CHAPTER 1: MULTINATIONAL FINANCIAL MANAGEMENT: AN

OVERVIEW
I. Multinational corporations: Coca-Cola
MNC is joint stock company, with at least 2 countries
II. Formation of multinational corporation
III. Goal of multinational corporation
- generally goal of enterprises: maximize the profit
- goal of MNC: maximize the value of the firm or maximize the value of shareholder ‘s
assets or maximize the wealth of shareholder
IV. Agency problems
- subsidiary pay dividend/ income to the parent company because subsidiary operates
independently
- in short-term, the MNC can pay more money to managers
- in long-term, issue stock to manager
V. Management Structure of an MNC
licensing => only sell the name
franchise => ngoài việc bán thương hiệu thì còn cung cấp nguyên vật liệu, sell the name and
supply manufacture
joint venture => chỉ góp vốn
VI. Theories of International Trade
- Theory of comparative advantages
- Imperfect markets theory:
- Product cycle theory
VII. International Business of MNC

CHAPTER 2: EXCHANGE RATE RISK MANAGEMENT

CHAPTER 3: MULTINATIONAL CASH MANAGEMENT
CHAPTER 4: MULTINATIONAL CAPITAL BUDGETING
CHAPTER 5: INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF
CAPITAL
CHAPTER 6: SHORT-TERM FINANCING
CHAPTER 7: FOREIGN DIRECT INVESTMENT AND CROSS BORDER ACQUISITION

UNILEVER
Unilever PLC (UL) is a consumer goods holding company headquartered in
the U.K. Through its subsidiaries, the company manufactures and sells
beauty and wellness, personal care, home care, nutrition, and ice cream
products.1

Unilever PLC. "Unilever Annual Report & Accounts 2022," Pages 156–158.
Unilever owns more than 400 brands in 190 countries. Some of those
brands include popular names like Dove, Vaseline, Lipton, Hellmann's, Ben
& Jerry's, Seventh Generation, and Sunlight.23

In order to compete in the highly competitive global consumer goods

market, Unilever has structured its business model around building
well-known, high-quality brands that consumers trust. Some of the
company's major rivals include Switzerland-based Nestlé S.A. (NESN),
Procter & Gamble Co. (PG), Johnson & Johnson (JNJ), PepsiCo Inc.
(PEP), and Colgate-Palmolive Co. (CL).

Key Takeaways
● Unilever is a global consumer goods company, offering beauty and
wellness, personal care, home care, nutrition, and ice cream
products.
● The Nutrition segment of the business generates the most revenue
but the greatest growth year over year was seen in the Home Care
segment.
● The company announced that it will be opening a new factory in
Ukraine in 2024 that will add 100 jobs.
● In 2023, the company announced that it will be purchasing Yasso, a
premium Greek frozen yogurt brand in the U.S.
Unilever's Financials
For its 2022 fiscal year (FY), Unilever reported a net profit of €8.3 billion, a
24.9% increase compared to the year before. Revenues, which the
company calls "turnover" and defines as sales of goods after deducting
discounts, sales taxes, and estimated returns, grew 14.5% to €60.1 billion.
Turnover, also referred to as "overall turnover," is a term for revenue
commonly used in Europe and Asia.14

Unilever's underlying sales growth (USG), which excludes the impact of

acquisitions, disposals, currency fluctuations, and excessive price growth in
hyperinflationary economies, was 9% compared to 2021. Operating profit
for the period, meanwhile, was €10.8 billion, up 23.6% from the previous
year.54
USG was driven by all sales groups and the improvement in underlying
operating profit was due to input cost inflation. The high global inflationary
environment, which increased prices, helped sales growth but did impact
volumes, which decreased by 2.1%.6

Unilever's Business Segments

Unilever has five main business segments: Beauty & Wellbeing; Personal
Care; Home Care; Nutrition; and Ice Cream. It provides a breakdown of
revenue (i.e., turnover) and underlying operating profit for each of these
segments, which we look at in closer detail below.

Beauty & Wellbeing

The company's Beauty & Wellbeing segment is comprised of sales of the
following products: hair care (shampoo, conditioner, styling), skin care
(face, hand, and body moisturizers), and includes Prestige Beauty and
Health & Wellbeing.1

For Fiscal Year 2022, turnover for the segment was €12.3 billion; a sales
growth of 7.8%. This segment contributed 20.4% to the total turnover. The
underlying operating profit (UOP) was €2.3 billion, making up 23.7% of the
total UOP.7
Personal Care
The company's Personal Care segment consists of the following products:
skin cleansing (soap, shower), deodorant, and oral care (toothpaste,
toothbrush, mouthwash).1

For Fiscal Year 2022, turnover for the segment was €13.6 billion; a sales
growth of 7.9%. This segment contributed 22.7% to the total turnover. The
underlying operating profit (UOP) was €2.7 billion, making up 27.7% of the
total UOP.7

