The economic consequences of Brexit (Vol 2)
Discussion
BBC is saying the hedging losses amount to 4.4bn, long term contracts taken out long before the referendum was even a twinkle in Cameron's kneecaps, based on the then premise that the US dollar would fall in value. What's happened is that the £ has fallen in value, not by the real equivalent of 4.4bn, but apparently by that amount in comparison to the point where they thought the dollar would be, but isn't in reality.
Not well explained I admit, best I can do at the moment.
Not well explained I admit, best I can do at the moment.
fblm said:
What a great experience (I hope)
it was indeed . unfortunately the return of ayatollah khomeini and an alcoholic mother meant the great experiences were in short supply for a long time afterwards .my life in iran is one reason i am a big advocate for equal opportunity for all regarding education .i can remember teachers in the first scottish primary school i attended on our return to the uk looking at me like i was an alien when they found out i could speak a fair amount of conversational french as a 10 year old,i could also hold a conversation in farsi as all my friends outside school in iran bar the americans next door were iranians.
the scottish education system soon knocked that nonsense out of me though
apologies for the off topic post op.
El stovey said:
Sway said:
Google is suggesting those fines came to c.£650M, was there more?
The vast majority of the losses were due to the GBP dropping against the USD. Had the pound soared, or dollar fallen, they'd have been lauding themselves as very smart cookies.
It's f
k all to do with Brexit directly.Sway said:
Google is suggesting those fines came to c.£650M, was there more?
Doesn't look like it... I thought the sum was bigger and part of the 4.4bn. Apparently not. Underlying profits down by half and fines. But their hedging strategy being the main culprit.
A good time to bring out bad news? Make everyone think it's all Brexit and/or Trump's fault when actually it looks like bad strategy/incompetence on hedging...
Sway said:
El stovey said:
Sway said:
Google is suggesting those fines came to c.£650M, was there more?
The vast majority of the losses were due to the GBP dropping against the USD. Had the pound soared, or dollar fallen, they'd have been lauding themselves as very smart cookies.
It's f
k all to do with Brexit directly.So yes it was a one way long term bet that went down the tubes.
The problem they have is that most of their revenue comes in dollars, but most of their expenses are in GBP. So they're always hedging one way.
Murph7355 said:
Just had a quick look out of amusement.
Looks like they hedged over 20bn (!!!) of income at $1.60 in 2013 for 6yrs.
Oh. Dear.
I wonder if the 4.4bn has backed them out of that fully, or if the pain will just keep on coming for a couple more years...
Yep it was running at 1.60 early in 2013, dropped a bit later in the year, rose well above in 2014, already down to below 1.40 before the referendum. At that point they'd already flushed 2.5 billion on the bet, guessimetric beer mat calcs.Looks like they hedged over 20bn (!!!) of income at $1.60 in 2013 for 6yrs.
Oh. Dear.
I wonder if the 4.4bn has backed them out of that fully, or if the pain will just keep on coming for a couple more years...
FiF said:
Yep it was running at 1.60 early in 2013, dropped a bit later in the year, rose well above in 2014, already down to below 1.40 before the referendum. At that point they'd already flushed 2.5 billion on the bet, guessimetric beer mat calcs.
They were evidently betting that the US economy would tank, the Fed would keep interest rates at basically zero and print loads of money trashing the USD.As it turned out, the US economy did OK, the Fed raised interest rates and stopped printing so much money so the USD has strengthened against everything.
The USD is up against everything - it is nearly 10% up on the Euro from early 2016 so even without Brexit they'd have been screwed.
FiF said:
Yep it was running at 1.60 early in 2013, dropped a bit later in the year, rose well above in 2014, already down to below 1.40 before the referendum. At that point they'd already flushed 2.5 billion on the bet, guessimetric beer mat calcs.
It peaked at 1.71, and was only over 1.60 for a max of 12mths before going under that towards the tail end of 2014. Any sane person has to agree with you - Brexit cannot be blamed for their hedging strategy being poor 
In the 4yrs before they put the hedge in place the rate looked to have been below 1.60 as much as above. Pre 2008 was different...
Whoever decided to enter these Fwd agreements should be shot. It's fx for dummies to know that you shouldn't go 6 years fwd and if you did you's be selling USD only at historically low rates not normal to high.
