Gaz de France Harvard Case Solution & Analysis

Question # 01: Refer to Exhibit 5. Among the economic indicators provided, which do you think is the one of the most key parameter that would drive the exchange rate of French franc against dollar?

gaz de france case solution

gaz de france case solution

Answer:

Exchange rate are normally affected by the key economic factors, like gross domestic product GDP, employment and unemployment rate, interest rate, government bond yield, consumer price index and different other factors, these all factors would affect the exchange rate. Commodities like gold and oil prices also affects the exchange rate. The parameters refer in the exhibit 5 shows the potential of the company to derive the exchange rate of the French franc against dollar. The key indicator for France would be foreign exchange reserves, as it determines all the related transactions with the trading country because different countries has different inflation rate, interest rate and other political and nonpolitical factors, which influence the change in exchange rate of the country.

Question # 02: Based on the data of your chosen economic indicator, what is its trend over the period 1980 to 1985 and how would you expect the French Franc to move against the dollar over these years? Will it appreciate or depreciate against the dollar?

Answer:

The foreign exchange economic factor has been fluctuated in the era of 1980 to 1985, in the year 1981, it has been decreased approximately 21.16 percent, it has been further decrease by 26.94 percent in 1982. Foreign exchange reserve has been improved from the year 1983, 1984 and 1985 that is 23.73 percent increase in 1983, 5.79 percent increase in 1984, and 27.31 percent increase in the year 1985, which shows that the foreign exchange reserve shows a positive trend. Dollar against the France Franc has move on the both side in these years that is appreciate and depreciate, dollar supposed to appreciate in the first two years, that is the foreign reserves has been decreased in these years because expansionary monetary policy of the country would cause the dollar to appreciate. Furthermore, increase in foreign exchange reserve in the years 1983 to 1985 shows that the dollar has depreciated in these years, as the restrictive monetary policy of the country has cause the dollar to depreciate in these years.

Question # 03: Now look at Exhibit 6 and comment whether the actual French Franc Rate reflect the trend that your answer in 2. Above would have suggested

Answer:

Exhibit 6 of the case shows that the dollar has been appreciated against the French Franc from the year 1980 to 1984 but it has been depreciated from the second quarter of 1985 and continue depreciating in the remaining quarters of the 1985. Meanwhile, the trend found in question 2 shows the varying trend of dollar to appreciate in the first two year and depreciating dollar in the remaining period that is from 1983 to 1985.

Question # 04: Please explain the reasons what were the risks that Gaz de France was facing which forced it to enter into the swaps and forward transactions

Answer:

Gaz de France use the swop instrument to hedge its local currency that is French Franc currency risk, the risk arises due to issuance of real French Franc bonds in United States dollar denominated currency. They go for the currency swap, that they held for the short term, that help them to appreciate the value of the bond and decrease in interest payment, which help the Gaz de France due to fixed currency swap, the declining interest payment on bonds hence increasing the profitability of the company. The appreciating dollar against the depreciating French Franc force the company to enters into swap contracts. The financial risk faced by the company during the 1986 is the depreciation of the dollar against the French Franc, as systematic risk which is not controlled by the management, but it can reduce the forward exchange contracts and forward exchange contracts will reduce the financial risk faced by the company.

Question # 05: Using you understanding of the Forward transactions, illustrate how Gaz de France could be using a forward contract to reduce some of the risks that you identified in 4 above

Answer:

Gaz de France enters into the forward contracts and hedging the local currency French Franc against the foreign currency United States dollar denomination to control the swap transactions made by the company. Entering of company into the future contracts helps the company to reduce the financial risk of appreciating dollar against the depreciating local currency........................

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Gaz De France Case solution

Treasurer Gaz de France is an aggressive, proactive manager responsible structure of the company, running one of the largest swap books of any non-financial corporations in the world. Currency futures, interbank forwards, currency options and is also often used to manage multi-currency liability company structure. This case needs students to investigate the causes and consequences of aggressive management responsibility, with particular attention paid to the administrative problems in such a large swap positions. An important decision to be taken in the management of a book swap in the face of the dollar, falling franc against the German mark, and possibly restructuring the European currency unit. This is a complex case involving swaps, debt policy, and currency risks, it is better to teach after the students have been introduced these topics. "Hide
on W. Carl Kester, William Allen Source: Harvard Business School 18 pages. Publication Date: April 28, 1988. Prod. #: 288030-PDF-ENG

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