Exchange Rate & Share Price Correlation Analysis

This assignment involves a statistical analysis of the correlation between Macquarie Group Limited's share prices and two exchange rates: Australian Dollar to Chinese Yuan (AUD/CNY) and Australian Dollar to South African Rand (AUD/ZAR). The analysis, based on historical data from 2018, aims to evaluate the impact of exchange rate fluctuations on the company's stock performance. Additionally, it discusses the potential benefits and drawbacks of secondary listings for Macquarie Group, considering its current listings on FTSE 100 and ASX 20.

Questions

TABLE OF CONTENTS

PART A
1. Stating whether there is a trade-off between the higher interest rates in Thailand and the
delayed conversion of baht into Australian dollars
By doing evaluation, it has identified that as per investment principle focus should be
placed on investing money where interest rates are high and currency appreciation takes place.
On the basis of such principle or aspects Aussie Blades Pty Ltd needs to make focus on
investing excessive funds in Thailand. The rationale behind this, due to the economic instability,
interest rates are higher in Thailand. Thus, by investing money in Thailand firm can take benefits
of high interest rate but it has to delay investment for the period of one year. On the other side, if
business unit focuses on investing money in Australia then it will receive money immediately but
at lower interest rate. By doing evaluation, it has found that cash flow associated with the
delayed conversion aspect is higher other option available such as immediate change of
Australian currency into TBH. Hence, by taking into account overall assessment it can be
entailed that taking benefits of high interest rates prevail in Thailand and converting TBH into
AUD$ later Aussie Blades can attain trade off and thereby would become to get the desired
level of outcome or success.
2. Assessing the extent to which Australian operations will be affected if net baht received are
invested in Thailand
Computation of net revenue that is available for investment purpose
Particulars Figures (In TBH) Figures (In TBH)
Sales revenue 180000 * 4594 826920000
Cost of goods sold 72000 * 2871 206712000
Net revenue (Sales – COGS) 620208000
The above mentioned table shows that Aussie Blade has net revenue of 620208000 TBH
after the deduction of COGS which in turn accounted for 206712000 TBH. Outcome of above
assessment presents that if net revenue generated from Thailand are invested in the similar
country then company needs to take more loan for continuing or ensuring smooth functioning of

operations in Australia. Given case clearly presents that company has already taken loan from
Australia @ 10%. In addition to this, given case presents that buying components in Thailand
becomes more expensive as compared to Australia. Considering such aspect, Thailand
departmental team focuses on importing components from Australia. Thus, operations of the
company will be affected if investment such as net revenue of 620208000 TBH is made in
Thailand over Australia. Moreover, without having enough funds, Australian manufacturing
plant, located in Perth WA, would not become able to manufacture Speedos.
3. Comparing the choice of investing funds versus using the same to provide needed financing
Particulars Figures Figures
Delayed conversion Future value: PV (1 + i)n 620208000 (1 + 0.15)1
= TBH 713239200
Conversion of TBH into AUD
$
TBH 713239200 * .0361
= $25747935.12
Immediate conversion Conversion of TBH into AUD $
TBH 620208000 * 0.0381
= $23629924.8
Future value = PV (1 + i)n
FV = 23629924.8 (1 + .08)
After 1 year future value:
$25520318.78
Conclusion: It can be concluded from the cash flow evaluation that business entity
should lay focus on the aspects of delayed conversion. Moreover, in the delayed conversion
option or strategy company will get high cash flows such as $25747935.12 respectively.
4. Giving recommendation about the plan if Thai baht will depreciate by at least 7 per cent in one
year
Particulars Figures Figures
Delayed conversion Future value: PV (1 + i)n 620208000 (1 + 0.08)1

