Nodal Logistics Harvard Case Solution & Analysis

Comparison of Different Alternatives

A comparison could be made against different strategies to evaluate the best option. The project will give best results of $12,500,647 if the BRL appreciates by 5% and will result a growth of +21.6%. On the other hand, if the BRL depreciates by 5% then Nodal will report worst results of $8,409,066 with a reduction of -18.2% against benchmark but this approach is highly uncertain because foreign currencies are subject to continual fluctuations and exchange rates cannot enjoy a steady appreciation or depreciation.

A fixed rate assumption of exchange rate will generate cash flows of $10,279,691 but this approach is highly uncertain because exchange rates are subject to continuous ups and downs. The same approach has been adopted for EIU forecast where cash flows give a figure of $7,577,631 with a reduction in growth of around 26.3% against its benchmark.

Forward contracts are the most secure way of minimizing risk and the cash flows are highly certain. Enabling a forward contract will result an NPV of $8,151,170 but will result in a decline of 20.7% against benchmark

Put option gives user the right to sell the derivatives at a premium, but a level of risk is also associated with such options. Enabling such contract will result in cash flows of $5,408,314 with a decline of 47.4% against base line.

 

  1. 1.      Which among the various hedging alternative would you recommend if you were John?

Summary

Remain uncovered                  $10,279,691                (Highly uncertain)

Appreciation 5%/year             $12,500,647                (+21.6% and highly uncertain)

Depreciates 5%/year               $8,409,066                  (-18.2% and highly uncertain)

EIU forecast                           $7,577,631                  (-26.3% and highly uncertain)

Forward Contract                   $8,151,170                  (-20.7% and certain)

Put options                              $5,408,314                  (-47.4%, minimum)

 

Choosing between various hedging alternative will strongly depend on two major factors. First is the risk taking approach of John and second is the way that John considers BLR currency in future.

If John strongly believes in highly complicated, aggressive, diversified and risk taking approach and he also believes that past will continue in future , then he should consider that BRL will continually appreciate against US Dollar and must go with uncovered approach.

On the other hand, if John is a risk averse and is not sure about its expectations and continually believes that the BRL will continually depreciate against US Dollar then, forward contracts is the most suitable option. Although, forward contracts enable companies to predict their future cash flows but, will result a loss of 20.7% of cash flow against benchmark.

If John’s expectations are modest and he believes that BRL will enjoy slightly different changes against US Dollar then, the put option would be more suitable. The pessimistic thing about put options is that it charges premium which reduces the projected cash flows and shows a worst approach as compared to other alternatives .Consequently, it reports a loss of 31.8% of cash flows against benchmark.

Risk sharing agreement is another way to minimize the risk but may not be acceptable to the majority of customers because Nodal’s major customers already suffers risk of foreign exchange rate  and may not accept to increase its risk by involving in risk sharing agreement.

Money Market Hedge is another favourable approach where the new project acquires loan in Brazilian real. The principal and interest are paid through cash flows generated over years from the period. Although adopting this approach is a complex one because it requires extensive relations with the bank as well as the interest rate offered in Brazil is not so much high that it may substantially threatens cash flows. Further, it also affects the leverage position of the company as well...........................................

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