FINANCE OF INTERNATIONAL TRADE ANALYSIS OF JAMAICA PRODUCERS GROUP

Jamaica Producers Group A Finance of International Trade Analysis

Sheneaqua Ashley Ashmead - 0505274 Novelette Johnson - 0703558 Kevin Whitehorne 0704456 Gerron Thomas 0601486 Karekia Brown - 0415439 Rose Bachan - 0704821

Finance of International Trade Tutor: Gregory Linton University of Technology February 13, 2012

FINANCE OF INTERNATIONAL TRADE ANALYSIS OF JAMAICA PRODUCERS GROUP

ASSIGNMENT COVER SHEET NAME GERRON THOMAS ASSIGNMENTS Development of Capital Markets, Countrys Currency Financial Status of JP Cost of Capital Analysis The Foreign Exchange Market Transaction Effects Derivative Application The Sovereign Debt Crisis Analysis of Jamaica Trade policy of Jamaica Trade Barriers Imposed The JDX Appreciation of the JMD Analysis of the UK History of UKs Development Global Appearance The EPA Translation Effects Analysis of the Netherlands The Currency of the Netherlands Trade Policy Banking Services Utilized by JP Trade Barriers Laws and Culture of Jamaica Banking Services Utilized Financial Status Trade Liberalization The Risk Environment The EPA and its effects on JP SIGNATURE

NOVELETTE JOHNSONWILLIAMS

KEVIN WHITEHORN

ROSE BACHAN

KAREKIA BROWN

SHENEQUA ASHLEY ASHMEADE

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Table of Contents
PART 1 ......................................................................................................................................................... 6 Background Summary on Jamaica Producers Group.................................................................................... 6 Analysis of Operating Countries ................................................................................................................... 7 Netherlands ................................................................................................................................................... 7 Background ........................................................................................................................................... 7 Trade ..................................................................................................................................................... 7 Basic Economy ..................................................................................................................................... 8 Culture .................................................................................................................................................. 8 Laws ...................................................................................................................................................... 9 Jamaica.......................................................................................................................................................... 9 Background ............................................................................................................................................... 9 Trade ................................................................................................................................................... 10 Basic Economy ................................................................................................................................... 10 Culture ................................................................................................................................................ 11 Laws .................................................................................................................................................... 11 Full Summary and Analysis of the United Kingdom & its Economy......................................................... 12 Background ............................................................................................................................................. 12 Trade ................................................................................................................................................... 12 Trade Policy ........................................................................................................................................ 13 Tariff Liberalization/laws ................................................................................................................... 13 History of the countrys Economic Development....................................................................................... 14 Currency (The Pound Sterling) ........................................................................................................... 15 Current Economic Environment ............................................................................................................. 16 Stage of the Business Cycle and GDP ................................................................................................ 16 Monetary and Fiscal Policies .................................................................................................................. 18 Monetary Policy .................................................................................................................................. 18 Yield Curves and the UK .................................................................................................................... 18 Fiscal Policy ............................................................................................................................................ 19 Exchange Rate Volatility .................................................................................................................... 20 Potential impacts exporting and importing to the UK may pose on Jamaica Producers Group ................. 22

FINANCE OF INTERNATIONAL TRADE ANALYSIS OF JAMAICA PRODUCERS GROUP

PART 2 ....................................................................................................................................................... 23 A full analysis of Jamaica Producers Group ............................................................................................... 23 Global Appearance.................................................................................................................................. 23 Financial Analysis ....................................................................................................................................... 24 Trend analysis of companys performance (2007 2010)...................................................................... 24 Capital Structure ..................................................................................................................................... 25 Cost of Capital Analysis ......................................................................................................................... 26 Cost of Debt (Kd)(1-tax rate) .................................................................................................................. 26 Cost of Equity (Ke) ................................................................................................................................. 27 Weighted Average Cost of Capital (WACC) .......................................................................................... 27 Risk Environment ....................................................................................................................................... 27 Financial Risks ............................................................................................................................................ 28 Currency Risks ........................................................................................................................................ 28 Credit Risks............................................................................................................................................. 28 Interest Rate Risks .................................................................................................................................. 29 Operational Risks .................................................................................................................................... 29 Detailed Analysis of Trade Barriers............................................................................................................ 30 Analysis of United Kingdom Trade Barriers .......................................................................................... 30 Tariff Barriers to Trade ....................................................................................................................... 30 Non Tariff Barriers to Trade ................................................................................................................ 30 Analysis of Jamaican Trade Barriers .......................................................................................................... 31 Tariff Barriers to Trade ........................................................................................................................... 31 Non Tariff Barriers to Trade ................................................................................................................ 32 Trade barriers, United Kingdom, Netherlands and their relation to Jamaica .............................................. 33 Benefits for Jamaica ................................................................................................................................ 34 Challenges for Jamaica ........................................................................................................................... 34 PART 3 ....................................................................................................................................................... 35 Banking Services Utilized by JP ................................................................................................................. 35 Banking Services - Bonds ....................................................................................................................... 35 Types of bonds utilized by JP ................................................................................................................. 35 Documentary Collection ......................................................................................................................... 36 Letters of Credit ...................................................................................................................................... 36

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Wire Transfers ........................................................................................................................................ 36 Examination of the Foreign Exchange Market ........................................................................................... 37 Applying the concept of hedging through the use of Derivatives ............................................................... 38 Forward Contracts ................................................................................................................................... 38 Futures .................................................................................................................................................... 39 Foreign Exchange Risk ........................................................................................................................... 40 The impact of recent macro-economic phenomena on JP .......................................................................... 42 The Jamaica Debt Exchange and its impact on JP .................................................................................. 42 The Appreciation of the JMD and its impacts on JP................................................................................... 43 The European Sovereign Debt Crisis .......................................................................................................... 43 The Economic Partnership Agreement ....................................................................................................... 44 Conclusion .................................................................................................................................................. 44 References ................................................................................................................................................... 46

FINANCE OF INTERNATIONAL TRADE ANALYSIS OF JAMAICA PRODUCERS GROUP

PART 1 Background Summary on Jamaica Producers Group

Jamaica Producers Group (JP) is a completely Jamaican-owned company that came into being on April 1, 1929, as a direct descendant of the Jamaica Producers Association formed in 1925 (Jamaica Producers Group, 2008). The company, collectively with its subsidiaries, engages primarily in the production, manufacture and sale of juice and food products. Other operations include; the cultivation, marketing, and distribution of bananas in Jamaica; and a shipping business. JP provides door-todoor freight consolidation, freight forwarding, and customs clearance services; produces tropical snacks, including cassava, sweet potato, and plantain chip products; and produces smoothies. The company offers its products under the JP, St. Marys, Hoogesteger, Nixx, JP RAM, and Taste Jamaica brand name (Jamaica Producers Group, 2008). JP operates primarily in Europe, the Caribbean, and Central America. Of its major operations, the Shipping subsidiary is located in London, the Fresh Juice and Smoothie Company is located in the Netherlands whilst the Tropical Snacks group operates locally in Jamaica (Jamaica Producers Group, 2008).

