Section 2: 60% (1,600 words)

Crosswell International, a U.S.-based manufacturer and distributor of health care

products has been approached by Material Hospitalar, a distributor of health care
products throughout Brazil who are interested in distributing Crosswells diaper
products. Considerable competition already exists in the Brazilian Market, so pricing
and therefore cost control will be critical for the success of this collaboration.
Case study of the core text book by Moffett, Stonehill and Eiteman (2014, p. 529)
Making use of extensive academic justifications and an in-depth analysis of the
Crosswell International and Brazil case answer the following questions:
Question A Mandatory (35 marks)
Discuss the exposure to currency risk that Crosswell International faces in its dealing
with Material Hospitalar and examine the methods of hedging it could engage with to
protect itself from this.
Question B (25 marks)
Discuss how the various stages and their costs impact the ability of Crosswell as an
exporter in being competitive on the pricing of its products in penetrating the Brazilian
market.
OR
Using an example of Croswell in Brazil, you are to discuss and apply management
guidelines to minimize the costs of funding working capital requirements in trading with
countries of different payment terms practices.

1. Section 2 Question A (Mandatory): 35% 950 words

Discuss the exposure to currency risk that Crosswell International faces in its dealing with
Material Hospitalar and examine the methods of hedging it could engage with to protect
itself from this.

Guidelines
a)
b)
c)

d)

e)

Define what constitutes currency transaction exposure

Explain the purpose of currency hedging
Relate to Crosswell Intl where they are selling health care products to Material Hospitalar
with payments to Crosswell Intl supposedly in Brazilian Real.
Risk to Crosswell Intl: Payment in Brazilian Real (worst case) since USD payment is not
guaranteed. Thus Crosswell Intl faced the potential weakening of Brazilian Real against USD
when they receive them in 60-day time per payment agreement.
Discuss on the types of factors impacting on FX rate changes like:
i) high inflation in USA higher USD interest rate -> higher USD currency value against
Brazilian Real unfavourable to Crosswell Intl should receivables in Brazilian Real .
ii) high trade deficit for USA US Govt needs to borrow more USD to meet foreign payments
-> USD decline against Brazilian Real -> favourable to Crosswell Intl
iii) Political instability in USA result in weaker USD -> favourable to Crosswell Intl should
their receivables in Brazilian Real .
Provide in-depth analysis on the outcome in terms of Profit/Loss of the FX hedging (more
details on next slide)
Action: Sell Brazilian Real against USD FX Forward 60-day per contract agreement. Use
numerical examples (next slide as example)
Conclusion

Section 2 Question A : 35% 950 words Mandatory Example of FX

hedging for Crosswell Intl

Analysis:
On June 7 the spot rate of BR is BR6.00 vs BR4.5 on Apr 08 , as a result BR ended
weaker worth lesser by US$100,000 (US$400,000 less US$300,000), Crosswell had
eliminated the FX risk by selling the Brazilian FX forward contract. Crosswell will benefit
when Brazilian Real appreciates and thus increase their sales revenue from the sale of
health care products. However, if the FX forward contract is not created, Crosswell would
have converted BR at the spot rate of BR6.00 to 1 US$ resulting in receiving lesser USD
when BR depreciates. However, the sale of FX forward contract on Brazilian real helped
Crosswell to lock the exchange rate and reduce their Brazilian real foreign exchange rate
fluctuation against them.

1. Section 2 Question B (i): 25% 550 words (Choose 1 out of 2)

Discuss how the various stages and their costs impact the ability of Crosswell as an
exporter in being competitive on the pricing of its products in penetrating the Brazilian
market.

Guidelines
a) Brief introduce the challenges/risks faced by exporter having to enter foreign
markets.
b) Identify the types of risks faced by Crosswell entering Brazilian market
resulting in an impact on their competitiveness in pricing their products.
i)
Political Risks (include Global-specific Risk; Country-specific Risk)
ii) Creditworthiness of Importer
iii) Riskiness of sale; Timing of sale
iv) Types of financing available
c) Provide in-depth analysis on the pros and cons on each of the risks impacting their
pricing competitiveness of their products with suggestion to overcome them.
d) Conclusion - There will always be challenges to success and education is for longterm investment with heavy capital outlay at initial stages.

1. Section 2 Question B (ii): 25% 550 words (Choose 1 out of 2)

Using an example of Croswell in Brazil, you are to discuss and apply management
guidelines to minimize the costs of funding working capital requirements in
trading with countries of different payment terms practices.

Guidelines
a)
b)

Briefly introduce what comprised of working capital requirements

Discuss the importance of minimising the cost of funding working capital
requirements to a typical company.
c) Relate to Crosswells challenges to minimise the cost of funding working
capital requirements like delay in receipts from customer or delay from
supplier
d) Provide in-depth analysis on the pros and cons on each of the risks with
strategy/suggestion to overcome them
i) factoring on a/c receivables, loans on a/c receivables, JIT for inventory
management, better credit terms from suppliers
e)

Conclusion suggest how to manage it or best practice.