Question

Discuss / describe how Tesla achieves consistent revenue and earning growth through the uses of financial options / derivative tools / off-balance sheet financing (e.g. foreign exchange hedging, interest rate risk management, and off-balance sheet financing like joint partnership).

Please explain in 2 paragraphs or more. Thank you.

Answer 1

Tesla is able to achieve consistent revenue and earnings growth through the uses of financial options / derivative tools / off-balance sheet financing. Tesla provides resale value guarantees and similar buy-back terms. These terms attract many buyers and hence Tesla is able to use such programs to grow its sales. Now for such programs the amount of proceeds related to residual value is deferred until the option expires or until the option is exercised. More importantly Tesla capitalizes its cost of leased vehicle.

The company actively uses fixed-for-floating interest rate swaps for hedging its interest rate risk exposure and this produces income for the company that is part of its “other income”. The company actively uses derivative instruments like interest rate swaps to mitigate its interest rate risk and hence to generate other income.