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Analysis of Operating Countries

Netherlands

Background

The Netherlands is a one of the countries that form part of the Kingdom of the Netherlands. Situated in northwestern Europe and borders on Germany to the east, Belgium to the south, and the North Sea to the west and north, the name "Netherlands" means "Low Lands" in reference to the nation's topography as an alluvial plain. Almost one-quarter of the landmass is below sea level, protected from the encroaching sea by dikes and dunes.

Trade

With no significant trade or investment barriers, the Netherlands remains a receptive market for U.S. exports and an important investment partner. The Dutch are strong proponents of free trade and staunch associates of the U.S. in international trade forums such as the World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD). Dutch exports are divided into five main categories: chemical products, 17 percent; agricultural products, 15 percent; machinery, 24 percent; industrial products, 12 percent and natural or enriched fuels, 6 percent with Germany being the principal trading partner. Two-third of Dutch exports goes to five nations: Germany, Belgium, France, the United States and the United Kingdom which accounts for Sixty one percent (61%) of the Dutch imports. The Netherlands is perfectly positioned as a gateway for goods imported into the EU and Dutch goods are easily exported throughout the EU (World Trade Organization, 2011).

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Basic Economy

The global financial crisis hit the Netherlands hard in the fall 2008; the Dutch economy entered recession in the fourth quarter of 2008, but annual GDP growth that year was still 1.9%. In 2009, however, the economy shrank by 3.9% and recovered slowly in 2010 with an annual growth rate of 1.8%. Forecasted growth of 2% was projected for 2011which is primarily due to the increase in international trade, which is the largest engine of the Dutch economy. The Dutch economy has recorded trade surpluses with marginal declines during the recession of the 2000s. In 2010, the exports increased by 12.8% and imports by 11.7%, in 2011 the forecasted figures are 6.75% and 5.25%. The expected national budget deficit for 2012 (3.7% of GDP) and government debt (64.1%) still are cause for concern as they exceed the limits set by the European Growth and Stability Pact (U.S. Department of State, 2009).

Culture

The diverse Dutch culture reflects regional differences as well as the foreign influences thanks to the merchant and exploring spirit of the Dutch and the influx of immigrants. The people of Netherlands have played an important role for centuries as a culturally liberal and tolerant centre, with the Dutch Golden Age regarded as the zenith. The Dutch make a distinction between two of their major cultural subdivisions, the (Rim City) and non-Randstad cultures. Randstad culture is distinctly urban, located in the provinces of North Holland, South Holland, and Utrecht. Whilst non-Randstad culturers locate in the rurals of south and west Holland (Bayer, 1993).

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Laws

The Netherlands is a civil law country where law is based on the French Civil Code with influences from Roman law and traditional Dutch customary law. The primary law making body is formed by the Dutch parliament in cooperation with the government. Trade laws (International) are facilitated through the membership status with the EU and guidelines have been adopted from WTO. Netherlands as a country is highly dependent on international trade, total supports a liberalized trade environment and is advocate for the reduction of trade barriers (National Encyclopedia, 2011).

Jamaica

Background Jamaica, a country with a population of more than 2.5 million is located some 90 miles south of Cuba and more than 450 miles west of Hispaniola, and is the third-largest island in the Caribbean Sea. Since 1870 the capital has been Kingston, now with a population of more than 645,000. The island holds one of the largest and best natural harbors in the world which facilitates international trade based on its central location and accessibility. The climate is tropical and tourists flock to Jamaica for its beautiful beaches. Jamaica has been called the Island of Springs, and the luxuriance of the vegetation is striking (National Encyclopedia, 2011).

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Trade

Over the past several decades, Jamaica has relied more and more on imports. Jamaicas major trading partners are the United States of America and the United Kingdom. The remaining trading partners include European Union countries, Canada, Norway, Japan and the various CARICOM countries. Major exports are bauxite and alumina, food, and garments assembled in Jamaica. As Jamaica's trade with the United States increase, its trade with fellow members of CARICOM, the Caribbean Common Market has decreased. This has resulted in the country reporting continuous trade deficits which forces it to borrow heavily to pay for its consumption (The Economist, 1999).

Basic Economy

Tourism, bauxite and alumina production dominated Jamaica's economy in 90s 2000 period, but the island's early economy was centered on the production sugar. The Jamaican economy is heavily dependent on services, which now account for more than 60% of GDP. The country derives most of its foreign exchange from tourism, remittances, and bauxite/alumina. Remittances account for nearly 15% of GDP and exports of bauxite and alumina make up about 10%. Tourism revenues account for roughly 10% of GDP, and as seen marginal growth in 2010 2011 periods ranging between 4% and 6% respectively (Bayer, 1993) (World Trade Organization, 2011). Economic growth is deterred by many challenges such as high crime and corruption, large-scale unemployment and underemployment, and a debt-to-GDP ratio of more than 120%. Jamaica's onerous public debt burden is ranked the fourth highest in the world on a per capita

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basis. In early 2010, the Jamaican government executed a Debt Exchange program (JDX) in order to retire high-priced domestic bonds and significantly reduce annual debt servicing (The Central Intelligence Agency, 2011).

Culture

Despite its size, Jamaican culture boasts a strong global presence. From the musical genres reggae, ska, mento, rocksteady, dub, and, more recently, dancehall and ragga, Jamaicas culture is described as being very unique and has largely impacted the tourism sector. The island is famous for jerk spices, herbs and fruits which form a popular part of Jamaican cuisine (National Encyclopedia, 2011). Jamaicas native language is English, but is however distinguished by another Creole dialect, Patois, which is influenced mostly by West African languages. Religious practices are also significant to the Jamaican culture, of global recognition is the Rastafarian culture (U.S. Department of State, 2009).

Laws

Laws within this small native country are determined by the judiciary which is based on the judiciary of the United Kingdom. The courts are organized at four different levels, with additional provision for appeal to the Judicial Committee of the Privy Council in London. Jamaica is a common law jurisdiction, in which precedents from English law and British Commonwealth tradition may be taken into account. Trade is governed by laws under the WTO, CSME, NAFTA, and GATS. Jamaica is actively engaged in the negotiation of multilateral, regional and bilateral trade agreements as a means of securing its trade interests and enhancing trade performance. In these agreements it seeks to remove tariff and non-tariff barriers on

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products of interest to Jamaica in asymmetrical arrangements with trading partners (Doing Business In Jamaica: A Country Commercial Guide for U.S. Companies, 2009).

Full Summary and Analysis of the United Kingdom & its Economy

Background The United Kingdom is a sovereign state consisting of four countries: England, Northern Ireland, Scotland and Wales. The governing structure takes the form of a constitutional monarchy and a parliamentary system, with its seat of government located in the capital city of England, London. The UK is a developed country and is regarded as the world's sixth-largest economy based off nominal GDP indicators and seventh-largest economy based of purchasing power parity. Historically it was the world's first industrialized country and held world power during the 19th and early 20th centuries. It is currently one of the leading economic, cultural, military, scientific and also most politically influential countries in the world which holds great significance as it relates to international trade (Bayer, 1993).

