Question

Financial managers should be able to determine how risk factors into a company’s decision to expand or start a new project.

Select one of the publicly traded Fortune 500 corporations listed below:

• Amazon
• Apple
• General Electric
• Samsung

Use Mergent Online to access the company’s annual report to its stakeholders, then complete the following activities:

Retrieve and analyze the steps that the selected company uses for scenario and sensitivity analysis, risk management techniques, and how companies mitigate currency fluctuation risk for the launch of a new product/project. (this information comes from the companys annual report)

Prepare your analysis in a minimum of 500 words with APA formatting.

Answer 1

AMAZON

Scenario analysis is the process of predicting the future value of an investment depending on changes that may occur to existing variables. It requires one to explore the impact of different market conditions on the project or investment as a whole.

Sensitivity analysis is the study of how the outcome of a decision changes due to variations in input. It is used in situations that rely on one or more input variables. For example, bond prices can be affected by changes in inflation, Interest rates and credit rating.

Investors use the two analytical methods to establish the amount of risk and potential benefits. The difference between the two methods is that sensitivity analysis examines the effect of changing just one variable at a time. scenario analysis assesses the effect of changing all the input variables at the same time. With such an approach, an analyst comes up with different possible events that are likely to occur in the future.

Below are mentioned the steps used to conduct sensitivity analysis:

1. Firstly the base case output is defined; say the NPV at a particular base case input value (V1) for which the sensitivity is to be measured. All the other inputs of the model are kept constant.
2. Then the value of the output at a new value of the input (V2) while keeping other inputs constant is calculated.
3. Find the percentage change in the output and the percentage change in the input.
4. The sensitivity is calculated by dividing the percentage change in output by the percentage change in input

There are different methods to carry out the sensitivity analysis:

• Modeling and simulation techniques
• Scenario management tools through Microsoft excel

There are mainly two approaches to analyzing sensitivity:

• Local Sensitivity Analysis
• Global Sensitivity Analysis

A credible sensitivity analysis typically has five (5) steps:

1. Identify key cost drivers, ground rules, and assumptions for sensitivity testing;
2. Re-estimate the total cost by choosing one of these cost drivers to vary between two set amounts; for example, maximum and minimum or performance thresholds;
3. Document the results;
4. Repeat 2 and 3 until all factors identified in step 1 have been tested independently;
5. Evaluate the results to determine which drivers affect the cost estimate most.

Risk Management techniques

• Sticking to a Winning Trading Strategy
• Minimizing losses
• Rules keep emotions out of trading decisions
• Avoiding risk
• Retaining risk
• Spreading risk
• Preventing or reducing loss
• Transferring the risk

How they mitigate currency flucatuation risk

• Setting up a Foreign-currency account so you can accept payments or pay bills in a foreign currency. You can use multiple Foreign-currency accounts if required.
• Using a Forward Exchange Contract to buy one currency amount and sell another at a fixed exchange rate on an agreed future date. This means you know exactly how many NZD you’ll pay for imports or receive for exports, and you can protect your business when exchange rates turn for the worse.
• Using a Currency option, where you can protect a certain exchange rate but also be able to participate if market rates move in your favour.
• Placing a market order. This allows you to request a foreign exchange conversion for a particular amount and exchange rate. You don’t need to constantly monitor the currency markets as your order will be filled if the market reaches the required level.