Home Care
The Home Care segment is primarily comprised of sales fabric care
(washing powders and liquids, rinse conditioners), and a wide range of
cleaning products.1

For Fiscal Year 2022, turnover for the segment was €12.4 billion; a sales
growth of 11.8%. This segment contributed 20.6% to the total turnover. The
underlying operating profit (UOP) was €1.3 billion, making up 13.9% of the
total UOP.7

Nutrition
The Nutrition segment primarily consists of sales of scratch cooking aids
(soups, bouillons, seasonings), dressings (mayonnaise, ketchup), and tea
products.1

For Fiscal Year 2022, turnover for the segment was €13.9 billion; a sales
growth of 8.6%. This segment contributed 23.1% to the total turnover. The
underlying operaring profit (UOP) was €2.4 billion, making up 25.3% of the
total UOP.7

Ice Cream
The Ice Cream segment consists of sales of ice cream products.1

For Fiscal Year 2022, turnover for the segment was €7.9 billion; a sales
growth of 9%. This segment contributed 13.1% to the total turnover. The
underlying operaring profit (UOP) was €919 million, making up 9.5% of the
total UOP.7

Unilever's Recent Developments

In March 2023, Unilever announced a €20 million investment in a new
factory in Ukraine. Construction will begin in 2023 and the factory will open
in 202. It will be located in Kyiv, the country's capital. The factory will
manufacture personal care products and create one hundred jobs.8

In June 2023, the company announced its purchase of Yasso, a premium

frozen Greek yogurt brand in the United States. The brand will become part
of its Ice Cream segment and join other brands in the portfolio, such as Ben
& Jerry's, Magnum, and Talenti.9

Does Unilever Pay a Dividend?

Yes, Unilever pays a dividend. In 2022, it paid quarterly dividends that
totaled €1.70 for the year.

What Is Unilever's Business Strategy?

Unilever states that it aims for sustainable growth based on four strategic
choices:

● Building a high growth portfolio across its five business groups.

● Producing winning brands powered by superior products, innovation,
and purpose.
● Focusing and investing in key growth markets.
● Leading in the channels of the future, including ecommerce.10

What Is the Fastest-Growing Piece of Unilever's

Business?
Home Care was Unilever's fastest-growing category, with underlying sales
growth at 11.8% in 2022.4
How Has Unilever's Stock Performed in Recent
Years?
Over the five years ending July 17th, 2023, Unilever's stock has fallen by
8.14%.11

The Bottom Line

Unilever is a diversified consumer goods holding company. It makes its
money through the sales of products across a range of categories,
including beauty, personal care, and ice cream. This diversified portfolio
helps the company weather volatility and grow profits over time.

*
the highest risk that Unilever faced is high competition because
competitors have more differentiated products and declining demand for
the company product. The mitigation must be implemented to reduce the
loss. The company should monitor external market trends and collect
feedback from consumer, Implemented research and development function
to translate the trends, Regularly update business forecast of business
results and cash flows and rebalance investment priorities, and also
Flexible business model allows the company to adapt all portfolio and
respond to develop new offerings.

Introduction
This project reports on the need of to introduce and market its detergent
products in Brazil, the Northeastern region. Unilever is a multinational
corporation (MNC) located in European Union (EU). It is an Anglo-Dutch
company, which has two headquarters in London and Rotterdam in the United
Kingdom Netherlands respectively. This company product falls into three
broad categories. They include Unilever cleaning agents, beverages, and
personal care products. In 2011, Unilever was rated as the world’s largest ice
cream producer and third largest world consumer.
 Learn More
Unilever Company controls 81% of detergent market shares in Brazil. In this
market, detergents products are presented in three brands. They include
Campeiro, Omo, and Minerva. Unfortunately, this dominance does not extend
to the North East region. This scenario is associated with poverty, which is
high in this region compared with other regions. Selling of detergents in the
North East region of Brazil by Unilever remains a challenge, calling for the
adoption of an international business method that will help capture the North
East market.

Selling the detergent product in the North East region, the identified MNC
should use the product line extension method. This is the method in which a
company uses an already established product brand name to introduce a new
item of a similar product. Considering the two brands of detergents introduced
in the Brazilian market (Omo, and Minerva), Unilever can make an extension
of these products. Extending the Minerva product will help the company
increase visibility and maintain the original Omo quality. An extension is better
than repositioning top products, which is likely to lead to a company losing its
loyal customers. Extension becomes helpful where more than one brand of
products is available in the market. In addition, extension is known to favor a
product that has good market penetration.