Trade

The United Kingdom is the world's fifth largest trading nation and is highly dependent on foreign trade. Its imports include copper, ferrous metals, lead, zinc, rubber, and raw cotton; most of its tin, raw wool, hides and skins, and many other raw materials; and about one-third of its food. Chief exports include manufactured goods, food, chemicals, and fuels. Primary trading partners are the European Union and the United States.

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According to the US Central Intelligence Agency (CIA), in 2002, the purchasing power parity of the United Kingdom's exports was $286.3 billion in comparison to its imports of $330.1 billion which results in a trade deficit of $43.8 billion. The International Monetary Fund (IMF) has also reports that in 2001 the United Kingdom had exports of goods totaling $276 billion and imports totaling $324 billion. The services credit totaled $111 billion and debit $95 billion (The
Central Intelligence Agency, 2011).

Trade Policy

Due to its reliance on trade, the UK has a major stake in the maintenance of a vigorous and open world trading system, and is in favor of the WTOs launch of a new round of trade negotiations focused on further liberalization of agriculture, industrial products and services. Trade policies implemented by the United Kingdom are in accordance with its membership status in the European Community. It has agreed to join with other Member States in a customs union with common arrangements for imports from and exports to third counties. These common arrangements are decided, discussed, agreed upon, and administered through the Community's 'Common Commercial Policy' (CCP). The United Kingdom, however, is a WTO member in its own right and maintains 'an effective and coherent external policy' to the EU's common stance (Hills, 2011).

Tariff Liberalization/laws

The United Kingdom favors reduced tariff levels across a broad range of sectors, including most goods and services. It seeks the elimination of nuisance and tariff peaks; it also favors binding tariffs at applied rates. The UK proposes duty-free market access for Least

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Developed Countries and improved access commitments for all other developing nations as a means of off-setting the considerations which were not given at the Uruguayan round of WTO negotiations. The United Kingdom urges for more transparency and objective administration of anti-dumping rules to prevent their abuse as a protectionist measure. It also supports stronger rules on subsidies to minimize the trade-distorting effects of these measures (World Trade
Organization, 2011).

History of the countrys Economic Development The UKs economy since the early 16th century, as grown to become a leading trading power and financial center in the world of international trade. The UK has held a partially regulated market economy. The Bank of England is the UK's central bank and is responsible for issuing the nation's currency, the pound sterling and maintaining and implementing the countrys monetary policy. Her Majesty (HM) Treasury performs the major government responsibility of developing and executing the British government's public finance policy and economic policy. Pound sterling is the world's third-largest reserve currency (after the U.S. Dollar and the Euro (Riley, 2012)). Whilst industry continues to decline in importance, services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP. After emerging from recession in 1992, Britain's economy enjoyed the longest period of expansion on record during which time economic growth outpaced most of Western Europe and other leading global countries. In 2008, the economy fell victim to another global financial crisis, due to the importance of its financial sector to the global economy. This resulted in declining home prices, high consumer debt, and a subsequent global economic slowdown which compounded Britain's

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economic problems, pushing the economy into recession in the latter half of 2008 and prompting the government to implement a number of expansionary fiscal measures to stimulate the economy and stabilize the financial markets. These include nationalizing parts of the banking system, cutting taxes, suspending public sector borrowing rules, and moving forward public spending on capital projects. Fiscal policies implemented lead to public deficits and debt levels, the government in 2010 initiated a five-year austerity program, which aimed at lowering London's budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015. In November 2011, Chancellor of the Exchequer George OSBORNE announced additional austerity measures through 2017 because of the slower-than-expected economic growth and the current impact of the euro-zone debt crisis. The Bank of England through its monetary policy periodically coordinates interest rate moves with the European Central Bank, but Britain has opted to remain outside the European Economic and Monetary Union (EMU). The UK is one of the world's most globalised countries with its capital London one of the world's largest financial centre alongside New York (after the United States and France) (Bank of England, 2012).

Currency (The Pound Sterling)

The currency of the UK is the pound sterling, represented by the symbol and is issued by the central bank, The Bank of England. The Sterling is the rated as the fourth most traded currency in the foreign exchange market, ranked behind the US dollar, the euro and the Japanese yen. As a result of Inflation concerns in the UK, the Bank of England raised interest rates in late 2006 and 2007. This caused an appreciation of the pound against other major currencies and, with the simultaneous devaluation of US dollar; the pound hit a 15-year high against the US

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dollar on 18 April 2007, reaching US$2, for the first time since 1992. There have been several fluctuations since the global financial crisis of 2008 which saw the pound depreciating against the dollar in 2008 and then appreciating in 2009 relative to the dollar and the euro (Bank of England, 2012). Current Economic Environment

Stage of the Business Cycle and GDP

The chart above depicts the annual rate of growth of national output (GDP) for the UK economy between 1980 and 2006. The UK has experienced two recessions in the last twenty-five years. In the early 1980s downturn there was a deep recession which represented the worst downturn in the UKs post-war history. From the diagram we can see the plunge into a period of recession in 1990 and 1991 and then a recovery which was prolonged throughout the remainder

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of the 1990s (Bank of England, 2012). An inspection of the International Monetary Fund working paper The U.K. Business Cycle, Monetary Policy and EMU Entry revealed that the U.K. business cycle is correlated with those of the United States and Canada which shows the degree of integration between the economies of the three named countries (International Monetary Fund, 2000). The UK felt the effects of the most recent financial crisis of 2000s where total manufacturing output fell by 7% at the of end 2008. This affected sectors such as, banks, investment firms, and other known business types. The current stage of UKs business cycle, a recovery is affected by the much speculated 'double dip' recession during the 2010 and 2011. GDP fell 0.5% in the 4th quarter of 2010 coupled with an increase in the rate of unemployment up to 8.1% in August 2011 which was the highest level since 1994. For the period ending October 2011, after 14 quarters, GDP is still 4% down from its peak at start of recession back in 2008 (International Monetary Fund, 2000).

Fig showing the UK business cycle heading for a double dip

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Monetary and Fiscal Policies

Monetary Policy

In light of the double dip recession speculations the UK Government and Central bank have taken drastic steps towards stimulating their economy. The current Monetary Policies implemented by the Bank of England include inflation targeting, alongside secondary targets on output and employment. The Bank of England recently injected money directly into the economy by purchasing assets a method known as quantitative easing. This means that the instrument used by the monetary policy is now the quantity of money provided rather than the price at which the Bank lends or borrows money (Bank of England, 2012). Since March 2009 the total asset purchases as authorized by the Monetary Policy Committee amounts to 325 bn. The main purpose of the purchases was to inject money directly into the economy in order to boost nominal demand (Bank of England, 2012).

