Summary

This case examines the exposure management strategy of the Dell Mercosur company, in terms of it expanding into Brazil.

In the end of 2001, argentine financial crisis was started which resulted on Brazil’s markets and currency. The problem was being effective on
the computer markets, although other computer companies like Compaq and HP were also facing same problems during this period, Dell was
more effected.

Dell came up with an aggressive price strategy and reduced costs through work force reductions and facility consolidations.

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

✤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

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.

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 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

✦ Forecasting Exposure: In this strategy, Dell team in Brazil has become very adept at forecasting revenues and in executing a strategy to
reach its target forecast.

✦ Designing Strategy to Hedge the Exposure: The revenues of the company were varying everyday, Pickett did not enter into contracting at
once. Instead, he works with corporate finance to enter into contracts in different amounts and different maturities. These strategies had been
the most effective strategies which helped Dell to not only survive the crisis, but also helped them to sustain in the markets till today.
3. Describe and evaluate Dell’s exposure management strategy.

1) Exposure management strategy involves four steps:

i. Forecasting the degree of exposure in each major currency in which the MNC operates.

ii. Developing a reporting system to monitor exposure and exchange rate movements to assist in protecting the MNC from risk.

iii. Assigning responsibility for hedging exposure and determining whether to centralize or decentralize exposure management.

iv. Selecting appropriate hedging tools including diversification of the MNCs operations, a balance sheet hedge, and exposure
netting.

Dell's Exposure Management Strategy in Brazil:

-> Dell employs the use of purchased option and forward contracts. This is used as a hedge in order to protect the company
against transactions that are whereby denominated in currencies other than the United States Dollar. Specifically, Dell uses
forward contracts to protect monetary assets and limit liabilities.

->Because of the tariff-free provisions of Mercosur and the close proximity of Dell’s manufacturing facilities in the south of
Brazil, Dell is well positioned to service all of Mercosur with its Brazilian manufacturing operations.

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.

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

5. what are some programs or strategies that management of dell Mercosur could implement to provide it with operational
hedges?

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 initiatives, based on the company’s business model. Additionally,
the firm could be more systematic in its approach to operational hedging by identifying vulnerable 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 evaluating 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 opportunities
to make it worthwhile.

1.Given how Dell translates its foreign-currency financial statements into dollars, how would a falling Brazilian real affect Dell
Mercosur’s financial statements? What about a rising real?

As stated in the case study, Dell MERCOSUR’s financial statements is translated based on the current rate methods, which
means both assets and liabilities of the companies are translated into dollars by using the current exchange rate whilst the
revenues and expenses are translated at the average exchange rates for the period (Daniel et al., 2012). Accordingly, when the
exchange rate changes, Dell can either benefit from the foreign exchange or suffer a lost. In the case of the falling real affect, it
can be easily seen that Dell MERCOSUR’s revenues, income statement along with balance sheet will be affected. Regarding the
revenues, if the value of the real falls, the value of the foreign revenue would reduce (Andersen and Schroeder, 2010).
Subsequently, the value of revenues that are translated into US dollar in the consolidated income statements would also
reduce. As the currency of the host country strengthens, the foreign operating income would go down (Andersen and
Schroeder, 2010). This situation will be vice versa in case of the rising real. However, only the equity of the Dell would be
unchanged despite of the lower or higher value of the foreign exchange that is used to translate (Sarno and Taylor,2003). It is as
the balance sheet or the shareholder’s equity, reflects the assets subtracts the liabilities. Given that all Dell’s subsidiaries have
both of their assets and liabilities relied on financial statements in the same currency, the value of the assets denominated in
foreign currency would fall (if the real falls), but the value of the foreign-currency denominated liabilities do not (Sarno and
Talyor, 2003)