Assessing Country Factors that will affect the Demand

for the Product
A country’s internal and external factors are vital in determining the demand
for a product. There is a range of factors, which range from an individual to the
government determining a product demand. This paper reports on Brazil’s
government factors that affect the demand for Unilever detergents products in
the North East region.
As explained earlier, Brazil’s North East region is a low-income region. This
implies that the purchasing power in this region is weak (Reddy 45). The
government is forced to encourage both foreigners and local investors to
penetrate this region. In addition, most domestic industries in Brazil continue
to rely on imports making it hard for the government to develop trade
restrictions that would scare foreign traders.

To support the domestic industries, import duties have been reduced by an

average of 50%. Reduction of import duties is encouraging to an MNC
because it helps to produce goods at low costs. Cost-effective production is
essential for Unilever as it prepares to introduce its new product in North East
Brazil, a region of low income.

The Brazilian government also provides tax incentives in the North East region
to increase purchasing power. Removal of tax incentives in Brazil North East
region would heavily impact the locals than investors because most of the
occupants in this region are low-income earners.

Learn More
Assessment of government trade barriers in North East Brazil indicates that
the barriers will not hinder Unilever from introducing its’ new detergent
product. North East region requires the government to remove or lessen trade
restrictions to boost the economy of this region. Therefore, the MNC has favor
with the Brazil government trade barriers, making it easier to introduce its’ new
product in North East Brazil.

Using the Foreign Exchange Market

Brazil has adopted the freely floating exchange system. In this system,
exchange rates are determined by market activities. However, governments
can influence the exchange rates through monetary and fiscal policies.
Understanding currency exchange rate is vital for an MNC to understand a
country’s competitive level. In Brazil, the currency used is known as the Brazil
real (abbreviated as R$). By April 13, 2013, the U.S. dollar to Brazilian real
exchange rate stands at 1.992. This was an improvement from the previous
day, which stood at 2.018 (-1.26%). In addition, this exchange rate had also
increased from 1.830 (8.90%) a year ago.

From the above table, it is a clear indication that the U.S. dollar and Brazilian
real exchange rate have been appreciating in recent days.

By April 12, the Brazilian exchange rate was reported to be performing well in
the top trading partners. See the table below:

From the above table, the Euro is the most competitive foreign currency in the
international market. Fortunately, Unilever MNC uses the Euro as its main
foreign currency. Its reports and assets are presented and calculated in Euros.
In this case, Unilever has an advantage over other competitors that have a
different main foreign currency. However, this advantage cannot be expected
to last in the long- run. This is because Brazil’s exchange rates are designed
on free-floating exchange rate systems, which change day by day, depending
on the market and other government regulations. This risk can also be
minimized by making borrowing in local currencies of their trading partners.

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Using Exchange Market Derivatives

Unilever as an MNC is exposed to risks of the changing foreign currency
values. Changes in foreign currency values affect a company’s earnings. To
protect an MNC from this risk, hedging is essential. Unfortunately, Hedging is
not that feasible to prevent foreign exchange fluctuations risk. In addition, for
Unilever, it is believed that the Euro currency can equalize with other foreign
currencies in time. With this in mind, the company operates on prescribed
limits when trading on financial foreign exchange.

Hedging against payables is the best option for Unilever. In a money market,
hedges on payables are less expensive when the interest rate in a foreign
country is high (Madura 37). In Brazil, the interest rate of the Euro (main
Unilever foreign currency) is higher than both the Brazilian real and the U.S.
dollar. In addition, the Euro is the most competitive in the world’s top 10
trading partners. This implies that the Euro has a higher interest rate in most
markets in the world including the United States and Brazil markets.

Using the futures and options, it is revealed that the euro stands in the best
position of hedging against receivables. The Euro and U.S. dollar stands to be
the best and most valued future options globally. For instance, the current
futures and options of the Euro and U.S. dollar indicate that the foreign
interest rate is expected to remain high. The future options indicate that by
June 2013, the EUR/USD future options will open at 1.3120 and the highest
and low rates being 1.3132 and 1.3064 respectively. By September 2014, this
rate’s prior settlement is expected to be at 1.3169 (Chicago Mercantile
Exchange Group (CME) 1). Customers associate the EUR/USD futures and
options with numerous benefits. These futures and options are known to have
deep liquidity, easy to access around the world, demonstrate transparency
and integrity in their prices, and risk is catered for in clearing.

The future and options value of the Euro reveal that the interests of this
currency are increasing and changing with time. This is a benefit to Unilever,
which can hedge against its receivables in a prescribed time, with the hope of
an interest rate increase in the future. This will help the company increase or
maintain its profits in Brazil North East region market. The futures and options
on Euro currency show that the foreign exchange interests are constantly
going up than the previous days. For example, by July 2014, the EUR/USD
foreign interest rate will change by -0.0002. This implies that the rate would be
up by -0.02% than the previous days.