Yield Curves and the UK

Despite the implementation of the Asset Purchase Program the Monetary Authority has managed to maintain a target bank rate of 0.5%. Interest rate is one of the key monetary policy tools used in the contraction of the supply of sterling. The yield curve below depicts the term structure of the UKs interest rate is currently flat and has been this way for short term securities since March 2009. The government liability nominal yield curves are derived from UK gilt prices and General Collateral (GC) repo rates. The real yield curves are derived from UK indexlinked bond prices

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Fiscal Policy The UKs current demand policy is for the most part concentrated on the use of Monetary policy as opposed to Fiscal policies due to the fact it is easier to change the interest rate than levels of tax and spending and fiscal policy has more side effects e.g. work incentives and impact on government borrowing. The cut in interest rates to 0.5% by the Monetary Policy Unit of the Bank of England appeared to be ineffective in getting the economy out of a recession. The economy according to the World Banks review was in a liquidity trap which forced the government to a turn to fiscal policy implementation in an to further stimulate economic activity (The Public Enquiry Unit - HM Treasury, 2011). The UK has since officially adopted the Golden Rule of fiscal policy which states that over the full economic cycle, the government should borrow to invest only for future needs. Government borrowing increased sharply due to falling tax revenues from the recession and attempted to increase Aggregate Demand (e.g. VAT cut to 15%) (The Public Enquiry Unit - HM Treasury, 2011).

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Along with the Golden Rule, the UK government follows the Sustainable Investment Rule, which monitors national debt at a prudent level currently set at 40 per cent of GDP. The UK public debt at the end of 2008 was estimated at 42 per cent, and rose to 70 per cent of GDP by 2010, meaning that the Sustainable Investment Rule was been broken in an attempt to reach the recovery stage of the business cycle (The Public Enquiry Unit - HM Treasury, 2011).

Exchange Rate Volatility

The UK has operated with a free-floating exchange rate system (no intervention by the Bank of England), hence exchange rate is purely market determined since the suspension of UK membership from the European Exchange Rate Mechanism. Exchange rate prices are expressed in various ways including; Spot Exchange Rate, Forward Exchange Rate, Bi-lateral Exchange Rate, Effective Exchange Rate Index (EER), and Real Exchange Rate. Significant changes in exchange rates are typically one of the attributes of any financial crisis. This was reflected by looking at the impacts of the recession on the British pound where the pound is viewed statistically as one of the worst victims of the crisis in the foreign exchange markets. The vast depreciation of the sterling can be attributed to a shocked banking sector, the Bank of Englands program on monetary quantitative easing and general budget and current account deficits. Although all these features of the UK economy closely mirrored the US economy, the pound depreciated as it did not benefit from the safe haven currency status (Stavrek, 2012).

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UKs Composition of GDP and Potential GDP

Figure above displays the historical trend of gross domestic product of United Kingdom at market prices estimated by the International Monetary Fund with figures in millions of pounds sterling. The Gross Domestic Product (GDP) in the United Kingdom declined 0.2 percent in the fourth quarter of 2011 over the previous quarter. Historically, from 1955 until 2011 the United Kingdom's average quarterly GDP Growth was 0.58 percent reaching an historical high of 5.30 percent in March of 1973 and a record low of -2.50 percent in March of 1974. Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance. Over the past two decades the government has greatly reduced public ownership and contained the growth of social welfare programs (Affairs, 2009).

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The chart above depicts the estimated output gap for the UK economy between 1980 and 2001. The deep recession of the early 1980s left the UK economy with a substantial amount of spare capacity. However economic recovery was realized and the strength of the consumer boom in the late 1980s created a substantial positive output gap which subsequently leads to inflation in 1989-90. At the end of the 1990-92 recessionary periods, actual GDP fell behind potential GDP which indicates a negative GDP gap and pressures on inflation. This inflation was gradually eroded during the mid late 1990s and in recent years the British economy has been growing at or around the long term trend rate of growth (i.e., about 2.5% per year, Hence there is currently no major inflationary of deflationary gap in the British economy (Affairs, 2009).

Potential impacts exporting and importing to the UK may pose on Jamaica Producers Group

As a company outside of the EU, engaging in international trade with UK/European based customers, may pose one or more of the following risks for JP; Buyers Insolvency/Credit

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Risk, Buyers Acceptance Risk, Knowledge Inadequacy, Sellers Performance Risk, Documentation Risk, Economic Risk, Cultural Risk, Legal Risk, Foreign Exchange Risk, Interest Rate Risk, Political/Sovereign Risk, Transit Risk. However, given the trade friendly environment proposed by the UK, the current governance as it relates to the trade by the WTO and with the firm establishment of the firms name in British markets, JP has built a brand which provides enough incentives towards assuming some of the named risk (Affairs, 2009).

PART 2 A full analysis of Jamaica Producers Group Global Appearance JP is seen as the market leader in the manufacturing and production of tropical snacks in the Caribbean. The firm is also the largest producer of fresh juice in the Netherlands which is also the channel used to provide exports to neighboring European countries. Despite the decline in banana exports, JP has benefited from being a company who was responsible for the exportation of one of Jamaicas major traded products. This has resulted in the company being identified on the global level has a known Jamaican household brand, given its rich history and affiliation with the production of the banana product. JP is perfectly positioned to achieve significant benefits from using brand Jamaica as one of its flagship marketing strategy on the global market. The company is a many time recipient of the Bureau of Standards Jamaica National Quality Award (NQA) which includes Excellence in Manufacturing Industry and the Top Quality Award for Commerce and Industry (Jamaica Prouducers Group, 2007 -2011). From a financial standpoint, the firms stock was a recommended Buy with a price 20.4% above its then current price. According to JMMBs equity research in 2010, the then

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forward looking strategy, restructuring, diversification of its product offering, rebranding and other acquisitions were positives which would impact the stock price in 2011. Our subsequent analysis of the quarterly financials revealed increases in both the firms stock price and operating profits. Major threats from a global standpoint are; the firms exposures to an increase in commodity prices specific references to food and petroleum based inputs. Additionally, exposures to the European Union the groups largest operating division that accounts for 70% of the groups profits. JP is also viewed from a global standpoint as being highly exposed to the risk of natural disasters affecting the manufacturing, production of banana and other by products of the banana crop.

Financial Analysis Trend analysis of companys performance (2007 2010) Since the great recession of the late 2000s, Jamaica Producers Group has realized steady growth patterns in all its major financial indicators. An assessment of the firms financial performance over the period 2006 2010 revealed the following results; i. The companys operational efficiency has improved after falling to an all time low of 22% in 2008 (effects of the recession on its major market UK). The company has since realized a 60.6% increase in its return on sales between 2009 and 2010. ii. Similarly, after major loses during the great recession where shareholders realized a 68.2% Return on Equity in 2008, this ratio improved to 4.6% in 2009 and 6.4% in 2010. iii. After highs of 18.2% in 2006, JP realized decreases in its Return on Assets ratio down to as low as -52% in 2008. However, 2009 saw the ROA increasing to 3.7% and a further 5.3% in 2010.

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iv.

The firms leverage ratio fell over the review period from 15.7% in 2006 down to 2.8% in 2009 and a marginal increase in 2010 up to 3.1%.

v.

