Week 5: Corporate risk management

Last week I have wrote about how to raise the finance in a corporation due to particular reasons such as intended to expand its business. Now, I am going to share regarding this week's lectures involving the foreign currency exchange rate and the tax issue to see how a corporation is able to manage these things.

 

First of all, we have to understand what is 'foreign exchange rate' in which it is define as the conversion of one currency for another currency. Changes in foreign currency exchange rate might cause the increasing of uncertainty related to the income from abroad's operations or trading internationally. Therefore, a company which is planning to expand its business widely to other country has to face several risks that could occur regarding the currency exchange if they still insist to expand their business globally. It is because, shifting in foreign currency exchange rate could impair the competition position and wreck its profit.

 

In addition, there are some possible impact due to the exchange rate changes on several firm's activities such as, income that a company will get from overseas is uncertain, amount of paying money to the importer at future date also uncertain as the time of deal may be struck, the valuation of foreign assets and liability could change easily due to the foreign exchange movements, the viability of foreign operations in the long-term period unpredictable and the  acceptability or otherwise of abroad's investment project volatile due to the future currency changes might have great impact on estimated NPV.

 

Who is involve in trading? They are the exporters or importer, tourists, fund managers, governments, central banks, speculators and banks. However, the major players are the large commercial banks and speculators as they are dealing on behalf of the clients therefore, they are holding their own proprietary transaction in order to gain profit by taking a position in market. This unstable of exchange-rate movements can give a bad effect for the business and shareholders if it could not manage the possible risks as shown by HSBC Bank in Malaysia where they have managed the foreign exchange rate by first; having a clear understanding of their foreign exchange risk which are describe in 3 types or risks: 

 

a) transaction risk = risk that occur when a company has commitment whether the amount to pay or receive money in foreign currency are depends on the foreign exchange rate movements which ultimately related to imports and exports of goods on credit. Other than that, investing abroad or borrow in a foreign currency also can create the transaction risk.

 

b)translation risk= when there is a foreign subsidiaries, the companies need to translate the figure in the consolidated accounts into the parent company's currency.

 

c)economic risk= risk is arises when a company loss in competitive strength because of foreign exchange movements and thus lead to decrease of the economic value of the company.

 

Other than that, they also have to understand the solution for the risks, developing any strategy using the combination of  spot, forward exchange contract and currency options and then implementing the plan quickly in order to protect the profit. These foreign exchange protection are also might be important for those who are exporters or importers, the owners of overseas assets or joint venture and partnership and companies that have more than one country

 

However, there are also a number of strategies that company (especially a firm with a number of characteristics such as those companies that seek for growth opportunities, financing policy, liquidity, expand their business size and those who have multinational transaction) could hedge themselves by : 

1.  invoice foreign customer and pay money to foreign company in a firm's home currency
2.  do nothing by bear the risk and hoping that the exchange rate movements will deliver a good news for the company
3. netting where multinational subsidiaries of company settle the debt base on net amount instead of gross amount with the parent company
4. matching is involve both group and third parties that matches inflow and outflow in different currencies caused by trade.
5. leading and lagging- the speedy up or delay the payment between now and the original due date of payment
6. forward market hedge which is regularly used by exchanging two currencies at fixed time in the agreement contract
7. money market hedge which involve borrowing money from the money market.

Why a company needs to hedging itself? This is because it has implications on hedging such as to ensure the availability of funds for investment opportunities, and could reducing some of these matters; the financial distress, incentives to under invest, managers' risk and cost to adjust capital structure. Apart from that, the most significant reasons for most companies are due to maximising the shareholder value and the tax function.   This include the tax because most international company may want to minimise the overall worldwide tax burden for their long-term strategic planning, long and short term cash flow and investment or project portfolio.  What most companies do in order to lessened the tax burden include the transfer pricing where this method could manipulate where the profit arise so, they will pay less tax.

 

Overall, a good corporate management would make people in the corporation always glad to work in the organisation...

Week 4: Raising corporate finance

It is commonly known that money is very important in one's life. Without money, it is very difficult to survive in this world that is increasingly developed. So does the business. Without enough money, how individual could run the business. Money in the sense of business normally is capital. A firm might needs the sufficient capital or even more money to run the business. Therefore, a firm needs to generate or increase the company's financial as to secure for long term period. Most people might think it is easy for a company to get money in order to stabilize or enhance the company's financial. However, this is the reality- that companies require to use several methods and go through several processes which they might have to concern if they want to improve the company's finances in order to sustain their business.

