Swatch Group and Francogeddon

Abstract

This case illustrates how exchange rate shocks affect international businesses. The focus is on one recent stark example: the effect on Swatch Group of the Swiss National Bank's January 2015 decision to end its policy of putting a ceiling on the euro/Swiss franc exchange rate. It is useful for an introductory class that defines different exchange rate concepts, illustrates why managers should care about exchange rates, and motivates/previews the study of the macroeconomics of exchange rates, capital flows, and monetary policy. This case is appropriate for use in a first-year MBA course that deals with international economics or finance, though it is written to be standalone and thus could also be employed in an advanced undergraduate or master's level course on international macroeconomics or finance. Excerpt UVA-GEM-0167 Oct. 29, 2018 Swatch Group and Francogeddon “The Swiss National Bank has decided to discontinue the minimum exchange rate of CHF 1.20 per euro with immediate effect and to cease foreign currency purchases associated with enforcing it.” Thomas Jordan, Chairman, Swiss National Bank With that one sentence uttered on a cold Zurich day in early 2015, Thomas Jordan ended the Swiss National Bank (SNB) policy to hold the Swiss franc (CHF) down against the euro (EUR). The policy, which had been in place since September 2011, had SNB purchasing foreign currency in exchange for the Swiss franc in order to maintain a floor of CHF1.2 per euro (or, equivalently, a ceiling of EUR0.83 per franc). Within a week of removing this policy, the franc appreciated over 20% and the stock price of Swatch Group, a Swiss watch manufacturer and exporter, fell by over 20% (Figure 1). Swatch CEO Nick Hayek Jr. proclaimed, “Words fail me! Jordan is not only the name of the SNB president, but also of a river and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country.” . . .