FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP

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Jamaica Producers Group A Finance of International Trade Analysis

Sheneaqua “Ashley” Ashmead - 0505274 Novelette Johnson - 0703558 Kevin Whitehorne – 0704456 Gerron Thomas – 0601486 Karekia Brown - 0415439 Rose Bachan - 0704821

Finance of International Trade Tutor: Gregory Linton University of Technology February 13, 2012

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP

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ASSIGNMENT COVER SHEET NAME GERRON THOMAS ASSIGNMENTS  Development of Capital Markets, Country’s Currency  Financial Status of JP  Cost of Capital Analysis  The Foreign Exchange Market  Transaction Effects  Derivative Application  The Sovereign Debt Crisis  Analysis of Jamaica  Trade policy of Jamaica  Trade Barriers Imposed  The JDX  Appreciation of the JMD  Analysis of the UK  History of UK’s Development  Global Appearance  The EPA  Translation Effects  Analysis of the Netherlands  The Currency of the Netherlands  Trade Policy  Banking Services Utilized by JP  Trade Barriers  Laws and Culture of Jamaica  Banking Services Utilized  Financial Status    Trade Liberalization The Risk Environment The EPA and its effects on JP SIGNATURE

NOVELETTE JOHNSONWILLIAMS

KEVIN WHITEHORN

ROSE BACHAN

KAREKIA BROWN

SHENEQUA “ASHLEY” ASHMEADE

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP

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Table of Contents
PART 1 ......................................................................................................................................................... 6  Background Summary on Jamaica Producers Group.................................................................................... 6  Analysis of Operating Countries ................................................................................................................... 7  Netherlands ................................................................................................................................................... 7  Background ........................................................................................................................................... 7  Trade ..................................................................................................................................................... 7  Basic Economy ..................................................................................................................................... 8  Culture .................................................................................................................................................. 8  Laws ...................................................................................................................................................... 9  Jamaica.......................................................................................................................................................... 9  Background ............................................................................................................................................... 9  Trade ................................................................................................................................................... 10  Basic Economy ................................................................................................................................... 10  Culture ................................................................................................................................................ 11  Laws .................................................................................................................................................... 11  Full Summary and Analysis of the United Kingdom & its Economy......................................................... 12  Background ............................................................................................................................................. 12  Trade ................................................................................................................................................... 12  Trade Policy ........................................................................................................................................ 13  Tariff Liberalization/laws ................................................................................................................... 13  History of the country’s Economic Development....................................................................................... 14  Currency (The Pound Sterling) ........................................................................................................... 15  Current Economic Environment ............................................................................................................. 16  Stage of the Business Cycle and GDP ................................................................................................ 16  Monetary and Fiscal Policies .................................................................................................................. 18  Monetary Policy .................................................................................................................................. 18  Yield Curves and the UK .................................................................................................................... 18  Fiscal Policy ............................................................................................................................................ 19  Exchange Rate Volatility .................................................................................................................... 20  Potential impacts exporting and importing to the UK may pose on Jamaica Producers Group ................. 22 

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP

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PART 2 ....................................................................................................................................................... 23  A full analysis of Jamaica Producers Group ............................................................................................... 23  Global Appearance.................................................................................................................................. 23  Financial Analysis ....................................................................................................................................... 24  Trend analysis of company’s performance (2007 – 2010)...................................................................... 24  Capital Structure ..................................................................................................................................... 25  Cost of Capital Analysis ......................................................................................................................... 26  Cost of Debt (Kd)(1-tax rate) .................................................................................................................. 26  Cost of Equity (Ke) ................................................................................................................................. 27  Weighted Average Cost of Capital (WACC) .......................................................................................... 27  Risk Environment ....................................................................................................................................... 27  Financial Risks ............................................................................................................................................ 28  Currency Risks ........................................................................................................................................ 28  Credit Risks............................................................................................................................................. 28  Interest Rate Risks .................................................................................................................................. 29  Operational Risks .................................................................................................................................... 29  Detailed Analysis of Trade Barriers............................................................................................................ 30  Analysis of United Kingdom Trade Barriers .......................................................................................... 30  Tariff Barriers to Trade ....................................................................................................................... 30  Non – Tariff Barriers to Trade ................................................................................................................ 30  Analysis of Jamaican Trade Barriers .......................................................................................................... 31  Tariff Barriers to Trade ........................................................................................................................... 31  Non – Tariff Barriers to Trade ................................................................................................................ 32  Trade barriers, United Kingdom, Netherlands and their relation to Jamaica .............................................. 33  Benefits for Jamaica ................................................................................................................................ 34  Challenges for Jamaica ........................................................................................................................... 34  PART 3 ....................................................................................................................................................... 35  Banking Services Utilized by JP ................................................................................................................. 35  Banking Services - Bonds ....................................................................................................................... 35  Types of bonds utilized by JP ................................................................................................................. 35  Documentary Collection ......................................................................................................................... 36  Letters of Credit ...................................................................................................................................... 36 

.................. 38  Futures ..... 39  Foreign Exchange Risk ...................... 42  The Appreciation of the JMD and its impacts on JP.....................................................................................FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 5 Wire Transfers ............................ 44  Conclusion .................................................................................................................................. 43  The European Sovereign Debt Crisis ............................ 37  Applying the concept of hedging through the use of Derivatives .................................................................................................................................................................................... 46  .................................................................................................................................................................................................................................. 38  Forward Contracts ........................................................................................................................................................................................................................................................... 44  References ................................................... 36  Examination of the Foreign Exchange Market ....... 42  The Jamaica Debt Exchange and its impact on JP ................................................................................................................... 40  The impact of recent macro-economic phenomena on JP ................................................................................................................................................................................................. 43  The Economic Partnership Agreement ...............................................................................................

and customs clearance services. and plantain chip products. JP provides door-todoor freight consolidation. the Caribbean. produces tropical snacks. the cultivation. collectively with its subsidiaries. Mary’s. The company. and Taste Jamaica brand name (Jamaica Producers Group. as a direct descendant of the Jamaica Producers Association formed in 1925 (Jamaica Producers Group. The company offers its products under the JP. JP RAM. the Shipping subsidiary is located in London. the Fresh Juice and Smoothie Company is located in the Netherlands whilst the Tropical Snacks group operates locally in Jamaica (Jamaica Producers Group. Nixx. JP operates primarily in Europe. Hoogesteger. and a shipping business. Of its major operations. manufacture and sale of juice and food products. 2008). Other operations include. sweet potato. marketing. engages primarily in the production. 2008).FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 6 PART 1 Background Summary on Jamaica Producers Group Jamaica Producers Group (JP) is a completely Jamaican-owned company that came into being on April 1. . and distribution of bananas in Jamaica. freight forwarding. and Central America. St. 1929. including cassava. 2008). and produces smoothies.