 

Therefore, based on this week’s lecture, there are some matters will be discussed throughout this blog-that a firm probably the management, needs to considered a several methods and processes they have to go through in order to raise the corporate finance. First of all, managers might need to consider the shareholders’ value where their shareholders always expect to get a high return on their investment. So, a firm possibly requires achieving an appropriate rate of return for the investors so that it will be easy to get the new funds from them as they are happy with the performance of firm’s activities and the possible high of return they might get from it. It will be good if the firm could have the lower cost of capital or cost of finance and get the higher return for the investors.

 

A firm could raise the capital or finance probably by two types that are long term equity finance and long term debt finance. Long term equity finance is by selling the ordinary shares to new investor perhaps via the stock exchange, or sells the shares to the existing shareholders in the firm that involve various issuing methods such as offer for sales, placing, tender offer and stock exchange introduction. So, as the ordinary shareholders, they probably have the rights towards the firm in terms of any rewards or returns or compensation as the definitive bearer of firm’s risk. Before a firm can sell its shares, the shares need to be quoted in the stock market which the firm also needs to fulfill the several listing requirements that set by UKLA Listing Rules so that it would be easy to get new long-term funds in future, however, to gain the stock exchange quotation probably costly, so as alternative, a firm may sell the shares in terms of right issue which is more cheaper of issuing costs to the existing shareholders first before offer to other investors.

 

Contrast to long-term debt finance, debt itself explain to something that needs to be paid back. The method of repayment might be through the negotiation period of repayment or pay total of debt at the end of borrowing. This includes several types of long term bonds (debentures or loan stock), international debt finance (eurobonds) or borrow from bank and other financial institution. For instances, Business Times News  (2013) reports that, Multi Agro Gemilang Plantation in Jakarta, Indonesia is using a bank loan to build its second palm factory as its financial provider to raise the capital of its development in order to earn more profit. This shows that this company is using long-term debt finance in order to improve its finance thus to increase the shareholder's wealth. Possible reasons why they have chosen this type of finance because it is a low legal costs and administration which also more cheaper of issuing costs than equity finance with lower of investor risk. They also might get the funds quickly as the bank loan process could be simple and more flexible where they can negotiate with the bank in terms of repayment of loan without penalty if the firm does a good performance than they expected.

 

As a summary, there are many ways in order to raise the corporate finance with such various characteristics, advantage and disadvantage of long-term equity finance and debt finance that a firm could choose or consider perhaps also concern in maintaining the shareholder's value.

Week 3 (Trial 2): Stock Market Efficiency

In this week lecture,  I have learned about the stock market and how to evaluate the stock market efficiency or in other words, to what extent the stock market is regard as efficient for some cases. Stock market is very important to government and industry in order to raise their long-term capital to finance the investment or joint-ventures abroad, investors also can have their excitement of returns in their investment, and not forget where society might get the advantage from this which grant a more appropriate allocation of sources so that they can get a maximum mix of goods and services. The stock market or stock exchange needs to be well-run for the good of all sorts of participants such as buyers, sellers and investors. For instances, help firms to find funds and grow its business, and allocation of capital will be more appropriate if there is a well-run stock market.

 

However, there also might have the opposite of a well-run stock exchange therefore, this can be avoid with the 3 different levels which had defined by the economist: weak-form efficiency where the share price is reflect regarding the information based on the past movement and the history of share price is meaningless as it can not predict the future, semi-strong efficiency which share prices are fully reflect with all relevant publicly available information and strong-form efficiency indicates that share price reflect with all relevant information including private information where the insider dealing are know more about their share price movement other than others do.

 

Lets look at this case where Facebook's share price was fall down by more than 9% due to the fourth quarter of its profit was down by 79% as reported in Money Morning Newspaper on 31st January 2013. Could we identify or examine if this change of share price react rationally and quickly and what about the evaluation of its efficiency? Is it in the weak-form or semi-strong form or strong form efficiency? Well, Facebook's revenue was $1.59 billion, up 40% year over year and $1.53 billion in future. The Menlo Park, CA-based company's advertising business grew at its quickest pace since before the company's initial public offering (IPO) on May 18, 2012, and contributed to the robust revenue growth but then its shares ended the volatile after-hours session down some 4% at $29.98. The sell off continued Thursday with its shares down by 3.52% in early morning trading.

 

From that news, it is shows that the share price will change which is, it is unforcastable and react quickly and rationally if any new information about a firm is revealed in the stock market and this also indicates that the share price of Facebook is in  semi-form efficiency because the share price is reflect not only based on the past information but also the current information as the investor also can predict for the future whether FB can make money in the future or not.