In this case, Unilever has an opportunity to hedge against payables, rather

than receivables. The U.S. dollar and Brazilian futures and options indicate
that the U.S. dollar is competitive in the Brazilian market. The Euro is more
competitive than the U.S. dollar, showing the need for Unilever to hedge
against payables. This kind of hedging can be strengthened by the company
making borrowings in the Brazil local currency. In addition, Brazil has a reliable
floating exchange rate system.

The hedging process by Unilever is not a guarantee to avoid the foreign

transaction exposure risks. This company can adopt other strategies that can
supplement hedging to prevent the exposure of foreign exchange risks. The
company can develop a well-integrated information system to help it evaluate
the market needs. Improvement of the sales promotion strategies can help the
company increase its profitability, rather than relying on foreign exchange
rates. In addition, the company can utilize the opportunities provided by the
foreign government to introduce and benefit from its new product. For
instance, the Brazilian government encourages investors in Brazil North East
region by reducing restrictions, which can help compensate for the foreign
exchange risks.

Summary and Conclusions

The product line extension method is a suitable strategy for Unilever MNC to
use in introducing its detergents product in Brazil North East region. The
Company already exists in the Brazilian territory but is not well developed in
the country’s North-East region. Coupled with the government’s need to
develop the North-East region, Unilever has to introduce and expand its
product in this region. The North East, a region occupied by low-income
earners, requires the government’s motivation to increase investors’ activity.
This explains why the Brazilian government trade barriers are reduced. This
factor is vital for the operation of an MNC in introducing a new product.
Favorable trade barriers in Brazil help an MNC operate at lower costs. This in
turn leads to a distribution of goods affordable to people of low income.

Exposure to foreign exchange transactions risks is not that huge for Unilever.
Unilever’s main currency is the euro. In this report, the Euro is revealed to be
a more competitive currency in the foreign market. It has a higher interest rate
than the U.S. dollar and the Brazilian Real. Futures and options indicate the
probability of the Euro to remain competitive in foreign exchange rates. This
attribute puts Unilever at the forefront to hedge against the payables and
continue enjoying the foreign exchange profits. However, to effectively control
the risk of foreign transactions exposure, Unilever should use hedging and
other strategies like information systems integration and proper use of sales
promotions.

Types of Exchange Rate Risk:

1. Transaction Risk:
○ This arises when Unilever engages in cross-border transactions such as buying
raw materials, selling products, or making investments. The value of foreign
currency transactions can fluctuate before the transaction is settled, affecting
the cost of goods sold, revenue, or profitability.
○ Example: If Unilever imports raw materials from the U.S. to its European
operations, a drop in the value of the euro relative to the dollar would increase
the cost of these imports.
2. Translation Risk (or Accounting Risk):
○ This refers to the impact of exchange rate fluctuations on the financial
statements of Unilever when it consolidates financial results from subsidiaries
 operating in different countries. The value of foreign-denominated assets,
liabilities, and equity might change when converted to the parent company's
reporting currency (e.g., GBP, EUR, or USD).
○ Example: Unilever's Asian subsidiaries may experience changes in the
reported value of their assets when translated into the British pound, leading to
fluctuations in the reported consolidated earnings.
3. Economic Risk:
○ This long-term risk arises from changes in exchange rates that affect the
competitiveness of a company's products and services. If the currency in one
of Unilever's major markets becomes stronger, the company might find it
harder to compete against local competitors, as its products may become more
expensive for consumers.
○ Example: If the U.S. dollar strengthens against the local currencies in South
America, Unilever’s products might become more expensive in those markets,
potentially reducing demand.
4. Cash Flow Risk:
○ This type of risk arises when fluctuations in currency exchange rates affect the
company’s future cash flows, such as earnings from foreign subsidiaries or the
costs of servicing foreign-denominated debt.
○ Example: If Unilever has debt in Japanese yen, a weakening of the yen could
increase the cost of repaying that debt in its home currency, impacting cash
flow.

Unilever’s Exposure to Exchange Rate Risk:

Unilever, with operations in over 190 countries, is particularly exposed to exchange rate risk
due to the following factors:

● Geographic Diversification: Unilever generates a significant portion of its revenue

outside of its home country, the UK, and its reporting currency. This means it has to
manage cash flows in many currencies, including the euro, U.S. dollar, Chinese yuan,
and Indian rupee, among others.
● Global Supply Chain: Unilever sources raw materials and goods from a variety of
countries and must pay suppliers in local currencies, creating the potential for
transaction and translation risks.
● International Sales and Profitability: As exchange rates fluctuate, the value of
revenues and profits from foreign subsidiaries (in local currencies) can change when
consolidated back into the parent company's reporting currency.