. machinery. 12 percent and natural or enriched fuels. Dutch exports are divided into five main categories: chemical products. 24 percent. Two-third of Dutch exports goes to five nations: Germany. Belgium. protected from the encroaching sea by dikes and dunes. the Netherlands remains a receptive market for U. and the North Sea to the west and north.S. Almost one-quarter of the landmass is below sea level.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 7 Analysis of Operating Countries Netherlands Background The Netherlands is a one of the countries that form part of the Kingdom of the Netherlands.S. agricultural products. The Dutch are strong proponents of free trade and staunch associates of the U. industrial products. 17 percent. exports and an important investment partner. 6 percent with Germany being the principal trading partner. Trade With no significant trade or investment barriers. 2011). 15 percent. in international trade forums such as the World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD). the United States and the United Kingdom which accounts for Sixty one percent (61%) of the Dutch imports. Situated in northwestern Europe and borders on Germany to the east. the name "Netherlands" means "Low Lands" in reference to the nation's topography as an alluvial plain. The Netherlands is perfectly positioned as a gateway for goods imported into the EU and Dutch goods are easily exported throughout the EU (World Trade Organization. France. Belgium to the south.

located in the provinces of North Holland. Whilst non-Randstad culturers locate in the rurals of south and west Holland (Bayer.S. In 2010. in 2011 the forecasted figures are 6. The Dutch economy has recorded trade surpluses with marginal declines during the recession of the 2000’s. Forecasted growth of 2% was projected for 2011which is primarily due to the increase in international trade.25%. In 2009. Randstad culture is distinctly urban. the (Rim City) and non-Randstad cultures.1%) still are cause for concern as they exceed the limits set by the European Growth and Stability Pact (U. The Dutch make a distinction between two of their major cultural subdivisions.7%. Culture The diverse Dutch culture reflects regional differences as well as the foreign influences thanks to the merchant and exploring spirit of the Dutch and the influx of immigrants.9%. The people of Netherlands have played an important role for centuries as a culturally liberal and tolerant centre.75% and 5. with the Dutch Golden Age regarded as the zenith. the exports increased by 12. South Holland. The expected national budget deficit for 2012 (3.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 8 Basic Economy The global financial crisis hit the Netherlands hard in the fall 2008. 2009).7% of GDP) and government debt (64.8%.8% and imports by 11. which is the largest engine of the Dutch economy.9% and recovered slowly in 2010 with an annual growth rate of 1. but annual GDP growth that year was still 1. 1993). . Department of State. and Utrecht. the Dutch economy entered recession in the fourth quarter of 2008. however. the economy shrank by 3.

Trade laws (International) are facilitated through the membership status with the EU and guidelines have been adopted from WTO.5 million is located some 90 miles south of Cuba and more than 450 miles west of Hispaniola. 2011). Since 1870 the capital has been Kingston. Netherlands as a country is highly dependent on international trade. 2011). The island holds one of the largest and best natural harbors in the world which facilitates international trade based on its central location and accessibility. . The primary law making body is formed by the Dutch parliament in cooperation with the government.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 9 Laws The Netherlands is a civil law country where law is based on the French Civil Code with influences from Roman law and traditional Dutch customary law.000. now with a population of more than 645. Jamaica has been called the Island of Springs. and the luxuriance of the vegetation is striking (National Encyclopedia. Jamaica Background Jamaica. a country with a population of more than 2. and is the third-largest island in the Caribbean Sea. total supports a liberalized trade environment and is advocate for the reduction of trade barriers (National Encyclopedia. The climate is tropical and tourists flock to Jamaica for its beautiful beaches.

Japan and the various CARICOM countries. 1993) (World Trade Organization. and bauxite/alumina. food. The Jamaican economy is heavily dependent on services. Basic Economy Tourism. As Jamaica's trade with the United States increase.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 10 Trade Over the past several decades. its trade with fellow members of CARICOM. Tourism revenues account for roughly 10% of GDP. 2011). Remittances account for nearly 15% of GDP and exports of bauxite and alumina make up about 10%. remittances. but the island's early economy was centered on the production sugar. 1999). Economic growth is deterred by many challenges such as high crime and corruption. This has resulted in the country reporting continuous trade deficits which forces it to borrow heavily to pay for its consumption (The Economist. the Caribbean Common Market has decreased. and a debt-to-GDP ratio of more than 120%. Norway. and garments assembled in Jamaica. large-scale unemployment and underemployment. and as seen marginal growth in 2010 – 2011 periods ranging between 4% and 6% respectively (Bayer. Canada. Jamaica has relied more and more on imports. Jamaica’s major trading partners are the United States of America and the United Kingdom. Jamaica's onerous public debt burden is ranked the fourth highest in the world on a per capita . bauxite and alumina production dominated Jamaica's economy in 90’s – 2000 period. Major exports are bauxite and alumina. The country derives most of its foreign exchange from tourism. which now account for more than 60% of GDP. The remaining trading partners include European Union countries.

CSME. Religious practices are also significant to the Jamaican culture. ska. Jamaica is actively engaged in the negotiation of multilateral. Trade is governed by laws under the WTO. with additional provision for appeal to the Judicial Committee of the Privy Council in London. The island is famous for jerk spices. 2011). but is however distinguished by another Creole dialect. rocksteady. herbs and fruits which form a popular part of Jamaican cuisine (National Encyclopedia.S. more recently. and GATS. which is influenced mostly by West African languages. regional and bilateral trade agreements as a means of securing its trade interests and enhancing trade performance. In these agreements it seeks to remove tariff and non-tariff barriers on . The courts are organized at four different levels. dancehall and ragga. Jamaican culture boasts a strong global presence. mento. of global recognition is the Rastafarian culture (U.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 11 basis. From the musical genres reggae. Department of State. Patois. NAFTA. Laws Laws within this small native country are determined by the judiciary which is based on the judiciary of the United Kingdom. Jamaica’s native language is English. In early 2010. Jamaica’s culture is described as being very unique and has largely impacted the tourism sector. 2009). Culture Despite its size. Jamaica is a common law jurisdiction. and. the Jamaican government executed a Debt Exchange program (JDX) in order to retire high-priced domestic bonds and significantly reduce annual debt servicing (The Central Intelligence Agency. in which precedents from English law and British Commonwealth tradition may be taken into account. dub. 2011).

