How 3M can hedge its foreign-exchange exposure
There are different methods that 3M can employ in hedging its foreign-exchange exposure. Some of them include financial hedging. In this method, 3M will be able to hedge its exposure by borrowing from money market. The company can also buy forward contracts. This will save it from suffering from currency fluctuation. 3M can also opt to use option in hedging its foreign-exchange exposure. With this method, the company has the freedom of switching to a different method of hedging on realizing that the option will not be effective in saving it from foreign-exchange exposure. Apart from these, 3M can embark on striking a balance between its payables and receivables valued in a foreign currency. Through this method, 3M would be able to offset costs related to a huge number of varied foreign-exchange transactions. Transfer pricing is another method that can be used by 3M. As most of its sales are affected by fluctuation in foreign currency, the company can come up with a mechanism that helps it vary the price at which it sells its products to its allied companies in foreign markets (Putra, 2009, para. 2-7).
If 3M is right in avoiding financial hedge
3M is right in avoiding financial hedging. Going by experience from other big companies which have for many years used financial hedging, the method does not help the company overcome foreign-exchange exposure during currency fluctuation. For instance, Coca Cola has used the scheme and have always experienced a reduction in its profit margin over the years. Financial hedging is very risky due to inability to effectively predict when the currency is expected to fluctuate. In the process, the company may incur huge loss (Hagelin & Pramborg, 2004, pp. 1-20). There are limited regulations to govern financial hedging making it vulnerable to defrauds.
Whether 3M should use centralized or decentralized method in managing its foreign-exchange risks
Based on the nature of the risk facing 3M, it is imperative for the company to focus on coming up with a decentralized method of managing its foreign-exchange risk. This method will help the company in transferring decision making process to staffs that come into direct contact with the risks thus being able to effectively determine the most appropriate measures to take. In this method, the decision making process is efficient thus saving the company from being adversely affected by the risks (Nakada, 2003, p. 1). Decentralization also leads to managers given the responsibility establishing a mechanism of checks and balances which gives them the impetus to focus on benefits accrued from using specific measures in overcoming the identified risks. In the process, they will be capable of realizing whether the company is experiencing growth and respond quickly on realizing that it is not growing.
Method to be used in the decentralized mechanism
On decentralizing its foreign-exchange risk management, 3M ought to bestow the responsibility to its various business divisions. Different products and services have different exchange rates as well as risks. As a result, the various business divisions are well equipped with information regarding constraints experienced during their transactions. Giving these divisions the responsibility of dealing with these risks would lead to them coming up with informed decisions thus helping the company effectively overcome them (Nakada, 2003, p. 2). Having the necessary information, the decision making process would also be fast and effective thus saving the company from wasting time before information is transferred to the central body responsible of making decisions and then the action to be taken being shipped back to the divisions.
References
Hagelin, N. & Pramborg, B. (2004). Hedging Foreign Exchange Exposure: Risk Reduction from Transaction and Translation Hedging. Journal of International Financial Management & Accounting, 15(3), pp. 1-20.
Nakada, P. (2003). The risk management tug of war: centralized versus decentralized control. RMA Journal, 42(5), pp. 46-62.
Putra, A. (2009). 6 ways to control foreign exchange risk. Web.