APPLE EARNINGS DISCUSSION 1

Question 1

During 2015, the strong U.S. dollar had large effects on Apple’s financial statements.

According to our textbook, Apple receives 66 percent of its revenue from countries outside of the

United States. When currency moves must be factored into reporting based on current exchange

rates in the foreign exchange market, there could be positive or negative effects on the ending

revenue totals. In this case, since Apple has a large majority of their currency in a foreign

country, and the U.S. dollar appreciates relative to foreign currency, it takes more money than

originally invested to “buy back” the dollars Apple started with. Therefore, they are bound to

lose revenue unless the dollar starts depreciating relative to foreign currency, or foreign

currencies begin to appreciate. Foreign exchange risk is not a surprise for corporations investing

internationally—in fact, it is always outlined as a risk to a company’s revenues in the risks

section of a financial statement.

Question 2

Apple did in fact try to hedge its foreign exchange exposure to avoid a hit on earnings in

2015. “An extremely well-timed currency hedging regimen saved Apple Inc. about 70 cents a

share — or $4.1 billion — in earnings during fiscal year 2015” (Adinolfi, 2015). Their strategy

included buying currency using a forward rate. However, the appreciation of the dollar rose

quicker than expected. However, Apple knew that if they continued to raise prices in hopes to

provide a cushion for profit margin and revenues, they run the risk of less demand for their high-

priced products. Therefore, while Apple did try to hedge against the appreciation of the dollar,

there is no way they could fully hedge. Too many risks were at play.

Question 3
APPLE EARNINGS DISCUSSION 2

The strength of the U.S. dollar most definitely a rational response to the economic factors

at play during the years 2014-2016. First, relative to the rest of the world, the U.S. economy was

growing extremely quickly. In fact, “the last economic growth figures Q3 2014 showed very

strong growth of 5%. With strong economic growth, unemployment has fallen to 5.9%. This is in

marked contrast to the rest of the developed world” (Pettinger, 2016). As a result of this growth,

the U.S. experienced a rise in interest rates, again raising the strength of the dollar. One of the

main trading partners of the U.S., European countries, experienced low growth and high

unemployment as a result of falling oil prices and deflation (Pettinger, 2016). Therefore,

compared to European currency, the U.S. dollar appreciated even more rapidly.

Question 4

Specifically for the U.S., monetary policy by the Fed (which could lower the interest rate)

could weaken the U.S. dollar. This would cause the U.S.’s large scale of investors to look to

foreign countries for higher returns on their investment. Additionally, if the United States

economy experiences another recession, or even a large amount of small recessions, this could

also depreciate the U.S. dollar. Lastly, the loss in corporate profits could incite investors to take

their money to foreign countries instead of the United States. This is more likely to happen when

and if the economy enters into a recession, but many other factors could also contribute to a

corporation’s loss in revenue.

Question 5

Large companies like Apple could take on transaction risk. This type of risk is taken on

when a company buys a product from a country located in a country with different currency. If

Apple has suppliers or customers in another country, there is a risk of money being lost through
APPLE EARNINGS DISCUSSION 3

the transaction. Additionally, similar to what Apple happened in 2016, there could be potential

loss in the financial statements in terms of revenue.

Question 6

Some firms do not hedge because of their low risk tolerance. This low risk tolerance

might be due to their size. Also, hedging itself is a risk, has a cost, and could impact a company’s

financial statement. Due to Apple’s size, I think it was a smart decision to attempt to hedge at

least a bit, in order to minimize the forecasted loss due to foreign exchange rates. If Apple were a

smaller company, hedging would be more a concern.

APPLE EARNINGS DISCUSSION 4

References

Adinolfi, Joseph (2015, December 14). Apple saved $4.1 billion hedging against a rising dollar,

says Stifel. Retrieved from https://www.marketwatch.com/story/apple-saved-41-billion-

hedging-against-a-rising-dollar-says-stifel-2015-12-14

Pettinger, Tejvan (2016, January 9). Reasons for rise in value of the dollar. Retrieved from

https://www.economicshelp.org/blog/12596/us/reasons-for-rise-in-value-of-the-dollar/