For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
Burwood said:
Whoever decided to enter these Fwd agreements should be shot. It's fx for dummies to know that you shouldn't go 6 years fwd and if you did you's be selling USD only at historically low rates not normal to high.
For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
That's bonkers. The USD has only spiked above 1.6/GBP a few times for short periods since 2009. RR were basically saying that they considered there was a high risk that it would be significantly above 1.6 for the next 6 years. I can't believe you'd find many people who would have agreed with them even at the time.For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
Burwood said:
Whoever decided to enter these Fwd agreements should be shot. It's fx for dummies to know that you shouldn't go 6 years fwd and if you did you's be selling USD only at historically low rates not normal to high.
For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
There must be some error here. You have explained the issue in a way I can grasp it completely. Without even so much as a diagram, let alone a smack to the side of my stupid head.For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
Have you 'phoned RR yet? Someone should.
Heres the curious thing. Years ago they wouldn't have had to report this 'loss'. Just a note in the accounts. Prior to that not even a note in the accounts. Are RR worse off? Not really. They still have their 1m quid for every 1.6MUSD which i can only assume, they are ok with. Of course they'd be better off had they not hedged. But the company will tell the shareholders that there is no impact. That is cobblers because think how more competitive they would be with 25% more margin to play with(fx move). They would hurt GE and win more business. All you will see is a circa 150M+/- in their books for every 1 cents change in the USD/GBP going forward (until these contracts expire).
Their Finance Director should be shot and i think he was....Rolls-Royce said Mr Smith (FD), who joined the group in January 2014 and was promoted to finance director in November that year, was leaving to pursue other interests.(sept 2016)
Their Finance Director should be shot and i think he was....Rolls-Royce said Mr Smith (FD), who joined the group in January 2014 and was promoted to finance director in November that year, was leaving to pursue other interests.(sept 2016)
Digga said:
Burwood said:
Whoever decided to enter these Fwd agreements should be shot. It's fx for dummies to know that you shouldn't go 6 years fwd and if you did you's be selling USD only at historically low rates not normal to high.
For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
There must be some error here. You have explained the issue in a way I can grasp it completely. Without even so much as a diagram, let alone a smack to the side of my stupid head.For those that find it a bit complex. The basics are that RR sold future USD revenue at 1.6/GBP (ignore the precise fig). So they receive 1.6M say in USD and that is agreed to be worth 1m gbp. (1.6M/1.6fx) today we see 1.25 so RR must sell that same 1.6M use for 1m gbp (the rate they agreed earlier)but at 1.25 that 1.6M would be worth 1.28M gbp. Now scale that up to 30B USD and we can see that the loss is huge (5.25B gbp loss)
Have you 'phoned RR yet? Someone should.
While I have not looked at the details I wonder if this is a result of moving from IAS 39 to IFRS 9.
Burwood said:
20 years hedging either at banks or at PWC accounting for it including making these vary calculations so FDs can get the notes in their accounts correct, says I'm correct but it's ok you think otherwise MrT
So based on this post you agree it was a change from IAS 39 to IFRS 9?Burwood said:
Heres the curious thing. Years ago they wouldn't have had to report this 'loss'. Just a note in the accounts. Prior to that not even a note in the accounts. Are RR worse off? Not really. They still have their 1m quid for every 1.6MUSD which i can only assume, they are ok with. Of course they'd be better off had they not hedged. But the company will tell the shareholders that there is no impact. That is cobblers because think how more competitive they would be with 25% more margin to play with(fx move). They would hurt GE and win more business. All you will see is a circa 150M+/- in their books for every 1 cents change in the USD/GBP going forward (until these contracts expire).
Their Finance Director should be shot and i think he was....Rolls-Royce said Mr Smith (FD), who joined the group in January 2014 and was promoted to finance director in November that year, was leaving to pursue other interests.(sept 2016)
You are also correct RR have made an opportunity loss. However, you’re missing the point. RR sell a lot of products on long term contracts to the USD which I am sure are fixed price in USD, also all of their main competitors are US based. So as a UK company with a significant GBP costs what is better the certainty of profit as an Aerospace company or the risk becoming a company dependant on FX rates.Their Finance Director should be shot and i think he was....Rolls-Royce said Mr Smith (FD), who joined the group in January 2014 and was promoted to finance director in November that year, was leaving to pursue other interests.(sept 2016)
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