Historically it was the world's first industrialized country and held world power during the 19th and early 20th centuries. lead. rubber. It is currently one of the leading economic. London. Chief exports include manufactured goods. cultural. with its seat of government located in the capital city of England. most of its tin. The governing structure takes the form of a constitutional monarchy and a parliamentary system. Trade The United Kingdom is the world's fifth largest trading nation and is highly dependent on foreign trade. 1993). Primary trading partners are the European Union and the United States. Its imports include copper. and raw cotton. raw wool. . ferrous metals. Scotland and Wales. military. chemicals. Northern Ireland. hides and skins. zinc. Companies. and many other raw materials.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 12 products of interest to Jamaica in asymmetrical arrangements with trading partners (Doing Business In Jamaica: A Country Commercial Guide for U. 2009). The UK is a developed country and is regarded as the world's sixth-largest economy based off nominal GDP indicators and seventh-largest economy based of purchasing power parity.S. Full Summary and Analysis of the United Kingdom & its Economy Background The United Kingdom is a sovereign state consisting of four countries: England. food. and fuels. and about one-third of its food. scientific and also most politically influential countries in the world which holds great significance as it relates to international trade (Bayer.

however. and is in favor of the WTO’s launch of a new round of trade negotiations focused on further liberalization of agriculture. The International Monetary Fund (IMF) has also reports that “in 2001 the United Kingdom had exports of goods totaling $276 billion and imports totaling $324 billion. It has agreed to join with other Member States in a customs union with common arrangements for imports from and exports to third counties. The UK proposes duty-free market access for Least .3 billion in comparison to its imports of $330. agreed upon. The United Kingdom. It seeks the elimination of nuisance and tariff peaks. “in 2002.8 billion”. These common arrangements are decided. is a WTO member in its own right and maintains 'an effective and coherent external policy' to the EU's common stance (Hills. Trade Policy Due to its reliance on trade. Trade policies implemented by the United Kingdom are in accordance with its membership status in the European Community. it also favors binding tariffs at applied rates. 2011). the UK has a major stake in the maintenance of a vigorous and open world trading system. The services credit totaled $111 billion and debit $95 billion” (The Central Intelligence Agency. the purchasing power parity of the United Kingdom's exports was $286. including most goods and services. 2011). and administered through the Community's 'Common Commercial Policy' (CCP).1 billion which results in a trade deficit of $43.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 13 According to the US Central Intelligence Agency (CIA). discussed. industrial products and services. Tariff Liberalization/laws The United Kingdom favors reduced tariff levels across a broad range of sectors.

The United Kingdom urges for more transparency and objective administration of anti-dumping rules to prevent their abuse as a protectionist measure.S. After emerging from recession in 1992. as grown to become a leading trading power and financial center in the world of international trade. This resulted in declining home prices. due to the importance of its financial sector to the global economy. History of the country’s Economic Development The UK’s economy since the early 16th century. and a subsequent global economic slowdown which compounded Britain's . services. the economy fell victim to another global financial crisis. Britain's economy enjoyed the longest period of expansion on record during which time economic growth outpaced most of Western Europe and other leading global countries. particularly banking. Whilst industry continues to decline in importance. high consumer debt. Her Majesty (HM) Treasury performs the major government responsibility of developing and executing the British government's public finance policy and economic policy.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 14 Developed Countries and improved access commitments for all other developing nations as a means of off-setting the considerations which were not given at the Uruguayan round of WTO negotiations. the pound sterling and maintaining and implementing the country’s monetary policy. insurance. The Bank of England is the UK's central bank and is responsible for issuing the nation's currency. In 2008. The UK has held a partially regulated market economy. Dollar and the Euro (Riley. 2011). account by far for the largest proportion of GDP. Pound sterling is the world's third-largest reserve currency (after the U. It also supports stronger rules on subsidies to minimize the trade-distorting effects of these measures (World Trade Organization. 2012)). and business services.

ranked behind the US dollar. pushing the economy into recession in the latter half of 2008 and prompting the government to implement a number of expansionary fiscal measures to stimulate the economy and stabilize the financial markets. This caused an appreciation of the pound against other major currencies and. These include nationalizing parts of the banking system. with the simultaneous devaluation of US dollar. suspending public sector borrowing rules. “The Bank of England”. the pound hit a 15-year high against the US . the government in 2010 initiated a five-year austerity program. which aimed at lowering London's budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015. the euro and the Japanese yen. represented by the symbol £ and is issued by the central bank. and moving forward public spending on capital projects. The UK is one of the world's most globalised countries with its capital London one of the world's largest financial centre alongside New York (after the United States and France) (Bank of England. As a result of Inflation concerns in the UK. In November 2011. 2012). cutting taxes. the Bank of England raised interest rates in late 2006 and 2007. The “Sterling” is the rated as the fourth most traded currency in the foreign exchange market. Fiscal policies implemented lead to public deficits and debt levels.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 15 economic problems. Currency (The Pound Sterling) The currency of the UK is the pound sterling. but Britain has opted to remain outside the European Economic and Monetary Union (EMU). Chancellor of the Exchequer George OSBORNE announced additional austerity measures through 2017 because of the slower-than-expected economic growth and the current impact of the euro-zone debt crisis. The Bank of England through its monetary policy periodically coordinates interest rate moves with the European Central Bank.

for the first time since 1992. The UK has experienced two recessions in the last twenty-five years. In the early 1980s downturn there was a deep recession which represented the worst downturn in the UK’s post-war history. 2012). From the diagram we can see the plunge into a period of recession in 1990 and 1991 and then a recovery which was prolonged throughout the remainder . Current Economic Environment Stage of the Business Cycle and GDP The chart above depicts the annual rate of growth of national output (GDP) for the UK economy between 1980 and 2006.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 16 dollar on 18 April 2007. There have been several fluctuations since the global financial crisis of 2008 which saw the pound depreciating against the dollar in 2008 and then appreciating in 2009 relative to the dollar and the euro (Bank of England. reaching US$2.

a recovery is affected by the much speculated 'double dip' recession during the 2010 and 2011. 2012). business cycle is correlated with those of the United States and Canada which shows the degree of integration between the economies of the three named countries (International Monetary Fund.1% in August 2011 which was the highest level since 1994. Business Cycle. banks. after 14 quarters. and other known business types. This affected sectors such as. An inspection of the International Monetary Fund working paper “The U. The current stage of UK’s business cycle. 2000). The UK felt the effects of the most recent financial crisis of 2000’s where total manufacturing output fell by 7% at the of end 2008.K. Monetary Policy and EMU Entry revealed that the U. investment firms. GDP fell 0.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 17 of the 1990s (Bank of England.K.5% in the 4th quarter of 2010 coupled with an increase in the rate of unemployment up to 8. Fig showing the UK business cycle heading for a double dip . GDP is still 4% down from its peak at start of recession back in 2008 (International Monetary Fund. For the period ending October 2011. 2000).

5%. 2012). The Bank of England recently injected money directly into the economy by purchasing assets a method known as quantitative easing. Interest rate is one of the key monetary policy tools used in the contraction of the supply of sterling. The government liability nominal yield curves are derived from UK gilt prices and General Collateral (GC) repo rates. Yield Curves and the UK Despite the implementation of the Asset Purchase Program the Monetary Authority has managed to maintain a target bank rate of 0. alongside secondary targets on ‘output and employment’. Since March 2009 the total asset purchases as authorized by the Monetary Policy Committee amounts to £325 bn. The current Monetary Policies implemented by the Bank of England include inflation targeting. The yield curve below depicts the term structure of the UK’s interest rate is currently flat and has been this way for short term securities since March 2009. The real yield curves are derived from UK indexlinked bond prices . This means that the instrument used by the monetary policy is now the quantity of money provided rather than the price at which the Bank lends or borrows money (Bank of England. 2012). The main purpose of the purchases was to inject money directly into the economy in order to boost nominal demand (Bank of England.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 18 Monetary and Fiscal Policies Monetary Policy In light of the double dip recession speculations the UK Government and Central bank have taken drastic steps towards stimulating their economy.