The company also bettered its liquidity position indicated by improvements in its Current Ratio over the review period. The latter years 2009 2010 saw improvements in the profit position for all JPs business

segments. The Europe division which accounts for 78% of the companys combined revenue improved its profitability despite volatility in commodity prices amongst other macro economic indicators. The company has made important strategic moves through the

restructuring of its operating divisions in two major operating arms JP Europe and JP Tropical (inclusive of its Corporate Fixed/Equity investments). These operational improvements have led to JPs profitability improvements and were the resulting moves to counter the effects of the global turndown and five consecutive hurricanes which had a catastrophic effect on JP business structure. The companys major restructuring move saw exits from its UK juice business and the exportation of banana from Jamaica to the UK along with a withdrawal of JP Tropical (the leading tropical snack producer in the Caribbean) from the Honduran market (Jamaica Prouducers Group, 2007 -2011). Capital Structure JPs balance sheet in 2010 shows the business boasting a debt to equity ratio of 20.6%. The company is lowly leveraged and is a strategy implemented to mitigate its exposures to interest rate risk. The 80/20 capital structure used in the financing of the companys operations includes a mix of fixed and variable instruments as a means of balancing its risk profile.

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Cost of Capital Analysis In analyzing the entitys cost of capital several assumptions have been made based on information presented in the latest published annual report for year ending December 2010. We assumed the following;

The weights used in the calculation of the firms weighted average cost of capital is derived from the firms capital structure components visible on the financial statements (financed totally by debt and equity)

The rates of interest/tax applied are taken as a percentage of the relating component ex. Effective tax rate applied is derived from taking the tax portion as a percentage of the before tax profits.

The dividend growth rate was derived from trends in dividends declared. Exchange rates applied are those reflected on the entities balance sheet. Conceptually, JP's cost of capital is an investor's opportunity cost of investing his or her

capital in the company. We made an estimate of the firm's WACC in an attempt to quantify the average return expected by all investors in the firm: creditors of short-term and long-term interest-bearing debt, preferred stockholders, and common stockholders. Cost of Debt (Kd)(1-tax rate) JP at the end of 2010 held a total debt position of $152,603,000 and a total finance cost of $1,626,000 which represents a 1.1% marginal cost of debt financing. Using the effective tax rate which is derived taking the taxable portion on the income statement as a percentage of the before tax profits we arrive at 22.4% effective tax rate. The weight used is derived from the firms capital structure; hence the weight of debt is 20%.

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Cost of Equity (Ke) Cost of equity is derived using the dividend capitalization model; the different components used in the formula include the dividends per share of 25c and market value of the stock of $20 at year end December. A .15% dividend growth rate is assumed based on the dividend policy of the company approved August 2010 to payout 15% of after tax profits as dividends (JMMB, 2010). (D0/P1)+G Weighted Average Cost of Capital (WACC) We therefore determine the amount of interest the company has to pay for every dollar it finances by finding the weighted average cost of capital; WACC = (Wd)(Kd)(1-T) + (We)(Ke) WACC=(.2)(.011)(1-.224)+(.8)(.1625) WACC=0.13 or 13% The companys cost of capital reflected using 2010 figures has an example is assumable low. This is similar to previous years and may be a reflection of the following; The firms capital structure and dividend policy , Tax rates given losses incurred during the recessionary period of 2007, 2008, and 2009, The firms investment policy and risk appetite, Other market conditions such as interest rate on loans denominated in depreciated currencies; euro, pound and US. Therefore the Cost of Equity amounts to .1625, where Ke =

Risk Environment Given the global operations of JP as a multinational corporation, the firms assets are exposed to several risks in their day to day trade operations and may be classified distinctly as those risks relating the firms operations i.e. operational risks and the uncertainty of a return and

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or the potential for financial loss, known as financial risks. Due to several uncertainties in the international trade environment, the most significant types of risk the firm might be exposed to are; currency risk/exchange rate risk, credit risk and interest rate risk.

Financial Risks Currency Risks The diversified nature of JPs business operations and different geographical locations creates the situation where its assets are based in five separate currency environments. Hence, as a multinational business, there are exposures to substantial gains and losses on both assets and profits as a result of fluctuations in the different currency denominations. The Europe based operations creates the major exposures to the euro along with the US dollar and pound sterling. Despite consistent growth in trading volumes, the Europe based division recorded a decline in Jamaican dollar denominated revenues. This arises primarily from the depreciation of the euro and the pound sterling relative to the Jamaican dollar. Credit Risks Credit risk is the loss of principal or loss of a financial reward stemming from a borrowers failure to repay a loan or otherwise meet a contractual obligation. At JP credit risk represents the risk of failure by a third party settling an outstanding debt to the company. JP business level units are exposed to the risk of buyer default but have assessed these risk based on trading environment of each business unit. Each unit or division is responsible for assessing trading relationships and using available information to sets prudent credit limits on the amount of exposure placed on a given customer relationship. From the corporate investment side, credit risk is mitigated through the use of underlying security for the different assets in JPs portfolio.

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Interest Rate Risks Interest rate risk is the risk borne by an interest bearing asset, such as a floating rate loan where future variations in the interest rate may result in adverse positions for the buyer or seller. Therefore, JPscash flows from financial instrument may be impacted by fluctuating interest rates. This is however mitigated at the capital structure level where JP maintains a low debt level relative to shareholders equity. The companys risk bearing debt at year end 2010 shows a blend of fixed and variable rate instruments which are used for the creation of a balanced risk profile. The risk portfolio of JP includes majority fixed rate instruments in high risk areas and variable rates in low risk areas. These risks are monitored by the companys corporate division, hedged via use of bonds, fixed income instruments or fixed for floating interest rate swaps. Operational Risks Operational risks are those risks inherent to JP business operations and are mitigated via management implemented controls at the business unit level along with offsetting to more experienced third party personnel with greater expertise in the identified area. Operational risk types include the risk of natural disasters which has been one of the major exposures of the firm affecting the manufacture of banana products and by products along with its other agricultural farm based business segments. This is mitigated through use of insurance mechanisms for continuing operations and monitoring capacity and demand based on seasonality of natural disasters. Global commodity prices also present major challenges for the firm over the past 6 years. Outside of indirect exposures to price increases in the energy commodity, other commodity risk include, citrus and other fresh fruits and packaging materials (glass and plastic) for the Europe division, fertilizers, cooking oils and packaging (plastic and cardboard) for the JP Tropical division. These risks are minimized via use of Forward Rate Agreements and long term

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contracts with customers and supply networks along with continued monitoring of market prices and ensuring sufficient working capital is maintained to leverage economies of scale.

