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Business & Finance

Currency Management and Profitability in Multinational Enterprises

Currency Management and Profitability in Multinational Enterprises

Johnson and Johnson is an American multinational corporation headquartered in New Brunswick, New Jersey. It is a global holding company engaging in research and development, manufacture, and sales of a range of healthcare products. It operates in three segments: consumer, pharmaceuticals, and medical devices. It is rated among the top three pharmaceutical companies in the world.

Johnson & Johnson (NYSE: JNJ) increased at a compound annual growth rate of 4.1% from $70.0 billion in 2015 to $82.0 billion in 2019. It is approximated to top $85 billion in 2020. The Company’s pharmaceuticals business is anticipated to be the single revenue driver with $44.8 billion in revenues.Johnson & Johnson’s cost of goods sold for the June 30, 2020 quarter was $6.58 billion, a 5.2 decline year over year. Its cost of goods sold for the twelve months ending June 30, 2020, was $27.64 billion, a 1.9 % increase yearly.Johnson and Johnson’s foreign operations examples include Johnson and Johnson United Kingdom, located in London, and Johnson and Johnson Germany, in Hamburg. Johnson & Johnson Europe generated sales worth $19 billion in 2019, second only to Johnson & Johnson United States, which generated $42 billion in sales in the same period.

Companies are exposed to risk when income earned abroad is converted into domestic currency. The potential exchange risk is also present when payables are converted from domestic to foreign currency. Adverse currency changes often affect the returns of companies with foreign-based operations. There are several approaches that companies can employ in hedging exchange risks. Some companies use derivatives as an option, while others resort to currency swaps.

The currency swap market is a standard means to hedge exchange rate risk. Currency swaps not only hedge against risk vulnerability associated with exchange rate variations but also warrant receipt of foreign earnings and realize better lending rates. Johnson and Johnson company applies this means in hedging the foreign exchange risk.

When the dollar is being exchanged with a euro, when the dollar per euro exchange rate increases, it takes more dollars to buy euros, meaning the dollar is depreciating or weakening.

If An American Company operates in Europe and the euro is more robust against the dollar, the Company’s profits from Europe will be denominated in Euros. After the euros are converted to dollars, there will be more and better profit margins.

When the dollar per euro exchange rate decreases, it takes more dollars to buy euros, meaning that the dollar is appreciating or strengthening. If an American company operating in Europe converts its euro-denominated returns to dollars, it will have fewer dollars, meaning low profit margins.

Reference

Johnson & Johnson Our Story. (2020) Retrieved from https://ourstory.jnj.com/johnson-johnson-expands-overseas

Segal, T. (2019). Hedging Risk With Currency Swaps. Investopedia. Retrieved from https://www.investopedia.com/articles/forex/11/hedging-with-currency-swaps.asp

Johnson & Johnson Cost of Goods Sold 2006-2020. (2020). Macrotrends. Retrieved from https://www.macrotrends.net/stocks/charts/JNJ/johnson-johnson/cost-goods-sold

Johnson & Johnson. (2020. Vault Rankings. Retrieved from https://www.vault.com/company-profiles/personal-care/johnson-johnson

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Question 

Select a U.S. multinational company and respond to the following questions:

Currency Management and Profitability in Multinational Enterprises

Currency Management and Profitability in Multinational Enterprises

  • Please describe how the firm prices its revenues and costs regarding currency denomination.
  • For multinational enterprises (MNEs) with multiple foreign operations, consider any 2 of those operations and their contribution to the parent firm’s profits.
  • What means do they use to hedge against exchange rate risk?
  • Using this information, what would be the effect of increases or decreases in the dollar’s exchange value on the firm’s profitability?
  • Be sure to show all applicable work.