VAT cut to 15%) (The Public Enquiry Unit . 2011).g.5% by the Monetary Policy Unit of the Bank of England appeared to be ineffective in getting the economy out of a recession. work incentives and impact on government borrowing. 2011).HM Treasury. The cut in interest rates to 0. Government borrowing increased sharply due to falling tax revenues from the recession and attempted to increase Aggregate Demand (e.HM Treasury.g.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 19 Fiscal Policy The UK’s current demand policy is for the most part concentrated on the use of Monetary policy as opposed to Fiscal policies due to the fact it is easier to change the interest rate than levels of tax and spending and fiscal policy has more side effects e. . The UK has since officially adopted the ‘Golden Rule’ of fiscal policy which states that over the full economic cycle. the government should borrow to invest only for future needs. The economy according to the World Banks review was in a liquidity trap which forced the government to a turn to fiscal policy implementation in an to further stimulate economic activity (The Public Enquiry Unit .

This was reflected by looking at the impacts of the recession on the British pound where the pound is viewed statistically as one of the worst victims of the crisis in the foreign exchange markets.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 20 Along with the Golden Rule. Effective Exchange Rate Index (EER). Although all these features of the UK economy closely mirrored the US economy. the pound depreciated as it did not benefit from the safe haven currency status (Stavárek.HM Treasury. and rose to 70 per cent of GDP by 2010. 2012). Forward Exchange Rate. Spot Exchange Rate. Exchange rate prices are expressed in various ways including. hence exchange rate is purely market determined since the suspension of UK membership from the European Exchange Rate Mechanism. Exchange Rate Volatility The UK has operated with a free-floating exchange rate system (no intervention by the Bank of England). meaning that the Sustainable Investment Rule was been broken in an attempt to reach the recovery stage of the business cycle (The Public Enquiry Unit . Bi-lateral Exchange Rate. 2011). and Real Exchange Rate. The UK public debt at the end of 2008 was estimated at 42 per cent. . which monitors national debt at a prudent level currently set at 40 per cent of GDP. Significant changes in exchange rates are typically one of the attributes of any financial crisis. The vast depreciation of the sterling can be attributed to a shocked banking sector. the Bank of England’s program on monetary quantitative easing and general budget and current account deficits. the UK government follows the “Sustainable Investment Rule”.

2 percent in the fourth quarter of 2011 over the previous quarter. The Gross Domestic Product (GDP) in the United Kingdom declined 0. and business services. Services.30 percent in March of 1973 and a record low of -2. insurance. Historically.58 percent reaching an historical high of 5. from 1955 until 2011 the United Kingdom's average quarterly GDP Growth was 0.50 percent in March of 1974. . Over the past two decades the government has greatly reduced public ownership and contained the growth of social welfare programs (Affairs.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 21 UK’s Composition of GDP and Potential GDP Figure above displays the historical trend of gross domestic product of United Kingdom at market prices estimated by the International Monetary Fund with figures in millions of pounds sterling. 2009). account by far for the largest proportion of GDP while industry continues to decline in importance. particularly banking.

However economic recovery was realized and the strength of the consumer boom in the late 1980s created a substantial positive output gap which subsequently leads to inflation in 1989-90.. At the end of the 1990-92 recessionary periods.5% per year. about 2. actual GDP fell behind potential GDP which indicates a negative GDP gap and pressures on inflation.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 22 The chart above depicts the estimated output gap for the UK economy between 1980 and 2001. Potential impacts exporting and importing to the UK may pose on Jamaica Producers Group As a company outside of the EU. engaging in international trade with UK/European based customers. The deep recession of the early 1980s left the UK economy with a substantial amount of spare capacity. 2009). may pose one or more of the following risks for JP.e. Buyer’s Insolvency/Credit . Hence there is currently no major inflationary of deflationary gap in the British economy (Affairs. This inflation was gradually eroded during the mid late 1990s and in recent years the British economy has been growing at or around the long term trend rate of growth (i.

4% above its then current price. JP has benefited from being a company who was responsible for the exportation of one of Jamaica’s major traded products. 2007 -2011).FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 23 Risk. However. From a financial standpoint. Political/Sovereign Risk. Economic Risk. Seller’s Performance Risk. given its rich history and affiliation with the production of the banana product. Legal Risk. Interest Rate Risk. JP is perfectly positioned to achieve significant benefits from using brand Jamaica as one of its flagship marketing strategy on the global market. Documentation Risk. The company is a many time recipient of the Bureau of Standards Jamaica National Quality Award (NQA) which includes Excellence in Manufacturing Industry and the Top Quality Award for Commerce and Industry (Jamaica Prouducers Group. the firm’s stock was a recommended “Buy” with a price 20. given the trade friendly environment proposed by the UK. Knowledge Inadequacy. PART 2 A full analysis of Jamaica Producers Group Global Appearance JP is seen as the market leader in the manufacturing and production of tropical snacks in the Caribbean. 2009). the then . Despite the decline in banana exports. Buyer’s Acceptance Risk. Transit Risk. The firm is also the largest producer of fresh juice in the Netherlands which is also the channel used to provide exports to neighboring European countries. This has resulted in the company being identified on the global level has a known Jamaican household brand. the current governance as it relates to the trade by the WTO and with the firm establishment of the firm’s name in British markets. Foreign Exchange Risk. Cultural Risk. JP has built a brand which provides enough incentives towards assuming some of the named risk (Affairs. According to JMMB’s equity research in 2010.

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 24 forward looking strategy. JP realized decreases in its Return on Assets ratio down to as low as -52% in 2008. iii. After highs of 18. Major threats from a global standpoint are.4% in 2010. However. this ratio improved to 4.3% in 2010. after major loses during the great recession where shareholders realized a 68. restructuring.2% in 2006. i. the firm’s exposures to an increase in commodity prices specific references to food and petroleum based inputs. production of banana and other by products of the banana crop. An assessment of the firm’s financial performance over the period 2006 – 2010 revealed the following results.2% Return on Equity in 2008. The company has since realized a 60. JP is also viewed from a global standpoint as being highly exposed to the risk of natural disasters affecting the manufacturing. Additionally. The company’s operational efficiency has improved after falling to an all time low of 22% in 2008 (effects of the recession on its major market UK).6% increase in its return on sales between 2009 and 2010.6% in 2009 and 6. diversification of its product offering. Our subsequent analysis of the quarterly financials revealed increases in both the firm’s stock price and operating profits. Jamaica Producers Group has realized steady growth patterns in all its major financial indicators. Similarly. . Financial Analysis Trend analysis of company’s performance (2007 – 2010) Since the great recession of the late 2000’s. exposures to the European Union the group’s largest operating division that accounts for 70% of the groups profits. ii. 2009 saw the ROA increasing to 3.7% and a further 5. rebranding and other acquisitions were positives which would impact the stock price in 2011.