= TBH 669824640
Conversion of TBH into AUD
$
TBH 713239200 * .0361
= $24180669.5
Immediate conversion Conversion of TBH into AUD $
TBH 620208000 * 0.0381
= $23629924.8
Future value = PV (1 + i)n
FV = 23629924.8 (1 + .08)
After 1 year future value:
$25520318.78
On the basis of the given case situation, if Thai baht will depreciate by 7% then cash flow
accounts for $24180669.5 (delayed conversion) and $25520318.78 in the context of immediate
conversion. Considering assessment, it is recommended to the firm to lay focus on undertaking
immediate conversion plan which proves to be more beneficial for the near future.
PART B
Presenting a brief background of two selected companies
From ASX 20 index two companies have been selected such as RT and Macquarie group.
Both the companies are operating in different sector such as:
Rio Tinto (RT): Energy sector
Macquarie group: Financial industry
Rio Tinto: It is one of the leading Australian-British multinational companies that
involved in metals and mining operations. RT is a dual listed company as it recognized as main
constituent of FTSE 100 and S&P/ ASX 20 index. It offers products or services to the customers
around the globe. The below mentioned table shows that Rio Tinto has operations in several

countries such as China, Asia, USA, Japan, Canada, UK and other countries. Considering this,
unit can be depicted that company is operating in several large countries outside Australia.
(Source: 2017 Annual Report Rio Tinto, n.d.)
Management of foreign currency exposure: Annual report of RT presents that, on
consolidation, all the elements of income statement related to each entity are translated from
functional currency into US dollars. For this purpose, average exchange rate is considered by the
business unit. However, in the case of material –off transactions exchange rate that prevails on
such date is considered (2017 Annual Report Rio Tinto, n.d.). Further, it has assessed that cross
currency interest rate, forward and option contracts are used by RT for managing and deal with
FOREX exposure. Further, report published by RT at the end of 2017 presents that management
team of the company assumes that there is a tendency in relation to compensating movements
take place in US$ in against to the Australian and Canadian dollar. Thus, PV values of cash
flows are translated at the spot exchange rate for effectual currency management.
Macquarie group:
Macquarie Ltd is leading global investment banking and diversified financial services
group. It provides several services to the institutional, corporate and retail investors regarding
banking, financial advisory, investment as well as funds management. Such business unit has
operations across 28 countries which in turn presents that it operates at large level. Majorly, firm
has wide operations in the countries, except Australia, such as Asia Pacific, America, Europe ,
Middle East and Africa.

(Source: 2017 Annual Report Macquarie Group, n.d.)
FOREX risk and management of foreign currency exposure: In the context of such
business unit, significant proportion of net income is mentioned in other currencies rather than
AUD $. Thus, it can be presented that net income will be lower if AUD $ appreciates in against
top the other currencies. Unfavourable impact of Pound Sterling movement has experienced by
Macquarie on net income (2017 Annual Report Macquarie Group, n.d.). This business unit also
follows exchange rates that exist on the date of occurring transactions. Hence, for balancing
currency exchange risk occurred through foreign market fluctuation company uses derivative
instruments such as futures, SWAP etc and assets-liability management practices.
Determining correlation between exchange rate and its share price
Annual report of both the companies clearly exhibit that they are operating at global
level. Hence, both the business units are facing issue or risk from the fluctuations taking place in
the stock market.
Rio-Tinto
In the context of Rio-Tinto, annual report pertaining to the year ended on 2017 clearly
presents that after Australia, key production location and sales destination is Chile and China.
Further, consolidated sales revenue statement presents that out of 100%, China’s revenue
accounted for 42.2%, 43.6% & 44.2% in 2015, 2016 and 2017. All such aspects present that
fluctuations will take place in China’s currency impose risk in front of the company. Table
depicted above shows that revenue generated from China inclined from 14701 to 14742 US$
million at the end of 2016. Hence, by taking into account such aspect, weekly chart of the foreign

