Question

Consider the two articles about Apple Inc.’s hedging policy.

"An extremely well-timed currency hedging regimen saved Apple Inc. about 70 cents a share — or $4.1 billion — in earnings during fiscal year 2015, analysts…said…”

Explain what this hedging regimen was and why it saved Apple Inc. so much money. Under this hedging regime what would have happened to Apple profits if the dollar had depreciated significantly instead of appreciating from mid-2014 to the end of 2015?

Answer 1

Apple expanded its hedging efforts in the second half of 2014, the analysts said, just as the dollar rally was heating up.

The iPhone maker increased its holdings of currency-hedging contracts from a carrying value of $132 million in the quarter ended in June 2014 to more than $3.5 billion by the end of the quarter ended in December 2014, helping to diminish the negative impact the strengthening dollar had on its profits. Apple has disclosed that those contracts typically carry durations between three and 12 months, the Stifel analysts said.

Apple’s benefit from its currency-hedging strategy in 2015 is significantly larger than in prior years. Stifel estimated that Apple saved $607 million through its hedging program in fiscal year 2012, $670 million in fiscal year 2013, while losing $150 million in fiscal year 2014.

A comprehensive currency-hedging program is especially important for companies like Apple, which AAPL generates about 65% of its revenue outside the U.S. — and about 24% of revenues in China alone.

Several different financial instruments exist to help companies hedge their currency risk. Companies can lock in a set exchange rate by entering into a forward contract with a currency dealer or entering into a swap agreement with another company. They can also buy currency futures, which are bought and traded on futures exchanges, including the Chicago Mercantile Exchange.

Apple’s precise hedging strategy couldn’t be determined.

Over the past year and a half, the price of hedging against the strong dollar has increased as futures markets have priced in the likelihood of a Federal Reserve interest rate hike. Indeed, the Stifel analysts said the Apple’s losses due to currency fluctuations will likely increase in fiscal year 2016 as its hedges expire.

Stifel maintain’s Apple’s shares at a “buy,” with a price target of $150.

Apple shares recently traded at $110.60, down 2.3% on the day, according to FactSet data.

U.S. companies have been griping about the drag on profits created by the strengthening dollar since the end of 2014. The dollar began appreciating against most of its rivals in July 2014.

Many expect the dollar to strengthen further if the Federal Reserve raises interest rates later this week, which it is widely expected to do. Though some believe a rate increase could cause the currency to weaken.