The latter years 2009 –2010 saw improvements in the profit position for all JP’s business segments.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 25 iv. These operational improvements have led to JP’s profitability improvements and were the resulting moves to counter the effects of the global turndown and five consecutive hurricanes which had a catastrophic effect on JP business structure.7% in 2006 down to 2. The company has made important strategic moves through the restructuring of its operating divisions in two major operating arms JP Europe and JP Tropical (inclusive of its Corporate Fixed/Equity investments). The 80/20 capital structure used in the financing of the company’s operations includes a mix of fixed and variable instruments as a means of balancing its risk profile. Capital Structure JP’s balance sheet in 2010 shows the business boasting a debt to equity ratio of 20. 2007 -2011).1%. The company is lowly leveraged and is a strategy implemented to mitigate its exposures to interest rate risk. The company’s major restructuring move saw exits from its UK juice business and the exportation of banana from Jamaica to the UK along with a withdrawal of JP Tropical (the leading tropical snack producer in the Caribbean) from the Honduran market (Jamaica Prouducers Group. The Europe division which accounts for 78% of the company’s combined revenue improved its profitability despite volatility in commodity prices amongst other macro – economic indicators. v.6%. . The company also bettered its liquidity position indicated by improvements in its Current Ratio over the review period. The firms leverage ratio fell over the review period from 15.8% in 2009 and a marginal increase in 2010 up to 3.

JP's cost of capital is an investor's opportunity cost of investing his or her capital in the company. We assumed the following. preferred stockholders. Effective tax rate applied is derived from taking the tax portion as a percentage of the before tax profits.603.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 26 Cost of Capital Analysis In analyzing the entity’s cost of capital several assumptions have been made based on information presented in the latest published annual report for year ending December 2010.  The weights used in the calculation of the firms weighted average cost of capital is derived from the firm’s capital structure components visible on the financial statements (financed totally by debt and equity)  The rates of interest/tax applied are taken as a percentage of the relating component ex.1% marginal cost of debt financing. We made an estimate of the firm's WACC in an attempt to quantify the average return expected by all investors in the firm: creditors of short-term and long-term interest-bearing debt.000 which represents a 1.   The dividend growth rate was derived from trends in dividends declared. Cost of Debt (Kd)(1-tax rate) JP at the end of 2010 held a total debt position of $152. . Using the effective tax rate which is derived taking the taxable portion on the income statement as a percentage of the before tax profits we arrive at 22.4% effective tax rate.626. Conceptually. and common stockholders.000 and a total finance cost of $1. The weight used is derived from the firm’s capital structure. Exchange rates applied are those reflected on the entities balance sheet. hence the weight of debt is 20%.

2008. WACC = (Wd)(Kd)(1-T) + (We)(Ke) WACC=(. operational risks and the uncertainty of a return and . This is similar to previous years and may be a reflection of the following. and 2009. the different components used in the formula include the dividends per share of 25c and market value of the stock of $20 at year end December.8)(. euro.1625) WACC=0. the firm’s assets are exposed to several risks in their day to day trade operations and may be classified distinctly as those risks relating the firms operations i.15% dividend growth rate is assumed based on the dividend policy of the company approved August 2010 to payout 15% of after tax profits as dividends (JMMB. pound and US.011)(1-.1625. The firm’s investment policy and risk appetite.2)(.224)+(. Other market conditions such as interest rate on loans denominated in depreciated currencies. Therefore the Cost of Equity amounts to . The firm’s capital structure and dividend policy . (D0/P1)+G Weighted Average Cost of Capital (WACC) We therefore determine the amount of interest the company has to pay for every dollar it finances by finding the weighted average cost of capital.e. where Ke = Risk Environment Given the global operations of JP as a multinational corporation. A .FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 27 Cost of Equity (Ke) Cost of equity is derived using the dividend capitalization model.13 or 13% The company’s cost of capital reflected using 2010 figures has an example is assumable low. 2010). Tax rates given losses incurred during the recessionary period of 2007.

Credit Risks Credit risk is the loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Due to several uncertainties in the international trade environment. From the corporate investment side. credit risk is mitigated through the use of underlying security for the different assets in JP’s portfolio. Hence. there are exposures to substantial gains and losses on both assets and profits as a result of fluctuations in the different currency denominations. Financial Risks Currency Risks The diversified nature of JP’s business operations and different geographical locations creates the situation where its assets are based in five separate currency environments. JP business level units are exposed to the risk of buyer default but have assessed these risk based on trading environment of each business unit. as a multinational business. The Europe based operations creates the major exposures to the euro along with the US dollar and pound sterling. currency risk/exchange rate risk. . the Europe based division recorded a decline in Jamaican dollar denominated revenues. the most significant types of risk the firm might be exposed to are. credit risk and interest rate risk. Despite consistent growth in trading volumes. Each unit or division is responsible for assessing trading relationships and using available information to sets prudent credit limits on the amount of exposure placed on a given customer relationship. known as financial risks.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 28 or the potential for financial loss. This arises primarily from the depreciation of the euro and the pound sterling relative to the Jamaican dollar. At JP credit risk represents the risk of failure by a third party settling an outstanding debt to the company.

other commodity risk include. cooking oils and packaging (plastic and cardboard) for the JP Tropical division. JP’scash flows from financial instrument may be impacted by fluctuating interest rates. The risk portfolio of JP includes majority fixed rate instruments in high risk areas and variable rates in low risk areas. Operational risk types include the risk of natural disasters which has been one of the major exposures of the firm affecting the manufacture of banana products and by products along with its other agricultural farm based business segments. These risks are monitored by the company’s corporate division. hedged via use of bonds. These risks are minimized via use of Forward Rate Agreements and long term . Operational Risks Operational risks are those risks inherent to JP business operations and are mitigated via management implemented controls at the business unit level along with offsetting to more experienced third party personnel with greater expertise in the identified area. This is mitigated through use of insurance mechanisms for continuing operations and monitoring capacity and demand based on seasonality of natural disasters.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 29 Interest Rate Risks Interest rate risk is the risk borne by an interest bearing asset. such as a floating rate loan where future variations in the interest rate may result in adverse positions for the buyer or seller. Therefore. citrus and other fresh fruits and packaging materials (glass and plastic) for the Europe division. The company’s risk bearing debt at year end 2010 shows a blend of fixed and variable rate instruments which are used for the creation of a balanced risk profile. fixed income instruments or fixed for floating interest rate swaps. Outside of indirect exposures to price increases in the energy commodity. fertilizers. Global commodity prices also present major challenges for the firm over the past 6 years. This is however mitigated at the capital structure level where JP maintains a low debt level relative to shareholders equity.

