I.

Background of the Case

There are many different areas in which Global Marine operated, the primary ones were Exploring
and Producing, Chemicals, and Marketing and Refining. A separate division called Marine served all
crude-oil transportation needs for the company.

A recent review of world oil markets had prompted a discussion about the firm’s need for new
tankers.The general belief was that declining U.S. domestic production would increase reliance on
Middle Eastern oil. If this scenario came true, the demand for VLCCs would increase dramatically over
the next 10 years, because these vessels were used for transporting crude oil over the long distances
from Saudi Arabia or Kuwait to the United States.

At present, Global Marine operated a fleet of 10 VLCCs, all constructed between 1978 and 1983.
Because the useful life of these vessels was approximately 20 years, all or most of them would probably
be retired by the early 2000s.

The ability of the shipbuilding industry to meet the expected increased demand was suspect.
Worldwide, in 1982, 32 shipyards were capable of building this type of vessel, but by 1998, only an
estimated 10 remained, all of which were in Japan or South Korea. (Exhibit 1 summarizes trends in the
shipbuilding industry.) Not only had the number of shipyards declined, but also—and more to the point
—the number of available building berths. The production capacity of 110 ships per year in 1982 had
fallen to 20.1 Given the capital and the long lead times necessary to bring new production facilities on
line, supply seemed unlikely to catch up with demand in the next 5 to 10 years.

Global Marine had done some preliminary analysis of how to meet its expected needs for VLCCs. The
option of leasing had been explored, but it raised a basic question about availability. In a few years, ships
might not be available to lease. An additional consideration was safety. Overall, the general level of
maintenance of ships available for charter was not expected to be up to the company’s standards.

II. Statement of the problems

1. How to meet an expected demand for a new VLCC?

2. Provided that hedging of currency risk is not an issue at global marine. Does it necessary to use
currency options to hedge the risk?

3. How who they mitigate currency risks?

III. Presentation of data

1. a. Raising the skill level of the workforce and also worker numbers.
 b. Optimise their production towards distillate fuel oil.

2. They need to hedge the currency risk to benefit form owning of fund. And It is a way for a firm to
minimize or eliminate Foreign currency risk and used in limiting or offsetting probability of loss from
fluctuations in the prices of commodities or currencies

3. These risks can be mitigate through the use of hedged exchange-traded fund or by the individual
investor using various investment instruments, such as Exhange- traded funds, currency forwards ,
futures or options.

a. Hedge the risk with specialized Exchange-Traded funds- There are many exchange-traded funds (ETFs)
that focus on providing long and short exposures to many differemt currencies.ETFs that specialize in
long or short currency exposure aim to match the actual performance of the currencies on which they
are focused.

b. Use for Forward Contracts- Currency Forward contracts are another option to mitigate currency risk. A
forward contract is an agreement between two parties to buy or sell a specific asset on a particular
future date, at one particular price. These contracts can be used for speculation or hedging.

c. Use Currency Options- Currency options give the investor right, but not the obligation, to buy or sell a
currency at a specific rate on or before a specicific date. They are similar to forward contracts, but the
investor is not forced to engage in the transaction when the contract's expiration date arrives.

IV. Conclusion and Recommendation

Foreign Currency risk exposure refers to changes in the currency rate that influences the firm's value.
The reason for the insignificant relationship due to larger firms gedging activities which is to reduce the
exposure is not considered in this study. Furms are able to mitigate the foreign exchange exposure
through netting or matching tools. Furthernore, the gain or loss from foreign sales or receipts can be
netted off against foreign costs or paymentsbwhenbthose transactions are donebin the same currency.

The study also discovered that the magnitude and size of exposure varies across the currencies. Most
firms basically have greater exposure to the US dollar and Japanese Yen, which might be due to the fact
that the United states and Japan are one of trade business partners. Furthermore foreign trading
activities are mainly contracted or denominated in U,S. Dollar and some in Japanese Yen. Therefore, if
the U.S. dollar currency changes significantly, then this will directly affect the firms value through the
trade flow impact. Besides that, firms in tradable sectors are more sensitive to change in the exchange
rate compared to non-tradable firms. This is because of the nature of the business as the tradable sector
is assumed to be actively engaged in export and import.
 Besides that, the time variation of exposure across sample is also reflected in the adaptability of firms
to exchange rate risk. Nevertheless, the foreign exchange rate tends to be more volatile during crisis
compared to the normal period due to economic uncertainty that consequently increase the foreign
exchange risk exposure.