Unilever’s Risk Management Strategies:

Unilever, like other large multinationals, employs several strategies to mitigate exchange rate
risk:

1. Hedging:
 ○ Unilever uses financial instruments such as forward contracts, options, and
swaps to hedge against adverse exchange rate fluctuations.
○ Example: The company may use a forward contract to lock in the exchange
rate for a future foreign currency transaction to avoid uncertainty in costs or
revenues.
2. Currency Diversification:
○ By operating in many countries and dealing in multiple currencies, Unilever
spreads its currency risk. Losses in one region (e.g., due to a depreciating local
currency) can be offset by gains in another.
3. Natural Hedging:
○ Unilever might attempt to match revenue and costs in the same currency (e.g.,
sourcing products in euros when selling in euros) to offset the impact of
currency fluctuations.
○ Example: The company may have local production facilities in key markets
like the U.S. or China, helping to mitigate exchange rate risk by reducing its
need to repatriate foreign earnings.
4. Flexible Pricing Strategies:
○ Unilever may adjust the prices of its products in response to currency changes,
helping to protect margins in volatile markets.
5. Operational Efficiency:
○ Unilever also focuses on cost control and operational efficiency across its
supply chain to absorb some of the shocks from currency fluctuations.

Conclusion:

Unilever, as a large multinational company with a complex global presence, faces significant
exchange rate risk due to its extensive cross-border operations. The company must carefully
manage this risk to protect its profitability, cash flow, and financial stability. Through
strategies like hedging, currency diversification, natural hedging, and flexible pricing,
Unilever works to mitigate the impact of exchange rate fluctuations on its business.

N Type of Explanation Risk Mitigation

o Risks
1 Treasury Changes to the relative value Currency exposures are
of a currency can fluctuate managed within prescribed
widely and could have a limits and by the use of forward
significant impact on business foreign exchange contracts.
results. Currency rates, if not Apart from contracts, we also
stable, can also result in hedge some of our exposures
significant swings in the through the use of foreign
prices of the raw materials currency borrowing or forward
needed to produce our goods. exchange contracts.

2 Brand Consumer tastes and We continuously monitor

Preference behaviours are constantly external market trends and
changing. We have to be collate consumer, customer
capable to anticipate and and shopper insight in order to
respond to these changes and develop categories and brand
to continue to differentiate our strategies that fits the need of
brands and products. We are our consumers.
dependent on creating Our Research and Development
innovative products that meet function actively searches for
the needs of our consumers. ways in which to translate the
trends in consumer preference
and taste into new technologies
for incorporation into future
products.

3 External Constantly changing The breadth of Unilever’s

Economy economic conditions may portfolio and our flexible
result in reduced consumer business model allows us to
demand for our products and adapt our portfolio and respond
may affect one or more quickly to develop new
countries within a region, or offerings that suit consumers’
even globally. and customers’ changing needs
Government actions, such as during economic downturns.
fiscal stimulus, changes to We regularly update our
taxation, and price controls forecast of business results
can impact the growth and and cash flows and, where
profitability of our local necessary, rebalance
operations. investment priorities.
4 Legal and Unilever is subject to local, Unilever is committed to
Regulatory regional, and global laws and complying with the applicable
regulations in such diverse laws and regulations in
areas as product safety, Indonesia. In specialist areas,
product claims, trademarks, the relevant teams at global,
copyright, patents, regional or local levels are
competition, employee health responsible for setting detailed
and safety, the environment, standards and ensuring that all
corporate governance, listing employees are aware of and
and disclosure, employment comply with regulations and
and taxes. laws specific and relevant to
Failure to comply with the their roles.
applicable regulations could Our legal and regulatory
expose Unilever to civil and/or specialists are heavily involved
criminal actions leading to in monitoring and reviewing our
damages, fines and sanctions. practices to provide reasonable
These could affect our assurance that we remain
corporate reputation, and our aware of and in line with all
cost of doing business relevant laws and legal
obligations.