local content requirements.becomes payable if the goods are over £135 in value but is waived if the amount calculated is less than £9. and Customs Duty. Import VAT. Analysis of United Kingdom Trade Barriers Tariff Barriers to Trade Barriers to trade in the form of Tariffs implemented by the UK government are dependent on whether the import or export is inside or outside the European Union. example. Excise duty .tariff barriers to trade include.this is charged on alcohol and tobacco products and is additional to customs duty. import license. For the importation or exportation of certain Common Agricultural Policy (CAP) commodities from or . are charged duties or VAT and include include alcohol. tobacco products. Most goods arriving from outside the EU are liable to. export license. The UK HM Revenue & Customs stipulate various license and enforcement for international trade. The excise duty on alcohol products such as wines and spirits Non – Tariff Barriers to Trade Non. goods purchased over the internet with an intrinsic value exceeding £15. Tariff and Non-Tariff trade barriers. Detailed Analysis of Trade Barriers Trade barriers are those government induced restrictions used in international trade and can be classified in two main categories. embargos and currency devaluation. Customs duty .FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 30 contracts with customers and supply networks along with continued monitoring of market prices and ensuring sufficient working capital is maintained to leverage economies of scale. Tariffs are guided by the annually published “UK Trade Tariff” which provides details relating to trade with the UK. perfume or toilet waters. Excise Duty. import quotas subsidies.

textiles. licenses help to monitor and control these markets in an attempt to protect domestic industries from foreign competition. The Import Licensing Branch (ILB) of the Department for Business. Innovation & Skills (BIS) is responsible for the issue of licenses required for imports such as. firearms and ammunition.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 31 to a country not in the European Union (EU). Potassium Chloride.0 c. This results in the partial or complete prohibition of trade and commerce with these nations. Special Consumption Tax of 10% and General Consumption Tax of 17. Textiles.c. 2011). These import quotas allow for the import of a limited amount of these goods at a rate of duty lower than normal (World Trade Organization. Postage Stamp Duties are levied for items sent through the post with a basic requirement of J$5 affixed to receipts with a Cost Insurance . Pakistan and India. Types of duties range from import duties/customs duties which are normally levied on goods imported into Jamaica for example motor vehicle import rates effective May 2011include Common External Tariff of 20%. The UK which is a member state of the EU has allowed full duty free access without quotas to countries on the UN’s list of least developed countries have since February 2001.5% for 1. and Footwear. Analysis of Jamaican Trade Barriers Tariff Barriers to Trade Tariff barriers for trade with the European Union member states are implemented by the Jamaican government through its customs authority and include duties and taxes on imports along with other cost related factors. nuclear materials and iron and steel from some countries. Other non-tariff trade barriers are “Embargoes” implemented by the EU against other nations such as China (arms). engine size amounting to a total of 55% aggregate duty on individually imported cars. The UK through the EU has also implemented quantitative restrictions on imports such as Steel.

Consumption Duty. plants. Only specially selected companies are granted the privilege of importing a certain percentage of this product and are limited to an annual allocation ranging between 6.3% of the total imported for the year.500 and less and receipts with values over and above this range. J$100 worth of stamps must be affixed. most chicken parts. pork and some pork products. the government of Jamaica adheres to the signed WTO multi. the WTO agreement with Jamaica has realized the implementation of anti-dumping and safeguard measures to protect manufacturing activities.5% and 9.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 32 and Freight (c. chemicals and gas. some aluminum products. These include Import Licenses which are issued by the Trade Board Limited authorizing the importation of the motor vehicles. There is also the implementation of Import Quotas on Chlorofluorocarbons an organic compound used in the production of solvents. e. As a means of protecting the local manufacturing industry..g. beef and some beef products. blowing agents. and cigarettes attract an additional stamp duty.lateral agreements and has implemented several Non – tariff trade barriers. GCT is payable on most imported items whilst SCT is levied on alcoholic beverages.f. . Other items such as chicken.i. alcoholic beverages. propellants and refrigerants. Hotel Accommodation Tax and Telephone Service Tax with the recent Special Consumption Tax and General Consumption Tax. Entertainment Duty. Retail Sales Tax.) value of J$5. Non – Tariff Barriers to Trade In an attempt to protect the Jamaican domestic industries from fierce competition from imports. plant extracts. Excise Duty. cement. Since 1991 the Jamaican government has reformed their tariff structure by replacing several duties and taxes. CARICOM Duty. most tobacco products and some petroleum products.

The EU has since moved to create reciprocity and non-discrimination in trade. Some major excluded items include agricultural and processed agricultural products (e. 82. The EPA is set to create preferential treatment in trade for least developed countries through the removal of trade barriers and the implementation of a Free Trade Area between countries in the EU and Caribbean countries including Jamaica.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 33 Trade barriers. Jamaica has entered an EPA agreement with the EU by being a part of CARIFORUM which includes other Caribbean countries along with Dominica. vegetables. and 86. These trade policies have however been harshly criticized for being discriminatory against African. quotafree access into the European Union market inclusive of colonial states. poultry. CARIFORUM has also agreed to the following liberalization on goods. United Kingdom. Caribbean and Pacific Group of States nations (ACP) and are incompatible with the World Trade Organization rules. Through the agreement. meats. fruits.7% of tariff items. .1% of EU imports in value over a 10 year period. Guadeloupe.1% of tariff lines previously set by the EU.7% over 15 years which represents 85.9% over 25 years which represents another 90. through the creation of the Economic Partnership Agreement between ACP nations.g. chemicals. dairy products). fish. a total of 61. The EU nations have developed a single market with collectively implemented trade policies to foster preferential trade agreements between member states for the benefit of economic development. Netherlands and their relation to Jamaica The United Kingdom and the Netherlands are two member states of the European Union (EU). Martinique and French Guiana with transitional arrangements for rice and sugar. CARIFORUM countries such as Jamaica Market will gain access for goods and phased tariff reduction. Duty-free. furniture and other industrial products. CARIFORUM has designated sensitive products that will not be considered under liberalization and are included in an exclusion list.

social implications through possible displacement of vulnerable and uncompetitive local industries. exposures to possible alterations and modifications made in world trade.6% of the regions exports and 38% of imports. development support for private and public sector. conditional improvements in the access to the EU for Jamaican services suppliers which include. business visitors. development support for tourism industry. professionals.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 34 Benefits for Jamaica Jamaica as a part of Cariforum benefits from the EPA through the receipt of duty free / quota free access to the large EU market. entertainers. exposures to local industries through increased competition from imports. emphasis on increasing private sector competitiveness and possible increase in foreign direct investments and technological transfers Challenges for Jamaica The criteria’s named in the EPA may be challenging for Jamaica has our major trading partner is the US who is responsible for over 54. investors and university graduates. an increase in the countries overall trade deficit. loss of revenues due to tariff reductions on imports and EPA may implicate future trade agreements with the US and Canada . Jamaica has had a trade deficit with all EU members except the UK and could realize.

