AMME 5105Risk Analysis Major Project

An analysis of Apple Inc. risk

Group 6 management practice & the
Nathan R Mardira 440019648 effect of its geographical
Damario Wijaya 440005283 operation location
Johannes Putra 440025524
Echo Zhao 450538272
Yee Man Peony Tam 440523857
Haijiang Yang 440022729
Contents
Overview on Apple

Foreign Exchange Risk

Supply Chain Risk

2
 Introduction
This project is about Analysis of Apple Inc. Risk Management Practice & The effect of Its
Geographical Operation Location. The goal is to understand the company risk
management structure. This has been done by examining into two parts: Foreign exchange
risk and the supply Chain Risk.
Apple is an American multinational corporation that designs and produces products for
computer software and electronics. It is also one of the biggest companies in the world.
Apple was found by Steve Jobs, Steve Wozniak and Ronald Wayne in April 1976. The
company’s best-known hardware is Iphone, Ipad and Macbook. In 2017, there are 502
apple stores in 24 countries.
Since Apple has a lot of store around the world, it would be important to understand if the
strength of the US dollar or the foreign exchange market has impact on the company’s
financial performance going forward. For different currency would also affect the total
profit for Apple. Even though Apple might have applied some policy to against this issue, It
is still valuable for us to investigate this situation for a company.
The second part of the project is Supply Chain Risk. This includes the Environmental Risk
and Physical Plant Risk for apple company. Most of the supply for Apple products are from
oversea. That would lead to the supply chain management. In order to understand this
situation, it has represented the solution and recommendation in this report.
 Brief overview on Apple Inc. as a
company
At the end of 2017,
Apple has got 502 A multinational corporation
stores in 24 countries based in Cupertino,
California

Apple’s revenue for Designs and produces

2017 was US$ 229.234 electronics and
Billion computer software

Found by Steve Jobs,

As of 2017, Apple Steve Wozniak, and
employs approximately Ronald Wayne in April
80,000 people 1976
Contents
Overview on Apple

Foreign Exchange Risk

Supply Chain Risk

5
 Foreign exchange volatility causes risk
exposure for Apple, Inc.
As the Chinese market
Apple Inc. Revenue by Geographical Location accounts for 25% of Apple’s
sales, the performance of
USD/CNY severely affects the
company
China
25%
Apple’s revenue is severely
International exposed to any movements in
Domestic Revenue
Revenue 65%
FX rates against USD
35% Rest of the
World
40% Apple may be forced to raise
prices during unexpected
fluctuation

Apple uses derivative instruments such as

FX forward contracts and options
A case study on FX exposure with apple
products

iPhone X is EUR/USD trading Gross revenue for

currently priced at at around 1.17 Apple = 1.17 * 1159 =
1159€ in France USD 1356.03

If EUR/USD drops to 1.07, then

Apple’s revenue is now = 1.07 * 1159 = 1240.13

Strengthening USD reduces Apple’s revenue

by USD 116.1 per iPhone X sold

Weakening USD increases Apple’s revenue in

USD and vice versa
 Impacts of weaker foreign exchange

Adversely affects Generally leads the Margin on sales in For competitive

the U.S. dollar value Company to raise foreign countries & reasons, local price
of the Apple's international sales of products may not be raised
foreign currency- pricing, potentially with component fully, or at all. This
denominated sales reducing demand from foreign weakens earnings
and earnings for the Company’s suppliers can be from local sales
products. adversely affected
by FX rate
Impacts of stronger foreign exchange

Beneficial to sales Could cause Increase cost of

and earnings company to reduce component,
international affecting gross
pricing, and incur margins
losses on Apple's FX
derivative
instrument.
Apple’s hedging practices to protect gross
margin

Subsidiaries with USD as Hedges a portion of their forecasted foreign currency

functional currency revenue

Subsidiaries with non-

USD as functional Hedges a portion of their inventory purchases
currency

Using foreign currency forward contracts to “lock in” FX

Forward Contracts rates for a period of time

Contract Duration 3-12 months

Potential pitfalls from using forward
contracts as a hedging method
 The effectiveness of the hedging method
Apple’s detailed risk management is the company’s secret, however insights could
be found on the effects of Apple’s FX risk management policy:

• In 2015, Stifel Financial Corp

evaluated that the company
saved $4.1 B from their
hedging strategy

• Profit/loss from hedge is

expected to have a degree
of correlation with USD/CNY
since most of Apple’s foreign
revenue comes from China
 The effectiveness of the hedging method

6.9 4,500.00

6.8 4,000.00

6.7
3,500.00

6.6
3,000.00

6.5
2,500.00 Gain/Loss from
FX contracts
6.4
2,000.00
6.3
1,500.00
6.2 USD/CNY

1,000.00
6.1

500.00
6

5.9 0.00
2013 2014 2015 2016 2017

5.8 500.00
Incorporating FX options as a
recommendation
Options give the company the right to buy(put) or sell(call) foreign
currency at a fixed rate in the future. The time frame of the options
contract is fixed, and the company is not obligated to exercise buy/sell
right
Example : Apple is expecting future revenue of CNY 1B. Current
USD/CNY rate is 6.35. If USD strengthen to say 6.55, the company
will loose around USD 4,808,559. The company can buy an
exercise a call option at an exercise price of say 6.45, and the
company can hedge the loss to “only” around USD 2,441,555.

If USD weakens, then Apple can let the option expire.

There are premiums for every option contracts and it should

be taken into consideration.
Contents
Overview on Apple

Foreign Exchange Risk

Supply Chain Risk

15
 Environmental risk in the supply chain
 Caused by risks from outside of the
 Solution:
supply chain itself involving
economics, social and governmental
issues
 Example: Product Stewardship
 A number of large scale plants
shut down due to releasing
pollutants to open waters.

Process Stewardship
 Regulation risk in the supply chain
 Caused by the condition of a
supplier’s physical facility and  Solution:
regulatory compliance.
 Example:
 Violations of labor policies for suppliers
Provide community
 Falsifying work hours data education program to
 Employees forced to pay excessive fees
for a job
empower workers
 Caused by
 High demands, last-minute changes,
large orders in short timeframes

Identify and address the

root causes of the risk
Conclusion
 Risks are prevalent in a multinational company with
different geographical locations

 Exposure to foreign exchange and supply chain risks

could be detrimental to Apple’s operation

 YOY revenue increase shows that their risk

management practices (hedge) are successful