Risk
is omnipresent and corporates are no exception. Companies
face a wide range of risks. This article allows the readers
to get access to the entire risk management mechanism at
the Microsoft. The article also presents a conceptual note
on VaR (Value at Risk), a risk measurement mechanism used
by Microsoft. The article also deals with the customized
mechanism designed by Microsoft using options and forwards
contracts to reduce its foreign exchange risk.
Around
90% of the desktops in the world use Windows operating system.
In addition to the market share that Microsoft enjoyed in
the global market, the statement provides various key insights.
It gives a key insight that Microsoft's products are marketed
in almost all the parts of the globe. In addition, it leads
us to think about a wide range of currencies in which Microsoft
deals. In turn, it helps us to ascertain the magnitude of
the foreign exchange risk that the company faces. For instance,
in Brazil, Microsoft's goods are listed in US dollars, which
created a gap in the profits. When Brazilian Real was appreciating,
the customers delayed their purchases and when it depreciated,
customers over purchased. Despite its aggressive marketing
strategies and cost effective operational strategies, highly
volatile foreign currencies badly affect the margins. For
instance, in the fiscal 2003-04, 28% of the total revenues
were collected in foreign currencies, up from 25%. If the
rates in 2002 had been in effect in 2003, then, translated
international revenue, billed in local currencies, would
have been approximately 10% lower. Certain manufacturing,
selling and other operational expenses are disbursed in
local currencies. Every year, a portion of international
revenue is hedged against translation exposure. To avoid
the losses due to foreign exchange volatility, what are
the tools and techniques that Microsoft has been using?
How is it that a company with such a vast geographic operations
hedging its foreign exchange risks? The article explains
the financial risk management at Microsoft and the risk
management tools and techniques adopted by Microsoft.
William
H Gates and Paul G Allen founded Microsoft as Partnership
Company on April 4, 1975. Microsoft was incorporated on
June 25, 1981. Headquartered in Redmond, Washington, Microsoft
operates in more than 60 countries with manpower of 44,000.
Microsoft's geographical operations can be divided into
five regions Europe and Middle East, Americas, Asia, Africa
and Pacific, where it has got offices. However, Microsoft's
products are marketed across the globe.
Today,
Microsoft is the worldwide leader in the field of software,
services and Internet technologies for personal and business
computing. Built on the popularity of Windows Operating
System and the MS-Office, Microsoft is focused on developing
technology for the next generation Internet.
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