5 Industrial With constant changes in the To mitigate this risk, we

Relations labour regulation, we have an constantly keep update with the
obligation to maintain good changes in labour regulation
relationship with our and maintain a good
employees and labour union. communication with our labour
Disruptions to the issue could union. Regular discussion is
affect our operations, costs periodically done to better
and reputation. understand each interest and
keep the harmonisation within
the industrial stakeholders.
6 Talent and Our ability to attract, develop, Resource committees have
People and retain the right number of been established and
appropriately qualified people implemented throughout our
is critical if we are to compete business. These committees
and grow effectively. have the responsibility to
In an emerging country, there identify future skills and
can be a high level of capability needs, develop career
competition for a limited paths and identify the key talent
talent pool. The loss of and leaders of the future.
management or other key We have an integrated
personnel or the inability to management development
identify, attract or retain process which includes regular
qualified personnel could performance reviews
make it difficult to manage the underpinned by a common set
business and could adversely of leadership behaviours, skills
affect operations and financial and competencies.
results. In addition, we have also
implemented targeted
programmes to attract and
retain top talent and actively
monitor our performance in
retaining talent within Unilever.
7 Systems We interact electronically with Limitation of access to
and customers, suppliers, and confidential information as well
Information consumers in ways which as segregation of duties are
place ever greater dependence also among our highest
on the need for secure and priorities
reliable IT systems and Limitation of access to
infrastructure. confidential information as well
A disruption of our IT systems as segregation of duties are
could inhibit our business also among our highest
operations in a number of priorities
ways, including hampering our We have policies covering the
sales, production, and cash protection of both business and
flow cycle. personal information, as well as
Limitation of access to the use of IT systems and
confidential information as applications by our employees,
well as segregation of duties in which they are trained to
are also among our highest understand these requirements.
priorities We have standardised ways of
hosting information on our
public websites and have
systems in place to monitor
compliance with appropriate
privacy laws and regulations,
and with our own policies.
 8 Safe and Unilever Indonesia’s Our product quality processes
High Quality manufacturing process is also and controls are
Products exposed to the risk of comprehensive, from end to
accidental or malicious end, from product design to
contamination of materials or customer shelf. They are
other product defects.These verified annually, and regularly
risks can be due to human monitored through
error, equipment failure or performance indicators that
other factors. drive continuous improvement
activities. Our key suppliers are
externally certified and the
quality of material received is
regularly monitored to ensure
that it meets the rigorous
quality standards that our
products require.
In the event of an incident
relating to the safety of our
consumers or the quality of our
products, incident management
teams are activated in the
affected markets under the
direction of our product quality,
science, and communications
experts, to ensure timely and
effective market place action.

Unilever, as a large multinational company, faces significant exchange rate risk due to its
global operations, which involve dealing with multiple currencies. Exchange rate risk for
Unilever can occur in several forms, and here are some of the key types along with examples:

1. Transaction Risk

● What it is: This type of risk arises when Unilever is involved in cross-border
transactions, such as importing or exporting goods, and the exchange rate fluctuates
between the time a transaction is initiated and when it is completed. This can lead to
unexpected changes in the cost of imports or the revenue from exports.
● Example: Unilever imports raw materials like palm oil from Indonesia (paid in
Indonesian Rupiah) but sells products in the European Union (where the transactions
are in euros). If the euro weakens against the rupiah during the transaction period, the
 cost of importing goods will increase when measured in euros, squeezing profit
margins.

2. Translation Risk (Accounting Risk)

● What it is: Translation risk refers to the impact of currency fluctuations on the
financial statements when the financial results of foreign subsidiaries are converted
into Unilever’s reporting currency, which is the British pound (GBP) or euro (EUR).
This can affect the company’s consolidated balance sheet, income statement, and
overall financial health.
● Example: If Unilever has a subsidiary in the U.S. generating revenue in U.S. dollars
but reports its earnings in GBP, fluctuations in the USD/GBP exchange rate will affect
how much revenue and profit are reported in the consolidated financial statements. A
strong dollar against the pound could increase the value of the U.S. earnings when
converted, while a weaker dollar would reduce the reported profits.

3. Economic Risk

● What it is: Economic risk refers to the long-term effect that currency fluctuations can
have on the company’s future market value, competitiveness, and cash flows. This
risk can arise from shifts in the exchange rate that alter demand for a company’s
products or services, or increase the cost of doing business in a particular market.
● Example: If Unilever operates in a country where the local currency weakens
significantly (e.g., the Indian rupee or Brazilian real), it might reduce the purchasing
power of consumers in those countries, potentially leading to lower demand for
Unilever products. Conversely, a strong local currency might reduce competitiveness
in markets where local producers can sell at lower prices.

4. Cash Flow Risk

● What it is: Cash flow risk occurs when exchange rate fluctuations affect Unilever’s
ability to predict and manage future cash flows. This can arise if foreign-denominated
revenues or expenses become more volatile due to currency changes.
● Example: Unilever has operations in several countries, including the U.S. If the
British pound strengthens against the dollar, Unilever may receive fewer pounds for
its U.S. dollar revenues when they are converted into GBP. This could create cash
flow issues, especially if Unilever is also incurring expenses in the U.S. that are paid
in dollars.

Recent Example of Unilever’s Exchange Rate Risk:

In recent years, Unilever has faced significant exchange rate risks, especially with currencies
in emerging markets where volatility is higher. For instance:
 ● Impact of the U.S. Dollar: The company has substantial operations in the U.S. and
generates revenue in U.S. dollars. If the dollar strengthens against other currencies,
like the euro or British pound, it can inflate the value of Unilever's
dollar-denominated revenues when converted to GBP. This might result in a
temporary boost in reported earnings. However, if the dollar weakens, the opposite
effect could occur, lowering the value of revenue and profits when converted to GBP,
thus impacting the overall financial performance.
● Emerging Market Currency Depreciation: Unilever also operates in emerging
markets like India, Brazil, and Indonesia. In times of economic instability, local
currencies in these countries may depreciate significantly (e.g., Indian Rupee,
Brazilian Real). This reduces the purchasing power of consumers and makes raw
materials more expensive for Unilever when sourced in foreign currencies. For
instance, in 2018-2019, the Indian Rupee weakened against the U.S. Dollar, making
Unilever's operations in India more expensive and less profitable when translated into
GBP.

