hedge management

Dell’s Exposure Management Strategy

The article states that Dell strategy includes aggressive product marketing in Brazil to expand its market base. Dell’s success is largely due to its build-to-order, direct sales model; however, it is expanding retail space in Brazil because of the strong potential there. The foreign currency in Brazil is denominated in reals, which is used for Dell’s revenues and operating costs. However, Dell’s manufacturing and administrative costs are in U.S. dollars. In Brazil, Dell has a relatively small exposed asset position; however, the company has to deal with foreign-exchange gains and losses whenever the exchange rate changes(Daniels, Radebaugh, & Sullivan, 2011).

Dell’s exposure management strategy regarding foreign currency exchange rate fluctuations and reducing the impact of these fluctuations on earnings and cash flows includes using foreign currency option contracts and forward contracts. This is to hedge its exposures on company commitments and forecasted transactions. The company also uses forward contracts for cash flow hedges to protect them from foreign currency exchange risks. Basically, Dell’s exposure management strategy consists of aggressively hedging all foreign exchange risks, because no options market exists in Brazilian currency. The company’s foreign exchange risks in Brazil are hedged with forward contracts. In addition, currency movements are monitored by corporate financial management for execution of the strategy.In a nutshell, Dell’s exposure management strategy is divided into two key parts, which are (1) forecasting exposure and (2) designing strategy to hedge the exposure(Daniels, Radebaugh, & Sullivan, 2011).

Strategies to Implement to Provide Operational Hedges

According to Osak (2012), operational hedging is best done with a “holistic risk-management approach”, allowing for more flexibility in how operational activities change, as well as how exchange rate fluctuations change factors such as cost structure, customer demand and competitiveness.Dell’s operational hedging strategies could include revamping supply chains, utilizing go-to-market programs, and strategies to enhance purchasing intiatives, based on the company’s business model. Additionally, the firm could be more systematic in its approach to operational hedging by identifying vulerable areas in the business. For example, cost and revenue drivers are directly affected by large fluctuations in the exchange-rate. Furthermore, Dell could consider different scenarios to fight against the impact of currency-related risks and conduct sensitivity analyses on the drivers. In addition, Dell could approach operational hedging strategically by evaluatig production locations, raw materials sources, pricing strategies, logistics networks and the organization of sales and marketing channels(Osak, 2012).

It is apparent that Dell’s operational hedging strategies will largely depend on how well it can adapt to change, as revenues, exchange rates and market trends fluctuate frequently. However, according to the article, Dell has many market opportuntities to make it worthwhile.

References

Daniels, J., Radebaugh, L., & Sullivan, D. (2011). International business, environment & operations (13th ed.). Upper Saddle River, NJ: Prentice Hall.

Osak, M. (2012, March 20). Operational hedging curbs exchange rate uncertainty. Retrieved from Financial Post: http://business.financialpost.com/2012/03/20/operational-hedging-curbs-exchange-rate-uncertainty/

SAP. (n.d.). Exposure Management. Retrieved from SAP.com: http://help.sap.com/saphelp_erp60_sp/helpdata/en/7c/3456429c69b430e10000000a155106/content.htm