. Both banks provide a range of products and services for export and import transactions. letters of credit. Conditional Bonds (with no documentary evidence) which specify Scotiabank must make payment to the importer in the event of default by JP without the use of documentary evidence such as a bill of laden. Bonds. Jamaica/UK and Citibank.Bonds Scotiabank on behalf of JP provides a guarantee to importers through the issuance of bonds either via the branch domiciled in the importers country or its local branch. Jamaica/UK. “a bond is issued for the exportation of 500 cases of banana chips to be honored by April 25. stand-by letters of credit. e. Documentary collection.g. and wire transfers Banking Services . Additionally. This provides the importer with assurance that JP Tropical will honor the agreed obligations of their export agreement.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 35 PART 3 Banking Services Utilized by JP The two main financial institutions used by JP to facilitate international trade financing are Scotiabank. JP will have to pay a percentage of the contract value (1% to 100%) to the UK importer for compensation” Types of bonds utilized by JP JP currently utilize two types of bonds namely Performance Bonds where Scotiabank on behalf of JP issues a performance bond agreeing that all requirements of the EU member states Food Standards Agency are met with regards to quality and other accepted standards. 2012. If this obligation is not fulfilled.

Letters of Credit Scotiabank and Citibank located in London/Amsterdam are responsible for advising and confirming LOC on behalf of JP. Citibank UK will remit funds to Citibank Jamaica to allow for the credit of JP’s account held locally with the bank. As a creditor. JP initiates a wire transfer via BNS Jamaica. BNS Jamaica notifies a bank in Netherlands who then advises the exporter of the existence of this credit.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 36 Documentary Collection Citibank Jamaica acts has the remitting bank of JP in the provision of a documentary collection service. This allows for the transfer of export documents such as bills of exchange and other title documents to the importers bank. Scotiabank then debits the account of JP held at the bank and release documents needed to clear goods. Wire Transfers This is an electronic means of payment utilized by JP to pay creditors or receive payment from debtors. exporter is paid and the Amsterdam Scotia is reimbursed subsequently through accounts held with Scotia Centre. This request authorizes . If sight drafts are called for payment is made immediately to the exporter as Scotia Amsterdam is the drawee. Goods are shipped by exporter Halse Chemicals and necessary documents are obtained and presented at the agreed time to the bank in Amsterdam. JP instructs the BNS Jamaica (issuing bank) to issue an irrevocable credit. In a typical arrangement. Documents are shipped to Scotia Centre. Depending on the size/type customer JP’s collection order will be prepared with instructions DP (documents against payment) where the importer must make payment before retrieval of the collection order used for small clients and DA (documents against acceptance) for large credit customers.

6% compared to the average of 2009. central banks. Private trade insurance. investment management firms and investors are provided the opportunity of buying. United States dollar (US$) and Euros (€).3% of JP’s 2010 revenues were reported as euro denominated and given the euro faced the most significant decline in the average 2010 rate of 5. JP generated a 5. Based on inspection of the company’s annual report 2010. Approximately 64. can be seriously affected by adverse movements in exchange rates. commercial companies. selling and exchanging currencies across different exchanges (Archer. transaction and economic. Thus the company faces foreign currency exposures namely translation. This reduction was heavily influenced by the impacts of the depreciation of all three of its major foreign currencies relative to the Jamaican dollar which are the euro. the company was largely exposed to the stated accounting risks. US dollar and pound sterling. Short to medium term financing for export schemes and Negotiation of bills drawn under documentary credit. JP has a multinational company involved in international trade.6% in total revenues of $5.91 billion relative to 2009. transaction . Other Banking Services include TRADEXPRESS elite which is an electronic service offered by Scotia Jamaica.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 37 BNS to wire funds from their account to an exporter’s account having provided the bank with the beneficiary’s banking information. Examination of the Foreign Exchange Market The Foreign Exchange Market is the world’s largest financial market which assists in international trade and investment by enabling the conversion of currency where participants such as banks. The company is exposed to foreign currency risk on transactions that are denominated in currencies other than the Jamaican dollar. The main currencies giving rise to this risk are the Pound Sterling (£). 2010).

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 38 and translation. In the export of ripe bananas to one of JP’s large customer. Citi-bank Jamaica. Applying the concept of hedging through the use of Derivatives Forward Contracts A Forward Contract is a binding agreement between a bank and its customer for purchase or sale of a specified amount of a particular foreign currency at an agreed future date. the future date at which the contract will be settled is fixed as opposed to option forward contracts which allow for the settlement date to be executed any time within the contracted period. These contracts are used to. JP is . US distributor Kompass Traders. Through its main international trade financing institution. The company manages this risk via use of an internal technique for hedging transaction exposures named a “Natural Hedge” or “Matching”. namely Fixed Forward contracts and Forward Option Exchange contracts. despite the expense of the foreign interest rate in comparison to the cost of Jamaican debt financing. by matching the debt payments to expected revenues in the euro. This occurs where JP subsidiaries in Europe borrows in that foreign currency to finance its operations. the company enters into a FRA with its main international trade bank Citibank. a) hedge payments and receipts denominated in foreign currencies and. For fixed forwards. at a rate of exchange determined at the time the contract is made. JP is offered two types of Forward Contracts. b) hedge the translation of foreign earnings for presentation in group consolidated financial statements. JP Jamaica will reduce its foreign currency exposure.

This is determined using the following formula p = (1 + Rf/m / 1 + Rd/m)n*m – 1. Premium = (1+. 2012 @ 1. The bank derives its forward rate by determining a premium/discount to reduce its risk as a result of subsequent changes in exchange rates.061665 We then use the formula F = Spot Rate(1+p) F = $86. where rf = JMD prime rate at 6.12(1+.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 39 contracted to export the following monthly orders according to the below details. To calculate the monthly figure.43 Therefore the shipment of banana chips values 1000*US$1000 = US$1000. where m equals the number of months and n equals the number of years. iii. i. JP wishes to eliminate the foreign exchange exposure in this transaction therefore the Citibank client representative and the head of JP’s export division on January 26. 000 Using the one month forward rate at the end of April JP will trade the US$ for JMD = $91.000.25% and rd = US prime rate at .000 per case. 1000 case of Tropical Snacks April 30. each rate is compounded monthly.25%.000 = JMD$91.430.000.061665) = $91. Using this approach we illustrate the general principle that forward rate is derived from the spot rate and interest rate differentials.0025/12)*12-1 = 0. 556. ii. then JP at the end of April would receive $80. 2011 agree to lock into a fixed forward rate.000 (JMD * sales revenue) Futures A futures contract similar to a forward is an agreement to exchange one currency for another at a specified date in the future at an agreed price known as the exchange rate which is . iv.43 * USD$1.0625/12/1+. If JP had not entered into the FRA and the JMD had appreciated against the USD up to $80.