Mitigation Strategies:

Unilever employs various strategies to mitigate exchange rate risks:

● Hedging: Using financial instruments like forward contracts and options to lock in
exchange rates for future transactions.
● Diversified Currency Exposure: Operating in multiple markets and earning revenues
in many currencies helps offset risks from any one currency.
● Natural Hedging: Matching costs and revenues in the same currency (e.g., sourcing
raw materials in the same country where products are sold) to reduce transaction risk.

In conclusion, Unilever faces exchange rate risks across multiple areas of its global
operations. By employing various risk management strategies, the company works to mitigate
these risks, although currency fluctuations remain a significant factor in its financial
performance.

Transfer pricing refers to the pricing of goods, services, or intellectual property transferred
between subsidiaries of a multinational company like Unilever. Because Unilever operates in
many countries with different tax rates, exchange rates, and regulatory environments, it uses
transfer pricing as a key mechanism to allocate profits and costs among its various entities.
This helps the company manage taxes, reduce costs, and optimize profits, while also adhering
to international regulations and avoiding tax evasion.

Here’s an example of how Unilever might use transfer pricing in its operations:

Example: Transfer Pricing in Unilever's Supply Chain

Unilever operates with a complex global supply chain, where raw materials may be sourced
from one country, products manufactured in another, and sold in yet another. To allocate
profits appropriately across its subsidiaries, the company might set internal prices for the
goods or services exchanged between subsidiaries.

Scenario:

Unilever has two subsidiaries:

● Unilever UK (the parent company) sells finished consumer goods (e.g., Dove soap)
to Unilever India, which then distributes them in India.
● Unilever India produces Dove soap locally using raw materials imported from
Unilever Indonesia, where the raw materials are sourced at lower costs.

Transfer Pricing Process:

1. Manufacturing Cost Allocation: Unilever Indonesia may charge Unilever India for the
raw materials used in production. The price of these raw materials is determined using
transfer pricing rules. For example, Unilever Indonesia might set the transfer price for
palm oil (sourced locally) based on market prices or a cost-plus method (where a
margin is added to the cost of the raw materials).
2. Finished Product Pricing: Unilever UK sets a transfer price for finished goods (e.g.,
Dove soap) sold to Unilever India. Unilever UK might apply a cost-plus pricing
model, where the price of the soap includes the cost of production in the UK, plus a
markup for profit, transportation, and other associated costs.
3. Revenue Recognition: The transfer pricing mechanism helps Unilever determine
how much revenue should be recognized in each subsidiary. For instance, the profit
from the sale of Dove soap will be recognized in Unilever India, where the products
are sold to consumers. The markup on the price of raw materials charged by Unilever
Indonesia will be a part of its profit.

Example of Transfer Pricing in Action:

Let’s say:

● Unilever Indonesia sells raw materials to Unilever India at $100 per ton (cost of
production + margin).
● Unilever India manufactures Dove soap and sells it domestically. It purchases raw
materials worth $500,000 (5,000 tons) from Unilever Indonesia, and then sells the
finished soap to consumers in India for $1,200,000 (after adding the local
manufacturing cost and a markup).
● Unilever UK sets the price of the soap for Unilever India at $1,000,000, based on a
cost-plus markup of 20%.

The transfer pricing in this scenario allows each subsidiary to recognize its share of profits:

● Unilever Indonesia recognizes $500,000 from selling the raw materials.

 ● Unilever India recognizes revenue from selling the finished soap (after covering the
cost of raw materials and manufacturing), and profits depend on the markup applied.
● Unilever UK recognizes its profit margin on the sale of the soap, though this depends
on the agreed transfer price between the UK and India.

Transfer Pricing Methods:

Unilever can apply several transfer pricing methods, including:

1. Cost-Plus Method: This method adds a fixed percentage (markup) to the cost of
goods or services transferred between subsidiaries. In the example above, Unilever
Indonesia might add a margin to the cost of palm oil or other raw materials.
2. Resale Price Method: This method involves setting the price based on the price at
which a product is sold to an independent party, minus a markup for the distributor’s
costs. This might apply to finished goods like Dove soap, where the price Unilever
India pays Unilever UK is based on the resale price in India.
3. Comparable Uncontrolled Price (CUP) Method: This involves setting a transfer
price based on prices charged in similar transactions between unrelated parties. For
example, Unilever might compare the price it charges its subsidiaries for palm oil to
the price of palm oil sold in open markets to unrelated buyers.
4. Profit Split Method: This method divides the combined profits of the subsidiaries
involved in the transaction according to a predetermined formula. It might be used
when the subsidiaries jointly develop a product or service, and the profits need to be
split according to each party’s contribution.