Detailed Analysis of Trade Barriers Trade barriers are those government induced restrictions used in international trade and can be classified in two main categories; Tariff and Non-Tariff trade barriers. Analysis of United Kingdom Trade Barriers

Tariff Barriers to Trade

Barriers to trade in the form of Tariffs implemented by the UK government are dependent on whether the import or export is inside or outside the European Union. Tariffs are guided by the annually published UK Trade Tariff which provides details relating to trade with the UK. Most goods arriving from outside the EU are liable to; Import VAT, Excise Duty, and Customs Duty; example, goods purchased over the internet with an intrinsic value exceeding 15, are charged duties or VAT and include include alcohol, tobacco products, perfume or toilet waters. Customs duty - becomes payable if the goods are over 135 in value but is waived if the amount calculated is less than 9. Excise duty - this is charged on alcohol and tobacco products and is additional to customs duty. The excise duty on alcohol products such as wines and spirits Non Tariff Barriers to Trade Non- tariff barriers to trade include; import license, export license, import quotas subsidies, local content requirements, embargos and currency devaluation. The UK HM

Revenue & Customs stipulate various license and enforcement for international trade. For the importation or exportation of certain Common Agricultural Policy (CAP) commodities from or

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to a country not in the European Union (EU), licenses help to monitor and control these markets in an attempt to protect domestic industries from foreign competition. The Import Licensing Branch (ILB) of the Department for Business, Innovation & Skills (BIS) is responsible for the issue of licenses required for imports such as; textiles, firearms and ammunition, nuclear materials and iron and steel from some countries. Other non-tariff trade barriers are Embargoes implemented by the EU against other nations such as China (arms), Pakistan and India. This results in the partial or complete prohibition of trade and commerce with these nations. The UK which is a member state of the EU has allowed full duty free access without quotas to countries on the UNs list of least developed countries have since February 2001. The UK through the EU has also implemented quantitative restrictions on imports such as Steel, Textiles, Potassium Chloride, and Footwear. These import quotas allow for the import of a limited amount of these goods at a rate of duty lower than normal (World Trade Organization, 2011).

Analysis of Jamaican Trade Barriers Tariff Barriers to Trade Tariff barriers for trade with the European Union member states are implemented by the Jamaican government through its customs authority and include duties and taxes on imports along with other cost related factors. Types of duties range from import duties/customs duties which are normally levied on goods imported into Jamaica for example motor vehicle import rates effective May 2011include Common External Tariff of 20%, Special Consumption Tax of 10% and General Consumption Tax of 17.5% for 1.0 c.c. engine size amounting to a total of 55% aggregate duty on individually imported cars. Postage Stamp Duties are levied for items sent through the post with a basic requirement of J$5 affixed to receipts with a Cost Insurance

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and Freight (c.i.f.) value of J$5,500 and less and receipts with values over and above this range, J$100 worth of stamps must be affixed. Other items such as chicken, most chicken parts, pork and some pork products, beef and some beef products; some aluminum products, alcoholic beverages, and cigarettes attract an additional stamp duty. Since 1991 the Jamaican government has reformed their tariff structure by replacing several duties and taxes, e.g., Excise Duty, CARICOM Duty, Consumption Duty, Entertainment Duty, Retail Sales Tax, Hotel Accommodation Tax and Telephone Service Tax with the recent Special Consumption Tax and General Consumption Tax. GCT is payable on most imported items whilst SCT is levied on alcoholic beverages, most tobacco products and some petroleum products. Non Tariff Barriers to Trade In an attempt to protect the Jamaican domestic industries from fierce competition from imports, the government of Jamaica adheres to the signed WTO multi- lateral agreements and has implemented several Non tariff trade barriers. These include Import Licenses which are issued by the Trade Board Limited authorizing the importation of the motor vehicles, plants, plant extracts, cement, chemicals and gas. There is also the implementation of Import Quotas on Chlorofluorocarbons an organic compound used in the production of solvents, blowing agents, propellants and refrigerants. Only specially selected companies are granted the privilege of importing a certain percentage of this product and are limited to an annual allocation ranging between 6.5% and 9.3% of the total imported for the year. As a means of protecting the local manufacturing industry, the WTO agreement with Jamaica has realized the implementation of anti-dumping and safeguard measures to protect manufacturing activities.

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Trade barriers, United Kingdom, Netherlands and their relation to Jamaica The United Kingdom and the Netherlands are two member states of the European Union (EU). The EU nations have developed a single market with collectively implemented trade policies to foster preferential trade agreements between member states for the benefit of economic development. These trade policies have however been harshly criticized for being discriminatory against African, Caribbean and Pacific Group of States nations (ACP) and are incompatible with the World Trade Organization rules. The EU has since moved to create reciprocity and non-discrimination in trade, through the creation of the Economic Partnership Agreement between ACP nations. Jamaica has entered an EPA agreement with the EU by being a part of CARIFORUM which includes other Caribbean countries along with Dominica. The EPA is set to create preferential treatment in trade for least developed countries through the removal of trade barriers and the implementation of a Free Trade Area between countries in the EU and Caribbean countries including Jamaica. Through the agreement, CARIFORUM countries such as Jamaica Market will gain access for goods and phased tariff reduction, Duty-free, quotafree access into the European Union market inclusive of colonial states; Guadeloupe, Martinique and French Guiana with transitional arrangements for rice and sugar. CARIFORUM has also agreed to the following liberalization on goods; a total of 61.1% of EU imports in value over a 10 year period; 82.7% over 15 years which represents 85.1% of tariff lines previously set by the EU; and 86.9% over 25 years which represents another 90.7% of tariff items. CARIFORUM has designated sensitive products that will not be considered under liberalization and are included in an exclusion list. Some major excluded items include agricultural and processed agricultural products (e.g. meats, poultry, vegetables, fruits, dairy products); fish, chemicals, furniture and other industrial products.

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Benefits for Jamaica Jamaica as a part of Cariforum benefits from the EPA through the receipt of duty free / quota free access to the large EU market, conditional improvements in the access to the EU for Jamaican services suppliers which include; entertainers, professionals, business visitors, investors and university graduates, development support for tourism industry, development support for private and public sector, emphasis on increasing private sector competitiveness and possible increase in foreign direct investments and technological transfers Challenges for Jamaica The criterias named in the EPA may be challenging for Jamaica has our major trading partner is the US who is responsible for over 54.6% of the regions exports and 38% of imports. Jamaica has had a trade deficit with all EU members except the UK and could realize; exposures to local industries through increased competition from imports, an increase in the countries overall trade deficit, social implications through possible displacement of vulnerable and uncompetitive local industries, exposures to possible alterations and modifications made in world trade, loss of revenues due to tariff reductions on imports and EPA may implicate future trade agreements with the US and Canada

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PART 3 Banking Services Utilized by JP The two main financial institutions used by JP to facilitate international trade financing are Scotiabank, Jamaica/UK and Citibank, Jamaica/UK. Both banks provide a range of products and services for export and import transactions; Bonds, Documentary collection, letters of credit, stand-by letters of credit, and wire transfers Banking Services - Bonds Scotiabank on behalf of JP provides a guarantee to importers through the issuance of bonds either via the branch domiciled in the importers country or its local branch. This provides the importer with assurance that JP Tropical will honor the agreed obligations of their export agreement. e.g. a bond is issued for the exportation of 500 cases of banana chips to be honored by April 25, 2012. If this obligation is not fulfilled, JP will have to pay a percentage of the contract value (1% to 100%) to the UK importer for compensation Types of bonds utilized by JP JP currently utilize two types of bonds namely Performance Bonds where Scotiabank on behalf of JP issues a performance bond agreeing that all requirements of the EU member states Food Standards Agency are met with regards to quality and other accepted standards. Additionally, Conditional Bonds (with no documentary evidence) which specify Scotiabank must make payment to the importer in the event of default by JP without the use of documentary evidence such as a bill of laden.