currency such as Chinese Yuan vs AUD exchange rate has been framed. Further, for developing
suitable policies for the upcoming time period, correlation between such two currencies have
been found.
3/27/2016
4/29/2016
6/1/2016
7/4/2016
8/6/2016
9/8/2016
10/11/2016
11/13/2016
12/16/2016
1/18/2017
2/20/2017
3/25/2017
4/27/2017
5/30/2017
7/2/2017
8/4/2017
9/6/2017
10/9/2017
11/11/2017
12/14/2017
1/16/2018
2/18/2018
3/23/2018
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Forex Exposure Assessment
share prices of Rio Tinto
AUD/CNY
(Source: AUD/CNY Historical Data, 2018)
(Source: Rio Tinto Limited share prices, 2018)
Correlation table
Share price AUD / CNY
Share price 1 .25
AUD / CNY .25 1
Macquarie group

In this, rationale behind considering ZAR is that Macquarie group generates high
revenue from Europe, Middle East and Africa. Hence, by taking into account the level of revenue
and assets in the year of 2016 & 2017, comparison of AUD$ in against to ZAR has been done.
3/27/2016
4/27/2016
5/28/2016
6/28/2016
7/29/2016
8/29/2016
9/29/2016
10/30/2016
11/30/2016
12/31/2016
1/31/2017
3/3/2017
4/3/2017
5/4/2017
6/4/2017
7/5/2017
8/5/2017
9/5/2017
10/6/2017
11/6/2017
12/7/2017
1/7/2018
2/7/2018
3/10/2018
0.00
20.00
40.00
60.00
80.00
100.00
120.00
Foreign exchange assessment AUD/ZAR and
Macquarie 'sgroup
share prices of
Macquarie Group
Limited
AUD/ZAR
(Source: AUD/ZAR Historical Data, 2018)
(Macquarie Group Limited share prices, 2018)
Correlation analysis
Share price AUD / ZAR
Share price 1 -.75
AUD / ZAR -.75 1

Findings and evaluation: Statistical evaluation shows that lower correlation takes place
between exchange rates and share prices of RT such as .25. Referring this, it can be presented
that exchange rate fluctuations, AUD / CNY, does not have significant impact of RT’s share
prices. This aspect exhibits that strategy undertaken by RT for FOREX risk management is good.
On the contrary to this, high and negative correlation has found between AUD / ZAR and
Macquarie group share price. In accordance with this, share price of the firm increases when
exchange rates fluctuations are lower.
Explaining benefits and downside to having that secondary listing pertaining to both the
concerned companies
From assessment, it has found that RT is listed on two stock exchanges such as FTSE 100
and ASX 20. Hence, reasons behind secondary listing can be understood from the benefits and
drawbacks which are enumerated below:
Benefits Drawbacks
 Enhances liquidity: Dual listing offers
opportunity to the firm to attract more
investors available in the concerned
market and thereby increases liquidity.
 Offers high protection to the investors
 Helps listed companies in increasing
investor base
 Promotes company’s brand and
products to a great extent. Moreover, in
the case of dual listing, company’s
news and reports are published by
media (Advantages of Dual listing,
2018).
 Cost pertaining to secondary listing
imposes financial burden in front of
firm.
 Ongoing cost associated with the dual
listing aspects imposes challenge in
front of the firm.
 Dual or separate listing aspect
demands for additional advisers and
overseas based directors
 Demand for additional resources
(Going Global: The benefits and
challenges of dual listings, 2018)
Hence, by taking into account both pros and downsides of secondary listing Macquarie
group are advised to lay focus on another stock exchange where it can be listed. Secondary

listing aspects will enhance the access of such group to the larger pool of potential investors.
Further, by operating in more than one market such as FTSE 100 business unit can increase its
liquidity to a great extent. This strategy will also increase Macquarie group’s ability in relation to
tapping in to varied market at different time. It also enhances opportunity pertaining to merger
and acquisition which in turn enables firm to explore its business operations to a great extent.
Referring all the above depicted aspects secondary listing is advised to Macquarie group.