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MME-34 - Group 2 : AlvenDesnecmen FeraDamayanti WidyaretnaBuenastuti ZakariaNurDjajadinataHalim Corporate Risk Management FM: Dr.Ida Juda Widjojo.

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Presentation on theme: "MME-34 - Group 2 : AlvenDesnecmen FeraDamayanti WidyaretnaBuenastuti ZakariaNurDjajadinataHalim Corporate Risk Management FM: Dr.Ida Juda Widjojo."— Presentation transcript:

1 MME-34 - Group 2 : AlvenDesnecmen FeraDamayanti WidyaretnaBuenastuti ZakariaNurDjajadinataHalim Corporate Risk Management FM: Dr.Ida Juda Widjojo

2  SNAP SHOT  COSO of adidas Solomon  Strategic  Operations  Reporting  Compliance  Component of ERM adidas Solomon  Internal Environment  Objective Setting  Event Identification  Risk Assessment  Risk Response  Control Activities  Information & Communication  Monitoring

3  SNAP SHOT  Risk Management Approach  Risk Typology  Risk Assessment, Mapping and Mitigation  Marketing Risk  Operations Risk  Social & Environmental Risk  Legal Risk  Financial Risk

4  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

5  Strategic  Financial Leverage still high  Identify, create, and fully exploit opportunities by balancing risk awareness  Operations  Reporting  Compliance

6  Internal Environment  Objective Setting  Financial impact of risks on the short term and long term forecasted earnings of each respective brand and regional business unit.  Event Identification  Risk Assessment  Assessment of the risk probability and classification of risk according to the likelihood of their occurrence and possible consequences  Risk Response  Risk avoidance, reduction, transfer or acceptance and continuous monitoring  Control Activities  Fully integrated it into day to day business function at all organization level  Information & Communication  Preparing & implementing an appropriate reporting structure  Participation in risk management of managers and employees at all levels of the group  Monitoring  Regularly reviewed specific risks through systematic reporting framework to ensure availability of timely, accurate and relevant information for the respective decision makers.

7  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

8 RISKS Market Risk Credit Risk Liquidity Risk Operational Risk Legal & Regulatory Risk Business Risk Strategic Risk Reputation Risk adidas’ Risks Financial Risk

9 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD RISK 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

10 RISK NAMERISK DEFINITION IMPACTLIKELIHOODRISK 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.

11 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD 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 workers Monitored and trained its business partners in developing system for self-governance

12 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD 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

13 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

14 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD RISK MITIGATION Transaction Risk High exposure in the transaction and revenue between USD and Euro High : RevenueHigh: 70-80% outsources volume in USD sales revenue dominated by Euro Forward contract and option Hedging: 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.

15  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

16  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

17  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

18  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

19  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

20 Important Exchange Rate for adidas Currency Unit per Euro Average rate for the yearSpot Rate ending December 31December USD GBP JPY ARS Source: Annual Report 2002 Exchange rate for revenue and expense Exchange rate for asset and liability

21  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

22 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD RISK MITIGATION Interest RiskProtection to the liquidity risk (for long term) and interest rate fluctuation (for short term) High : RevenueHigh: liquidity problem Long term financing agreement High: interest rate fluctuation Interest rate caps for in case interest rate increase

23 Interest Rate +1% -1% € 11 Million (after-tax Erarning)

24  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

25 CAP = 14% REF. RATE = 17% REF. RATE = 5% Receive 3 % if loan(buyer), Pay 3% if deposit (issuer) Option not exercised BUY A CAP : option for maximum interest for loan ; ISSUE A CAP : issuing rights for maximum interest to be paid

26  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

27 FLOOR = 8% REF. RATE = 17% REF. RATE = 5% Option not exercised Pay 3% if loan (issuer), Receive 3% if deposit (buyer) BUY A FLOOR : option for minimum interest for deposit ; ISSUE A FLOOR : issuing rights for minimum interest to be received

28 CAP = 3.6% REF. RATE CAP = 3.2% REF. RATE

29  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

30 RISK NAME RISK DEFINITION IMPACTLIKELIHOOD RISK MITIGATION Credit RiskVolatile 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.

31  Thanks


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