000 on January 1. translation of JP’s assets/liabilities.000. Foreign Exchange Risk Derivatives such as FRA’s and futures are used in the financial market as a means of hedging against various financial risks such as foreign currency exposures and interest rate risk. Without the use of such derivatives.000 worth of futures contracts expiring on January 1. Transaction Exposure on the other hand arises out of normal international trading activities. The current exchange rate implied by the futures is $114. If exchange rates change since the prior reporting period. JP can thus lock in this exchange rate by selling €1. Translation exposures arise from the revaluation of balance sheet items using the quoted rate of exchange at a balance sheet date. In JP’s case. 1977). the firm suffered translation losses as a result of the appreciation of the JMD (Brear.2/€ regardless of exchange rate fluctuations in the meantime.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 40 fixed on the purchase date but gives the investor the option of exiting the obligation by buying or selling the currency prior to the contract's delivery date.2/€. 2011. hence un-hedged . These contracts could be applied to JP has a Netherlands based business who will receive €1. In this way. JP has an exporter to Europe invoices in both the sterling and euro. revenues/expenses that are denominated in foreign currencies such as the euro and pound sterling will result in the entity reporting a foreign exchange gain or loss. 2011.000. the company suffers translation and transactional risk related effects where Translation effects are the effects of fluctuations in exchange rates and their impacts on the consolidated accounts of a company that has businesses that report in different currencies. the company is guaranteed an exchange rate of $114.

. the volatility of exchange rates between the purchase and settlement date of the contract will similarly impact the value of the associated foreign currency cash flows. Another type of exposure considered under the foreign exchange market is Economic exposures. financial statements were translated using UK£139. 1977).81. earnings and foreign investments. This relates to the impact of unanticipated changes and fluctuations in exchange rates on the firms cash flows. Therefore the book value of fixed assets for JP foreign subsidiaries would be reported at a lower Jamaican dollar value in the groups consolidated accounts at the end of 2010.80 as opposed to 2010 that was translated using UK£130. Companies like JP who hold operations in more than one currency are exposed to this type of risk which is hedged with the use of holding positions in the forex market. Additionally the act of invoicing in the foreign currency will also be impacted as contracts at their maturity date will be worth less than originally slated and hence invoiced amounts will fall (averaged) to the value of the exchange rate as of the income statement reporting date (Brear. JP’s accounts receivable associated with a sale denominated in Euros or the obligation to repay a UK pound sterling debt was exposed to the appreciation of Jamaican currency.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 41 contracts will be exposed to devaluation/appreciation of these currencies. leading to currency gains and losses. For example. Thus. The JP Annual Report 2010 indicated that at the end of 2009. A typical transaction exposure will result from transactions that give rise to the realization of contractually binding future foreign currency denominated revenues.

the price of a bond before JDX was $920 with a face value of $1000 and that the annual coupons are $100 or 10% coupon rate with 10 years remaining until maturity. JP and other companies make strategic plans with the expectation of the return from these investments.38% After JDX the coupon rate is adjusted to 8% and the years to maturity adjusted to 15 years the new YTD would be 8. These plans would now be adversely impacted as the present value of projected earnings would be reduced. Domestic holders of government securities such as JP would therefore be impacted as the present value of projected earnings from interest income would be less than expected. I is the interest or coupon rate. Given the following assumption. longer maturity coupons. The initiative required an exchange of high interest.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 42 The impact of recent macro-economic phenomena on JP The Jamaica Debt Exchange and its impact on JP The JDX was implemented in 2010 by the government of Jamaica in an attempt to reduce the general level of public debt interest payments. To assess possible impacts of the JDX on JP we observe the results of changes in the specific terms of the government’s policy with regards to holders of GOJ bonds. . M is the face value of the bond. Using the formula below we calculate the change in the yield to maturity on a GOJ bond held by JP as a result of the JDX requirements. Using the formula the YTD before JDX would be 11. YTM = 1+(M-P0)/n / (M+ P0)/2 where YTM is the yield to maturity on a bond. Given the assumption that government securities are the most secure form of investment. short maturity debt instruments for lower interest.99% with annual coupon payments of $80 instead of $100 hence reducing expected interest income by $20. Po is Price of bond and N is Years to maturity.

FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 43 The Appreciation of the JMD and its impacts on JP Appreciation of the JMD occurs when it takes less Jamaican dollars to purchase foreign currencies such as the USD. The crisis if not handled well will have rippling domino effects on other members of the European Union such as Netherlands and UK. The European Sovereign Debt Crisis The European Sovereign Debt Crisis is an ongoing financial crisis caused by rising government debt levels. This would result in a devaluation of the Euro against the JMD which will result in the before mentioned effects of an appreciation of the Jamaican currency. monetary infleility and general loss of confidence in the Euro zone which includes countries such as Greece. Transaction effects between the foreign currencies value on the date of the commercial contract versus the date of conversion of the receivables into Jamaican equivalent hence a loss on exports and a gain on imports (Affairs.g. GBP and the Euro e. The afore mentioned countries constitute over 60% of revenues reported by JP and as such the consequences of a collapse of the euro zone may lead to failure of JPs business due to the high market concentration in Europe. JP could be impacted from both a fall in customer demand as a result of a European economic downturn and weakened confidence in the European economy. an increase in the cost of exports could lead to a reduction in the demand for JP exported products and hence reduction in revenues. trade imbalances. the inability to realize possible investment income from positions held in European . Portugal and Italy. Another effect relates to the Translation exposures impacting the company’s financial statement such as a gain on the net liabilities position and a loss on the net asset position. In addition. in JP’s case 2009 versus 2010 UK£1 to J$. 2009). Spain. This led to a reduction in operational cost as a result of cheaper imports. In addition.

. increased opportunities for joint ventures and co-production with EU firms. diversification of exports and increased value added and duty free / quota free access to large EU Markets. credit risks and default risks (United Overseas Bank Limited. expanded market access in the EU for CARIFORUM goods and services. In this review.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 44 securities as a result of country risk. The EPA may also adversely affect Jamaica as a country in general and JP subsequently as several challenges may be experienced due to. international trade concepts have been applied to JP and the effects of various facets of the literature has been examined to identify the practical relations of the theories learnt. The Economic Partnership Agreement The EPA is set to create preferential treatment in trade for least developed countries through the removal of trade barriers and the implementation of a Free Trade Area between countries in the EU and Caribbean countries including Jamaica. inability of JP’s products to meet international recommended standards due to technological advanced production techniques of which JP is unable to conform to and increased foreign transaction exposures related to credit customers. Conclusion As a multi-national entity involved in international trade. 2010). enhanced competitiveness with the adoption of higher standards. Therefore the benefits accrued to JP includes but is not limited to. This creates opportunities as well as challenges which must be monitored by management in an attempt to remain competitive. interest rate risk. increased competition for banana related exports and other items produced from competitors in Latin American countries. Jamaica Producers Group forms a part of the global business environment.

globalization. International trade and business is now more open as a result of Trade liberalization.FINANCE OF INTERNATIONAL TRADE – ANALYSIS OF JAMAICA PRODUCERS GROUP 45 Jamaica Producers in this regard is both exposed to various types of risks related to the financial market as well as opportunities created by the various bodies in international trade such as the WTO. advanced transportation and increases in technology. There exists cost and benefit factors which can be carefully measured in determining the position of the company with regards to business feasibility and this project will highlight the application of international trade within the context of Jamaica Producers Group . Jamaica Producers Group participates in international trade involving the 6th and 7th largest international trading countries in UK and the Netherlands and also locally exports to regional Caricom countries.

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