Why Unilever Uses Transfer Pricing:

● Tax Optimization: By setting transfer prices strategically, Unilever can shift profits
to subsidiaries in low-tax jurisdictions. For example, if Unilever UK faces a high tax
rate, it might use transfer pricing to allocate more profits to a subsidiary in a country
with lower taxes (e.g., the Netherlands or Singapore).
● Minimizing Costs: Transfer pricing allows Unilever to manage internal costs
between subsidiaries. For instance, it can choose to allocate a higher or lower transfer
price depending on which subsidiary has more cost-effective manufacturing
capabilities.
● Risk Management: Transfer pricing helps mitigate financial risks and protect
Unilever’s profitability across regions with different exchange rates, tax rules, and
political climates.

Regulatory Compliance:

It’s important to note that multinational companies like Unilever must comply with transfer
pricing regulations set by tax authorities in each country where they operate. Most countries
follow the OECD (Organization for Economic Cooperation and Development)
guidelines on transfer pricing, which require that the prices set for intercompany transactions
be "arm's length." This means the prices should reflect what independent parties would agree
to in a similar transaction.

Unilever’s use of transfer pricing helps it manage global operations efficiently, but it must do
so in compliance with international tax and accounting standards to avoid tax penalties or
regulatory scrutiny.

Recent Developments:

In recent years, transfer pricing has come under increased scrutiny from tax authorities
worldwide, especially as governments tighten regulations to prevent tax avoidance. For
example, changes in BEPS (Base Erosion and Profit Shifting) rules by the OECD aim to
ensure that multinational companies pay taxes where value is actually created, rather than
shifting profits to low-tax jurisdictions.

Unilever, like other multinationals, has to ensure its transfer pricing policies are transparent
and in line with these evolving standards.

* FDI

What Are the Advantages and Disadvantages of Foreign Direct Investment?

FDI can foster and maintain economic growth, in both the recipient country and the country
making the investment. On one hand, developing countries have encouraged FDI as a means
of financing the construction of new infrastructure and the creation of jobs for their local
workers. On the other hand, multinational companies benefit from FDI as a means of
expanding their footprints into international markets. A disadvantage of FDI, however, is that
it involves the regulation and oversight of multiple governments, leading to a higher level of
political risk.

* M&A

When one company takes over another and establishes itself as the new owner, the purchase
is called an acquisition. Unfriendly or hostile takeover deals, in which target companies do
not wish to be purchased, are always regarded as acquisitions. However, an acquisition can
also be done with the willing participation of both companies.

On the other hand, a merger describes two firms that join forces to move forward as a single
new entity, rather than remain separately owned and operated. In general, the two firms are of
approximately the same size, and this action is known as a merger of equals.

Advantages of Mergers and Acquisitions

The following are a few of the advantages of mergers and acquisitions;

Improved Economic Scale

A new large business or a business that has acquired another company generally has
increased needs in terms of materials and supplies. And when a business has high demands, it
means it has a high purchasing power. A high purchasing power enables a company to
negotiate bulk orders, and when a business is able to negotiate bulk orders, it results in cost
efficiency. In other words, by purchasing supplies and materials at higher volumes, a
company is able to improve its scale.

Enhanced Distribution Capacities

A merger or an acquisition may result in a business expanding geographically, which would,

in turn, increase the business’s ability to distribute goods or services to more people.

Increased Market Share

When two businesses operating in the same industry become one, or when a company
acquires another company operating in the same industry, the new or larger company gets to
enjoy a greater market share.

More Financial Resources

When two companies merge or when a company acquires another company, it results in two
companies pooling their financial resources, and that can result in, among other things, a
business being able to reach more customers because of a larger marketing budget.

Disadvantages of Mergers and Acquisitions

The following are some of the disadvantages of mergers and acquisitions;

Job Losses

When two companies doing the same activities come together and become one company, it
might mean duplication and over capability within the company, which might lead to
retrenchments.

Diseconomies of Scale

Sometimes mergers and acquisitions can result in diseconomies of scale. For example, this
can happen if the owner of the new larger company lacks the control required to run a bigger
company.

Higher Prices

Although not something that affects the business, it is worth mentioning. A great market
share is good for a business, but it can be bad for consumers. When a company has less
competition and greater market share, consumers tend to pay more for products or services.
Lost Opportunities

Lastly, the process of merging two companies or acquiring a company takes time and requires
energy and money. The energy, time, and funds that go into the merger or acquisition process
could mean that the businesses involved give up other potential opportunities.