International Monetary Relations Memphis-Based FedEx Essay

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In many countries, FedEx Express charges a fuel surcharge. In foreign countries, an increase in the value of the U.S. dollar is inherently built into the price of jet fuel, or even into the price of gasoline. As such, a fuel surcharge helps to offset the currency impact on the local price of jet fuel. The result is that it serves as something of a hedge, pushing this particular risk at least in part onto its customers.

FedEx Express conducts as much of its business as possible in U.S. dollars. In particular, the company's major cost drivers in U.S. dollars. The foreign currency that is not reinvested into foreign subsidiaries may be repatriated to the U.S., or invested in other areas of the world. Despite its global footprint, FedEx Express therefore is well-hedged operationally against fluctuations in the U.S. dollar.

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Canadian dollar surpluses, for example, have been used to make fleet and facility upgrades in that country -- a new plant was opened in Ontario last year for example (FedEx Canada, 2009).

What this means for FedEx Express is that the company faces foreign exchange rate risk almost as if it was a service exporter. An increase in the value of the U.S. dollar would increase the firm's cost structure. The value of foreign exchange receipts would decline, harming FedEx's profits. The firm has no hedge against such translational risk. If the U.S. dollar declines in value, the core cost structure of the firm is lower, thus improving the firm's profitability. For example, in the 2009 Annual Report, FedEx noted that it benefited in that fiscal year from foreign exchange rate fluctuations.

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