N.V. Philips Electronics— Currency Hedging Policies: forecast of the exchange rate and interest rate for Egypt

N.V. Philips Electronics— Currency Hedging Policies


N.V. Philips is a major global electronics company, headquartered in the Netherlands, but active around the world. 1990 was an extremely turbulent year for the company, with management changes at the highest level, and radical reorganizations with restructuring provisions resulting in a loss of more than four billion guilders on worldwide sales of 55,764 million guilders which was 3% less than in 1989. Without the adverse effects of exchange rate movements (7%) and changes in consolidations (1%), there would have been a 5% increase in sales.

We quote from the 1990 Annual Report:

1990 was a year of fundamental reappraisal for the whole company. A number of developments gave rise to this. Persistently large losses on information systems and integrated circuits had been causing a drain on equity and even threatening the continuation of healthy growth in the other sectors. In Europe and the United States, our Lighting Division had to contend with intense price competition, which could only be partly offset by improvements in efficiency. Furthermore, exchange rate movements and appreciable rises in interest rates had an adverse impact on both our earnings and our competitiveness.


Against this background it was decided that the measures taken in the past few years to enhance the company’s maneuverability should be radically intensified and speeded up. A revitalization process was started with the aim of rapidly restoring the company to lasting profitability and improving its financial structure.


Company Background


Philips today is one of the very few remaining giant electronic groups with a broad consumer franchise that are headquartered outside the Far East. By around 1925 Philips had National Organizations—the local faces in the national economies—in 24 countries, many of which were outside Europe. Fifteen years later that number had increased to 47. Now there are National Organizations varying from trading companies to fully industrialized enterprises in some 60 countries. Nine Product Divisions and a Music Subsidiary determine global product policy. They are:


Bulbs; Lighting Electronics; Batteries; Glass, Filaments and other components.


Consumer Electronics

Television; Audio equipment; Video equipment; Car Stereo; Personal Information products (P.C., fax).


Domestic Appliances and Personal Care

Shavers, hair/health/body care; Kitchen appliances; Home comfort.


Communications Systems

PBX’s; Mobile Communications; Networks; Cables and interconnect components.


Information Systems

Office Automation; Optical and Magnetic Storage; Smart Cards; Dictation.


Industrial Electronics

Analytical Instruments; Communication and Security; Industrial Automation; Test and Measurement.


Medical Systems

X-ray; Tomography; MRI; Ultrasound; PACS; Radiation therapy.



CRT Displays; LC Displays; Passive Components; Magnetic Products.



IC’s; Microcontrollers; Discrete semiconductors.


Philips may therefore be thought of as organized in a two-dimensional matrix by product group and by country, and we will refer to these management entities as P.D.’s and N.O.’s. Over time, power and responsibility has increasingly shifted from the N.O.’s to the P.D.’s, reflecting the worldwide standardization of product and the integration of the global network of production and development facilities within a given P.D. Nonetheless, it should be remembered that the N.O.’s in most countries are nationally established corporations, and constitute in each country major employers with responsibilities to the government, to trade unions and to the community that cut across the P.D.’s. In some countries, local Philips’ subsidiaries are partly owned by local investors, or even listed on local exchanges. Furthermore, Philips is extremely vertically integrated, which provides another dimension of interdependence across P.D.’s.


The company, in its 1990 Annual Report which was published on February 27, 1991, takes a cautious view toward the future. We quote the “Outlook” as presented in that report.


In a number of markets which are important to us, such as the United States, the United Kingdom, and Brazil, the economic outlook for 1991 was unfavorable even before the Gulf War broke out. We now anticipate a slowing down of economic growth throughout the world. We therefore consider it advisable to assume that the level of sales in 1991 will not be higher than the previous year. The exchange rate of the dollar—our forecasts are based on an average rate of f 1.75—also implies a risk.


It is difficult to predict which of our product sectors will be most vulnerable to unfavorable market trends. In the Consumer Products sector we can see signs of declining consumer confidence in the future. It goes without saying, however, that none of the other sectors would be immune to an economic downturn.

We are on safer ground as far as continuing reductions in costs are concerned. The downward trend in the number of employees which manifested itself in 1990 will become more pronounced in 1991. Provided that there are no unexpected delays, the total number of persons employed will have dropped to below 240,000 by the end of 1991. Expenditures for research and development will be lower than in 1990.


The combined effect of improvements in efficiency in all sectors, restructuring in a number of divisions and the discontinuation of unprofitable activities will result in an improvement in income. Our expectations are that this will start to become visible in the second half of the year.


On this basis and assuming the same level of sales, we believe that we shall be able to conclude 1991 with a net profit. We anticipate that, thanks to a further reduction in working capital and a prudent investment policy, no special financing measures will be required.


Currency Policy

More than 20 years later, 2012,  a broad and uniform currency hedging policy was introduced throughout Philips. The foundation of the policy was to place all entrepreneurial responsibility for the bottom-line result, including exchange-rate effects, squarely with the PD’s. If they consider it necessary, the PD’s organizational units can cover currency risks via forward exchange contracts with the financial function of the NO.



Philips wants to have a clear vision on the future exchange rate and interest rates of many countries. They have approached you to give them a very well based forecast of the exchange rate and interest rate of the country that is appointed to you.

The format you have to write your report in is the Thesis Format. (see document Thesis Report)



Week steps





Plan of Approach






Empirical evidence








Hand in paper


This is an integrated assignment. The grade is 50% of the final grades of ECO, Risk Management and International Financial Management