Question 1
The CEO of Sons of Midas (company) should be concerned about the volatility given the inconsistent movement of gold prices and currency fluctuations associated with US dollars (USD) in relation to Australian dollars (AUD). This can result in unexpected outcomes to the company’s profit & loss.
Without an effective hedging strategy, the company is exposed to volatility in gold prices and currency fluctuations between USD and AUD. As production costs incurred in AUD are expected to be constant at a volume of 50,000 troy ounces. However, as the revenue of the company is generated in USD this exposes the company to negative profitability if the AUD appreciates against the USD. Furthermore, decrease in gold prices also affects revenue and the profit margin of the company. The company can protect itself by entering into forward or futures agreement with its costumers to minimize the impact of volatility on fluctuations associated with the exchange rate and gold prices. The following factors necessitates the need for reducing volatility:
• There is a direct correlation between depreciating AUD against USD and gold prices – as gold prices fall, AUD depreciates against USD. Given that global gold sales are down by 12% and are expected to significantly decrease in 2014 . This creates uncertainty and puts pressure on gold prices.
• The company is trading in USD; any possible weakening in USD will put pressure on the company’s bottom line. However, the company is naturally hedged where movement in gold prices offset risks associated with exchange rate fluctuations to customers in USD. A weakening USD is likely to result in an increase in gold prices given the inverse correlation between USD exchange rate fluctuations...
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...on if the gold price rises and goes against market expectations. From a conservative standpoint, bought put option, straddle and strangle are best options despite the higher premium involved since it produces gains when gold prices fall and limits losses or in some cases even provides a gain when gold prices rises.
Overall conclusion:
It is highly recommended that the company incorporate the use of options in its hedging strategy, as the gold commodities market is increasingly volatile and the use of forward and futures contracts alone exposes the company to losses if the forward and futures move against market expectation. Options despite its complexity if utilized and monitored effectively can minimize the downside exposure in forward and future contracts with losses restricted to the option premium if the hedging strategy goes against market expectations.
Money related derivatives empower companies to exchange particular monetary dangers, (for example, premium rate hazard, cash, value and product value hazard, and credit hazard, and so ...
Despite the increase in volatility, the NASDAQ Composite Index is up by 15.4% for 2007 and by 28% since the last MoneySoft M&A Outlook was published. During the same period, the Dow Jones Industrial Average has moved from 10,705 to 13,930—an increase of 30%, but the market is “wobbly.”
On the other hand, there are disadvantages on weaken dollar. Weaken dollar is bad for America citizen. Weaken dollar lifted price import. Consumers face higher prices on foreign products or services.
World Bank International Task Force on Commodity Risk Management in Developing Countries. ¡°Dealing With Commodity Price Volatility In Developing Countries: A Proposal For A Market-Based Approach.¡± Discussion Paper for the Roundtable on Commodity Risk Management in Developing Countries. World Bank. Washington, DC: 24 September 1999.
The pharmaceutical industry is relatively immune from the effects of economic cycles. Demand for the industry's product remains constant in up and down economic cycles as market demand is a function of the overall health of the population. However the globalization of the pharmaceutical industry increases the risk associated with foreign investments and exchange rates. The firms in this industry seek to minimize risks by using hedging practices such as foreign currency forward-exchange contracts, borrowing in foreign markets, and using currency swaps.
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
1. What is the business reason for China Noah’s potential currency exposure? Does the company need to subject itself to substantial exchange rate risk? Is the risk “material” to China Noah? Do you think China Noah should hedge?
Not since the late 1970s has gold been so popular. For many years, gold was an afterthought. No one wanted to deal with it. It's heavy, hard to store safely (especially in any kind of volume), and it's expensive to ship. It lacks convenience, liquidity, and the market can be confusing.
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
...sk is also preferable. (Tufano, 1996) stated that most firm hedge against gold price risk in order to smooth out revenues they will receive on output. In addition, there are also firm that use commodity price risk to protect themselves against commodity price in their inputs. In this case, Hershey’s can use futures contracts on cocoa to reduce the cost uncertainty in the future.
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
Dollar value fluctuation has various impacts on Costco performance some being favorable and others being adverse. With the expanding level of globalization of economies of the considerable number of nations, the business sectors for every one of the merchandise and administrations have gotten to be hyper aggressive.
According to The Star Online, up to 80% of the total group borrowings of RM7.49 billion were denominated in US dollar. Simultaneously, 8% of the total group borrowings were denominated in Euro currency. In other words, the total debt of the group that denominated in US currency worth at US$1.33 billion, approximately cost at RM5.91 billion. The total debt that denominated in Euro currency cost around €129.8 million, approximately cost at RM610.61 million. The high composition of debt in foreign currency caused the group extremely vulnerable to foreign exchange risk. A sensitivity analysis conducted by CIMB Research revealed that IOI could face RM148 million of loss or gain for foreign exchange translation risk with every RM0.10 rise/drop in Ringgit to US dollar exchange rate. Due to substantial losses on foreign exchange translation and fair value loss on derivative loss, the company predicted that the second quarter net profit of 2017 will be dropped by 98% to RM15.6 million, compared to the first quarter net profit recorded at RM703.7 million (Kok, 2017). Thus, foreign exchange risk is considered as high risk for
One can accurately state that the role of the competent and capable financial manager is figuratively worth its weight in gold. As global markets today's financial markets increase in complexity, the tradition of learning by doing will not suffice. The financial manager today must hit the ground running with ready expertise to be used effectively as the CFO or as part of a team of financial experts within the ranks of the CFO's office. In navigating the international marketplace effectively, financial managers find themselves in a technology driven, real time information deluge which helps them to satiate the knowledge demands of investors, commercial and investment bankers, shareholders, employees, brokers, traders et al who must know particular companies, their products and the markets wherein they operate. The financial manager is charged with providing the information necessary to fulfill this relentless demand for a range of financial information that literally runs the gamut.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).