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Documentary Collection Citibank Jamaica acts has the remitting bank of JP in the provision of a documentary collection service. This allows for the transfer of export documents such as bills of exchange and other title documents to the importers bank. Depending on the size/type customer JPs collection order will be prepared with instructions DP (documents against payment) where the importer must make payment before retrieval of the collection order used for small clients and DA (documents against acceptance) for large credit customers. Citibank UK will remit funds to Citibank Jamaica to allow for the credit of JPs account held locally with the bank. Letters of Credit Scotiabank and Citibank located in London/Amsterdam are responsible for advising and confirming LOC on behalf of JP. In a typical arrangement, JP instructs the BNS Jamaica (issuing bank) to issue an irrevocable credit. BNS Jamaica notifies a bank in Netherlands who then advises the exporter of the existence of this credit. Goods are shipped by exporter Halse Chemicals and necessary documents are obtained and presented at the agreed time to the bank in Amsterdam. If sight drafts are called for payment is made immediately to the exporter as Scotia Amsterdam is the drawee. Documents are shipped to Scotia Centre, exporter is paid and the Amsterdam Scotia is reimbursed subsequently through accounts held with Scotia Centre. Scotiabank then debits the account of JP held at the bank and release documents needed to clear goods. Wire Transfers This is an electronic means of payment utilized by JP to pay creditors or receive payment from debtors. As a creditor, JP initiates a wire transfer via BNS Jamaica. This request authorizes

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BNS to wire funds from their account to an exporters account having provided the bank with the beneficiarys banking information. Other Banking Services include TRADEXPRESS elite which is an electronic service offered by Scotia Jamaica, Private trade insurance, Short to medium term financing for export schemes and Negotiation of bills drawn under documentary credit.

Examination of the Foreign Exchange Market The Foreign Exchange Market is the worlds largest financial market which assists in international trade and investment by enabling the conversion of currency where participants such as banks, commercial companies, central banks, investment management firms and investors are provided the opportunity of buying, selling and exchanging currencies across different exchanges (Archer, 2010). JP has a multinational company involved in international trade, can be seriously affected by adverse movements in exchange rates. Thus the company faces foreign currency exposures namely translation, transaction and economic. The company is exposed to foreign currency risk on transactions that are denominated in currencies other than the Jamaican dollar. The main currencies giving rise to this risk are the Pound Sterling (), United States dollar (US$) and Euros (). Based on inspection of the companys annual report 2010, JP generated a 5.6% in total revenues of $5.91 billion relative to 2009. This reduction was heavily influenced by the impacts of the depreciation of all three of its major foreign currencies relative to the Jamaican dollar which are the euro, US dollar and pound sterling. Approximately 64.3% of JPs 2010 revenues were reported as euro denominated and given the euro faced the most significant decline in the average 2010 rate of 5.6% compared to the average of 2009, the company was largely exposed to the stated accounting risks, transaction

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and translation. The company manages this risk via use of an internal technique for hedging transaction exposures named a Natural Hedge or Matching. This occurs where JP subsidiaries in Europe borrows in that foreign currency to finance its operations, despite the expense of the foreign interest rate in comparison to the cost of Jamaican debt financing; by matching the debt payments to expected revenues in the euro, JP Jamaica will reduce its foreign currency exposure.

Applying the concept of hedging through the use of Derivatives Forward Contracts A Forward Contract is a binding agreement between a bank and its customer for purchase or sale of a specified amount of a particular foreign currency at an agreed future date, at a rate of exchange determined at the time the contract is made. Through its main international trade financing institution, Citi-bank Jamaica, JP is offered two types of Forward Contracts, namely Fixed Forward contracts and Forward Option Exchange contracts. For fixed forwards, the future date at which the contract will be settled is fixed as opposed to option forward contracts which allow for the settlement date to be executed any time within the contracted period. These contracts are used to; a) hedge payments and receipts denominated in foreign currencies and; b) hedge the translation of foreign earnings for presentation in group consolidated financial statements. In the export of ripe bananas to one of JPs large customer, US distributor Kompass Traders, the company enters into a FRA with its main international trade bank Citibank. JP is

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contracted to export the following monthly orders according to the below details; 1000 case of Tropical Snacks April 30, 2012 @ 1,000 per case. JP wishes to eliminate the foreign exchange exposure in this transaction therefore the Citibank client representative and the head of JPs export division on January 26, 2011 agree to lock into a fixed forward rate. The bank derives its forward rate by determining a premium/discount to reduce its risk as a result of subsequent changes in exchange rates. This is determined using the following formula p = (1 + Rf/m / 1 + Rd/m)n*m 1, where rf = JMD prime rate at 6.25% and rd = US prime rate at .25%. To calculate the monthly figure, each rate is compounded monthly, where m equals the number of months and n equals the number of years. Using this approach we illustrate the general principle that forward rate is derived from the spot rate and interest rate differentials. i. ii. iii. iv. Premium = (1+.0625/12/1+.0025/12)*12-1 = 0.061665 We then use the formula F = Spot Rate(1+p) F = $86.12(1+.061665) = $91.43 Therefore the shipment of banana chips values 1000*US$1000 = US$1000, 000

Using the one month forward rate at the end of April JP will trade the US$ for JMD = $91.43 * USD$1,000,000 = JMD$91,430, 556. If JP had not entered into the FRA and the JMD had appreciated against the USD up to $80, then JP at the end of April would receive $80,000,000 (JMD * sales revenue) Futures A futures contract similar to a forward is an agreement to exchange one currency for another at a specified date in the future at an agreed price known as the exchange rate which is

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fixed on the purchase date but gives the investor the option of exiting the obligation by buying or selling the currency prior to the contract's delivery date. These contracts could be applied to JP has a Netherlands based business who will receive 1,000,000 on January 1, 2011. The current exchange rate implied by the futures is $114.2/. JP can thus lock in this exchange rate by selling 1,000,000 worth of futures contracts expiring on January 1, 2011. In this way, the company is guaranteed an exchange rate of $114.2/ regardless of exchange rate fluctuations in the meantime. Foreign Exchange Risk Derivatives such as FRAs and futures are used in the financial market as a means of hedging against various financial risks such as foreign currency exposures and interest rate risk. Without the use of such derivatives, the company suffers translation and transactional risk related effects where Translation effects are the effects of fluctuations in exchange rates and their impacts on the consolidated accounts of a company that has businesses that report in different currencies. Translation exposures arise from the revaluation of balance sheet items using the quoted rate of exchange at a balance sheet date. If exchange rates change since the prior reporting period, translation of JPs assets/liabilities, revenues/expenses that are denominated in foreign currencies such as the euro and pound sterling will result in the entity reporting a foreign exchange gain or loss. In JPs case, the firm suffered translation losses as a result of the appreciation of the JMD (Brear, 1977). Transaction Exposure on the other hand arises out of normal international trading activities. JP has an exporter to Europe invoices in both the sterling and euro; hence un-hedged

