¶ … risk that Apple Inc. faces with respect to its international economic exposure. Apple designs its products in the United States, manufactures them in China and then sells them all over the world. In order to analyze this exposure, a number of steps will be undertaken. The first step will be to provide an overview of the business, what its foreign exchange exposure is, and how the company manages that foreign exchange rate risk. The subsequent sections will discuss the degree of exposure that the company has to other forms of international risk -- economic risk in particular. There will be an industry and company analysis to provide a framework for this discussion of risk. There is also going to be a discussion of how the company manages the different risks to which it is exposed, and what the analysts' views of this exposure are as well. The final component of this report will consist of a scenario analysis, wherein Apple's business will be evaluated for robustness in best-, worst- and most likely-case scenarios. Conclusions will be drawn from all of this research and analysis with respect to how well Apple is managing its international risk.
Foreign Exchange Rate Risk
Foreign exchange rate risk is defined as the risk that arises from the fluctuations in foreign exchange rates vs. The home currency. There are two forms of foreign exchange rate risk, transactional and translational. Translational risk arises when the company exchanges currencies. The company typically will either gain on these transactions or lose, depending on which direction the currency has moved. The volatility of these currency movements is where the risk arises. Translational risk occurs in translating back foreign earnings to the home country income statement. This type of risk is more difficult to hedge and therefore is often not addressed by companies. This report will focus on transactional risk.
Apple's foreign currency risk mainly arises from the goods it sells, but there is also some indirect risk that it faces with its suppliers. The direct risk arises when selling in foreign markets, with the price of goods denominated in foreign currencies. At the retail level, Apple aims to achieve pricing parity worldwide -- the price of an Apple product in a foreign currency will be the equivalent of that product's USD price on the domestic market. The company therefore is exposed to risk when it attempts to repatriate earnings from foreign countries back to the United States. There is significant exposure to the pound, the euro, the yen, CAD, AUD, HKD, SGD, as well as the won and yuan. Exposure to Asia-Pacific currencies has increased significantly in recent years. Since the company is especially susceptible to gains in the USD, the currencies most at risk are ones that are prone to weakness against the USD - in recent the years the macroeconomic situations make the EUR, GBP and JPY the most at-risk currencies; the CAD, yuan and AUD are among the less at-risk currencies that are generally appreciating against the USD.
In the Form 10-K, Apple specifically mentions that it "uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures in foreign currency exchange rates" (p.19). The company also noted that in 2011 it faced higher premium expenses on such hedges. Under Item 7A (p.40), the company notes that it "regularly reviews its foreign exchange forward and option positions…in conjunction with its underlying foreign currency and interest rate exposures." The company notes that it is a "net receiver of currencies other than the U.S. dollar" and therefore is particularly prone to strengthening of the U.S. dollar. The company also notes that it might at some point be forced to adjust local currency pricing in response to significant volatility in foreign currency exchange rates. Apple normally hedges its positions for up to six months, and chooses only to hedge certain exposures, leaving other unhedged (p.40). The company does not specify the reasons it does this. There is also a degree of indirect exposure in terms of the economic conditions under which its suppliers operate. While Apple pays its suppliers in dollars, its suppliers typically pay their expenses in yuan, and inflation in China can dramatically affect the ability of Apple suppliers to meet the prices the company sets profitably. There is risk that these pressures will affect Apple's ability to bring its products to market at the price points it wishes to set.
In general, Apple's foreign exchange rate management program is in line with industry norms. The company understands its exposure specifically,...
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