Gaz De France Harvard Case Solution & Analysis

Question number 1:

            The question is about the business model of Gaz De France (GDF) and any changes in the models after the incorporation of the company.

gaz de france case solution

gaz de france case solution

Business models:

            In the recent past the company used to follow the approach to raise the debt from the local bonds and local sources to finance the expansion of the company. It used to follow the approach that had not any approach to minimize the financial risk that is related to the forex transactions. The company had no measure to minimize the risk through forward, future, swaps and other measures used to minimize the risk of foreign transactions. It used to undertake transactions related to the operations in foreign countries and it also used to pay payment according to the terms and any exchange gain or loss on the payment were charged to the income statement.

            The approach is risky, but widely used during the periods of the 1950 s to 1980 s, the forward, future and swaps were not common in those days therefore the company used to follow the approach specified in the reporting standards to report any foreign exchange gain or loss on the reporting date. This approach is simple to follow and at that time no mitigation of forex risk taken place due to the difficulty and unavailability of forex risk mitigating contracts. The only benefit of foreign exchange used to flow to the entity was the exchange rate differences, no else benefit like forex and interest rate benefit taken place.

Changes in business model:

            The changes in business model taken place in 1986, those times during that Mr. Reboul appointed as a CEO of the company.  He followed the widely used and accepted approach to use currency swaps and forward rate agreements to mitigate the foreign exchange risk. In this approach it used to take currency swaps and forward rate agreements to mitigate the risks relate to the foreign exchange. The company uses to raise debt in other currencies and followed the approach of swaps to mitigate the forex risk. In the recent years the France Franc used to become stronger due to the economic conditions of France therefore it used the approach to currency swap in which it can take benefit of decrease in the exchange rate and any interest rate benefit through raising debt from the US and other countries rather than raising debts from the home country in home currency. It used to raise debts extensively from US and other country to take most of the advantages.

Justification of changes:

            The change is necessary because this approach is estimated to give benefit to the company, Reboul has played a very important role to implement these changes. The USD is stronger than FF therefore the interest rate in USD is less than that FF therefore it is expected that the interest rate benefit can flow to the company as well by simply raising finance from US in USD rather than raising finance from France in FF to pay more interest expense. The change was necessary to earn a foreign exchange and interest rate benefit that happened as the total unrealized gain for the year is FF553.1 million that is a huge amount that can hit the income statement to increase the profitability.

Question number 2:

            The second part consists of the risks related to the operations and foreign exchange and the reasons that why these risks are important to the company and its shareholders. The session also considers the mitigation measures of these risks.

Risks associated with Gaz De France (GDF):

            GazDe France is operating under the utility business in which the gas rates are listed over the international market and the rates are fluctuating according to the world demand. Currently, it is providing gas to the country and the risk associated is the price of the Gas in the market, the other countries in the Middle East has efficiency to affect the demand for the gas of the France.

            The second associated risk of the GDF is the risk of substitutes, nowadays the individuals of the world are willing to utilize oil and electricity that are economical and thus can increase efficiency. Currently, the gas substitute products are available that can be used through electricity or oil therefore the substitution effect is also there that can affect the operating revenues and profitability of the company.........................

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