Vanguard Security Corporation (VSC), a Portuguese company, is working with banks to investigate future foreign exchange risk in trade finance on import and export transactions between the United States and Europe. In the process, VSC decided on the Foreign Currency Exposure option, taking into account their specific financial status and the macro-financial risks of both the US and the EU.
F. John Mathis and Paul G. Keat
Harvard Business Review (TB0033-PDF-ENG)
February 27, 2008
Case questions answered:
- What are the issues facing Vanguard Security Corporation (VSC)?
- What is the financial condition of VSC, and what are its financial needs?
- What are the exposures or risks facing VSC? How much risk can VSC accept?
- How do the different forecasting methods suggest the dollar will behave relative to the euro during the contact period? Which hedging product is optimal for VSC?
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Vanguard Security Corporation: International Transaction Dilemma Case Answers
This case solution includes an Excel file with calculations.
Executive summary – Vanguard Security Corporation: International Transaction Dilemma Case Study
Vanguard Security Corporation (VSC), a Portuguese company, is working with banks to investigate future foreign exchange risk in trade finance on import and export transactions between the United States and Europe.
In the process, VSC decided on the Foreign Currency Exposure option, taking into account their specific financial status and the macro-financial risks of both the US and the EU.
Vanguard Security Corporation utilizes the techniques of analysis and reporting to forecast their needs as they outsource their supply chain necessities. The company is seeking to exploit the weak points of its exposure to the international markets.
They may want to determine if they are making a sound investment in the European versus United States market. They want to know if they can pay upfront the cost of capital and the needed fees associated.
The bid proposal will include future import and export prices. Vanguard Security Corporation wants to become a stronger company, although it faces emerging competition from a new Asian company, with additional competition emerging from United States-based companies. In regard to economic exposure, the VSC company may ask: How many people and industries know about the company, and will it be protected?
It consists of quantitative and qualitative analysis in regard to Vanguard Security Corporation wants to know how much risk is involved in spending money against the exchange rate of the United States and making the necessary investments to support the European Union.
VSC Company needs to explore all possible options to mitigate the risk of investments in its market and that of any other market to predict the success and budget requirements.
After performing the analysis, we have concluded the forward rate contract would be the best option for Vanguard Security Corporation, offering the highest cash flow for other options while offering less risk, as risk can be shifted or shared and is comparatively less complex to implement.
Introduction – Vanguard Security Corporation
Vanguard Security Corporation, one of the most reputable financial security providers, was founded in Portugal in the early 1990s. It had a major customer of a large European region bank as its main customer and was rapidly expanding its profits.
However, they faced fierce competition with Asian competitors, resulting in a significant decline in revenue over the past few years. When listing on the market shortly before the bursting of the IT bubble in 1999, VSC aimed to expand its business by lowering prices and margins.
At the same time, they focused on the US as a new market to expand their customer base and bid on projects as an opportunity to enter. Then, when they participated in the project, they discovered the exchange risk of service remittance with US companies and examined how they hedge the exchange risk.
The Financial Condition of Vanguard Security Corporation and The Needs
Income Statement and Balance Sheet
The latest report disclosed by VSC shows the severity the company is facing financially now. According to the Sales and Income Statement, the sales were 374.2 million euros in 2004.
Although the company had hit a peak of 437.3 million euros in sales in 2006, the sales became just 307.5 million euros in 2008, 30% less than the number at the peak. Changes in the net incomes were dramatic as well.
The enterprise lost nearly 100 million euros in net income in just a few years, dropping from 88.4 million euros in 2005 to -8.7 million euros in 2008. Therefore, achieving profitability is paramount for Vanguard Security Corporation to maintain its operation and financial stability.
As for the balance sheet, cash was scarce in the company, whose Quick Ratio was 50.4% based on data in 2008. According to CSI Market (CSIMarket, 2020), the industry average of the quick ratio was 1.16 in 2020 Q1, double the number of VSC.
Moreover, the Acid Test Ratio was 54.0% in 2008. This ratio implies that VSC has a problem with liquidity. Thus, resolving this problem is critical to its operation.
The latest situation
Vanguard Security Corporation won a bid with an American enterprise that the company is expecting to reverse a downward trend in revenue and profitability. Revenue in the deal was supposed to be 161.03 million in USD and 109.5 million in EUR based on a spot rate on April 1, 2009. The agreement consists of three financial parts.
The first is a down payment of 16.103 million USD that VSC received as soon as the American company accepted the offer. The second is money that the company will…
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