Full Answer Section

Contribution of Foreign Operations to Parent Firm’s Profits

Apple has two of its largest foreign operations in China and the European Union. In 2022, China accounted for 25% of Apple’s total revenue, and the European Union accounted for 24% of Apple’s total revenue.

Apple’s foreign operations make a significant contribution to the company’s profits. In 2022, Apple’s foreign operations generated $206 billion in revenue, which was 60% of the company’s total revenue. Apple’s foreign operations also generated $103 billion in net income, which was 65% of the company’s total net income.

Hedging Against Exchange Rate Risk

Apple uses a variety of means to hedge against exchange rate risk. One common hedging strategy is to use forward contracts. A forward contract is an agreement to buy or sell a currency at a predetermined price on a future date. Apple can use forward contracts to lock in the exchange rate for its future revenues and costs.

Another common hedging strategy is to use currency options. A currency option gives the holder the right, but not the obligation, to buy or sell a currency at a predetermined price on or before a certain date. Apple can use currency options to protect itself against unfavorable movements in exchange rates.

Effect of Changes in the Dollar’s Exchange Value on the Firm’s Profitability

Increases in the dollar’s exchange value can have a negative impact on Apple’s profitability. When the dollar rises in value, Apple’s foreign-currency denominated revenues are worth less in US dollars. This can lead to a decrease in Apple’s revenue and profits.

Decreases in the dollar’s exchange value can have a positive impact on Apple’s profitability. When the dollar falls in value, Apple’s foreign-currency denominated revenues are worth more in US dollars. This can lead to an increase in Apple’s revenue and profits.

Conclusion

Apple is a US multinational company that prices its revenues and costs in multiple currencies. The company has two of its largest foreign operations in China and the European Union. Apple’s foreign operations make a significant contribution to the company’s profits.

Apple uses a variety of means to hedge against exchange rate risk, including forward contracts and currency options. Increases in the dollar’s exchange value can have a negative impact on Apple’s profitability, while decreases in the dollar’s exchange value can have a positive impact on Apple’s profitability.

Additional Thoughts

In addition to the obstacles mentioned above, there are a number of other challenges that Apple faces in managing its currency exposures. One challenge is the volatility of exchange rates. Exchange rates can fluctuate wildly, making it difficult for Apple to predict the future value of its foreign-currency denominated revenues and costs.

Another challenge is the complexity of the global financial system. Apple has operations in over 200 countries, each with its own currency and financial system. Managing currency exposures across such a complex landscape is a daunting task.

Despite these challenges, Apple has been successful in managing its currency exposures. The company has a team of experienced currency risk managers who use a variety of hedging strategies to protect the company from unfavorable movements in exchange rates.

Example of Apple’s Hedging Strategies

In 2018, Apple used a combination of forward contracts and currency options to hedge against its exposure to the Chinese yuan. The company entered into forward contracts to sell Chinese yuan at a predetermined price in the future. The company also purchased currency options that gave it the right to sell Chinese yuan at a predetermined price on or before a certain date.

These hedging strategies helped Apple to protect its profits from the decline in the value of the Chinese yuan in 2018. As a result, the company’s revenue and profits from China were relatively stable despite the volatility in the exchange rate.

Conclusion

Apple is a global company that faces a number of challenges in managing its currency exposures. However, the company has a team of experienced currency risk managers who use a variety of hedging strategies to protect the company from unfavorable movements in exchange rates.