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Posted on 16th February 2017
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While reading this BBC new report, I started off feeling sympathy for Rolls Royce, but then I thought about it for a couple of seconds.
Rolls Royce (the aero-engine manufacturer, not the car maker) has reported a record loss of £4.5bn. Part of this (£671m) was to settle corruption cases with UK and US authorities , but the remainder is due to "currency related contracts".
It is usual in their business for contracts to be agreed in US$, or sometimes even in the currency of the end-customer, which can lead to shortfalls in revenue when the invoices are paid.
Everyone knows that the British pound went into a slide against other currencies, mostly because of the Brexit referendum, but there is a standard financial technique for dealing with this: currency hedging. This involves buying foreign currency, or options on foreign currency, when you agree contracts in those foreign currencies, to protect against exchange rate variations. Companies can either do this themselves, or pay to use a service (provided by banks and other financial institutions). It is not complicated!
So, the real question here is, why didn't Rolls Royce do this? Are the management really that stupid? I think that the £4.4bn loss due to such poor financial management should be, at least in part, recovered from the bonuses and salaries of senior management; then maybe there will be less such stupidity in the next financial year.