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contracts will be exposed to devaluation/appreciation of these currencies. A typical transaction exposure will result from transactions that give rise to the realization of contractually binding future foreign currency denominated revenues. Thus, the volatility of exchange rates between the purchase and settlement date of the contract will similarly impact the value of the associated foreign currency cash flows, leading to currency gains and losses. For example, JPs accounts receivable associated with a sale denominated in Euros or the obligation to repay a UK pound sterling debt was exposed to the appreciation of Jamaican currency. The JP Annual Report 2010 indicated that at the end of 2009, financial statements were translated using UK139.80 as opposed to 2010 that was translated using UK130.81. Therefore the book value of fixed assets for JP foreign subsidiaries would be reported at a lower Jamaican dollar value in the groups consolidated accounts at the end of 2010. Additionally the act of invoicing in the foreign currency will also be impacted as contracts at their maturity date will be worth less than originally slated and hence invoiced amounts will fall (averaged) to the value of the exchange rate as of the income statement reporting date (Brear, 1977). Another type of exposure considered under the foreign exchange market is Economic exposures. This relates to the impact of unanticipated changes and fluctuations in exchange rates on the firms cash flows, earnings and foreign investments. Companies like JP who hold operations in more than one currency are exposed to this type of risk which is hedged with the use of holding positions in the forex market.

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The impact of recent macro-economic phenomena on JP The Jamaica Debt Exchange and its impact on JP The JDX was implemented in 2010 by the government of Jamaica in an attempt to reduce the general level of public debt interest payments. The initiative required an exchange of high interest, short maturity debt instruments for lower interest, longer maturity coupons. Domestic holders of government securities such as JP would therefore be impacted as the present value of projected earnings from interest income would be less than expected. Given the assumption that government securities are the most secure form of investment, JP and other companies make strategic plans with the expectation of the return from these investments. These plans would now be adversely impacted as the present value of projected earnings would be reduced. To assess possible impacts of the JDX on JP we observe the results of changes in the specific terms of the governments policy with regards to holders of GOJ bonds. Using the formula below we calculate the change in the yield to maturity on a GOJ bond held by JP as a result of the JDX requirements. YTM = 1+(M-P0)/n / (M+ P0)/2 where YTM is the yield to maturity on a bond, I is the interest or coupon rate, M is the face value of the bond, Po is Price of bond and N is Years to maturity. Given the following assumption; the price of a bond before JDX was $920 with a face value of $1000 and that the annual coupons are $100 or 10% coupon rate with 10 years remaining until maturity. Using the formula the YTD before JDX would be 11.38% After JDX the coupon rate is adjusted to 8% and the years to maturity adjusted to 15 years the new YTD would be 8.99% with annual coupon payments of $80 instead of $100 hence reducing expected interest income by $20.

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The Appreciation of the JMD and its impacts on JP Appreciation of the JMD occurs when it takes less Jamaican dollars to purchase foreign currencies such as the USD, GBP and the Euro e.g. in JPs case 2009 versus 2010 UK1 to J$. This led to a reduction in operational cost as a result of cheaper imports, an increase in the cost of exports could lead to a reduction in the demand for JP exported products and hence reduction in revenues. Another effect relates to the Translation exposures impacting the companys financial statement such as a gain on the net liabilities position and a loss on the net asset position. In addition, Transaction effects between the foreign currencies value on the date of the commercial contract versus the date of conversion of the receivables into Jamaican equivalent hence a loss on exports and a gain on imports (Affairs, 2009).

The European Sovereign Debt Crisis The European Sovereign Debt Crisis is an ongoing financial crisis caused by rising government debt levels, trade imbalances, monetary infleility and general loss of confidence in the Euro zone which includes countries such as Greece, Spain, Portugal and Italy. The crisis if not handled well will have rippling domino effects on other members of the European Union such as Netherlands and UK. The afore mentioned countries constitute over 60% of revenues reported by JP and as such the consequences of a collapse of the euro zone may lead to failure of JPs business due to the high market concentration in Europe. JP could be impacted from both a fall in customer demand as a result of a European economic downturn and weakened confidence in the European economy. This would result in a devaluation of the Euro against the JMD which will result in the before mentioned effects of an appreciation of the Jamaican currency. In addition, the inability to realize possible investment income from positions held in European

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securities as a result of country risk, interest rate risk, credit risks and default risks (United Overseas Bank Limited, 2010).

The Economic Partnership Agreement The EPA is set to create preferential treatment in trade for least developed countries through the removal of trade barriers and the implementation of a Free Trade Area between countries in the EU and Caribbean countries including Jamaica. Therefore the benefits accrued to JP includes but is not limited to; increased opportunities for joint ventures and co-production with EU firms, expanded market access in the EU for CARIFORUM goods and services, enhanced competitiveness with the adoption of higher standards, diversification of exports and increased value added and duty free / quota free access to large EU Markets. The EPA may also adversely affect Jamaica as a country in general and JP subsequently as several challenges may be experienced due to; increased competition for banana related exports and other items produced from competitors in Latin American countries, inability of JPs products to meet international recommended standards due to technological advanced production techniques of which JP is unable to conform to and increased foreign transaction exposures related to credit customers.

Conclusion As a multi-national entity involved in international trade, Jamaica Producers Group forms a part of the global business environment. This creates opportunities as well as challenges which must be monitored by management in an attempt to remain competitive. In this review, international trade concepts have been applied to JP and the effects of various facets of the literature has been examined to identify the practical relations of the theories learnt.

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Jamaica Producers in this regard is both exposed to various types of risks related to the financial market as well as opportunities created by the various bodies in international trade such as the WTO. International trade and business is now more open as a result of Trade liberalization, globalization, advanced transportation and increases in technology. Jamaica Producers Group participates in international trade involving the 6th and 7th largest international trading countries in UK and the Netherlands and also locally exports to regional Caricom countries. There exists cost and benefit factors which can be carefully measured in determining the position of the company with regards to business feasibility and this project will highlight the application of international trade within the context of Jamaica Producers Group

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References
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The Public Enquiry Unit - HM Treasury. (2011). Analysing UK Fiscal Policy. HM Treasury Archives , 48. U.S. Department of State. (2009, March 13). Burea of Public Affairs Electronic Information. Retrieved February 20, 2012, from www.state.gov: http://www.state.gov/r/pa/ei/bgn/3204.htm United Overseas Bank Limited. (2010). Risks in International Trade & Mitigating Measures. UOB , 6. World Trade Organization. (2011, June 12). Trade Topics. Retrieved February 14, 2012, from wto.org: http://www.wto.org/english/tratop_e/devel_e/a4t_e/aid4trade_e.htm