Treasury and Risk Management

This document discusses treasury and risk management, including the background of AUD/EUR, the role of the bid process, and hedging strategies. It also provides references and bibliography.

Running head: TREASURY AND RISK MANAGEMENT
Treasury and Risk Management
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1TREASURY AND RISK MANAGEMENT
Table of Contents
Question 4:.......................................................................................................................................2
a. Preparing short introduction on the background of AUD/EUR and the role of the bid process
and the risks associated with a bid:..................................................................................................2
b. Evaluating the following two hedging strategies:.......................................................................3
References and Bibliography:..........................................................................................................7

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Question 4:
a. Preparing short introduction on the background of AUD/EUR and the role of the bid
process and the risks associated with a bid:
Figure 1: AUD/EUR historical price movement
(Source: Xe.com 2019)
The above figure provides information about the historical currency movement of
AUD/EUR, which helps in depicting the volatility in the currency. Hence, using the hedging

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process would eventually help in minimising the level of risk involved in currency conversion.
The volatility witnessed in the above currency conversion would have negative impact on the bid
process of EagleEyes Ltd, which in turn might affect total benefits that would be tenanted from
the bid process. The overall process of the bid is a risky endeavour, as without the final
completion of the selection process the person selected for the project is not detected. In the
above case, EagleEyes Ltd is opting for the bid process, where the overall hedging process
would risk the relevant losses, if bid process is not successful. The timeline of bid submission,
bid decision, and payment times is directly interrelated, where the total bid process is directly
conducted for completing the total process. Without the completion of one process the second
process cannot be started, while the organisation making hedging decision before the bid process
could incur losses from their operations. Therefore, the overall problems faced by the bid process
could have negative impact on the total financial performance on the organisation (Hopkin
2018).
b. Evaluating the following two hedging strategies:
Strategy A:
Bid is accepted
Particulars Value
EUR/AUD Spot 1.2953
Risk free rate Australia 2.45%
Risk free rate Euro -0.55%
Time 120
Forward contract rate 1.3344
Payment 1 € 40,00,000.00
Spot rate after 120 days AUD 1.33
FC AUD 53,37,575.14
SP AUD 53,05,039.79
Profit/loss from the hedge AUD 32,535.35

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Particulars Value
EUR/AUD Spot 1.2953
Risk free rate Australia 0.0245
Risk free rate Euro -0.00548657
Time 120
Forward contract rate 1.3344
Payment 1 € 40,00,000.00
Spot rate after 120 days AUD 1.27
FC AUD 53,37,575.14
SP AUD 50,63,291.14
Profit/loss from the hedge AUD 2,74,284.00
Bid is not accepted
Particulars Value
EUR/AUD Spot 1.2953
Risk free rate Australia 0.0245
Risk free rate Euro -0.00548657
Time 120
Forward contract rate 1.3344
Payment 1 € 40,00,000.00
Spot rate after 120 days AUD 1.33
loss from FC AUD -53,37,575.14
loss from SP AUD -53,05,039.79
Particulars Value
EUR/AUD Spot 1.2953
Risk free rate Australia 0.0245
Risk free rate Euro -0.00548657
Time 120
Forward contract rate 1.3344
Payment 1 € 40,00,000.00
Spot rate after 120 days AUD 1.27
loss from FC AUD -53,37,575.14
loss from SP AUD -50,63,291.14
Strategy B:

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Bid is accepted
Particulars Value
EUR/AUD Spot 1.295336788
Payment 1 € 40,00,000.00
Strike price call option 1.312335958
Spot after 120-days 1.326259947
Premium 2.38%
Premium AUD 1,24,829.40
Loss from Hedge AUD -69,133.44
Particulars Value
EUR/AUD Spot 1.295336788
Payment 1 € 40,00,000.00
Strike price call option 1.312335958
Spot after 120-days 1.265822785
Premium 2.38%
Premium AUD 95,120.00
Loss from Hedge AUD -95,120.00
Bid is not accepted
Particulars Value
EUR/AUD Spot 1.295336788
Payment 1 € 40,00,000.00
Strike price call option 1.312335958
Spot after 120-days 1.326259947
Premium 2.38%
Premium AUD 95,120.00
Loss from Hedge AUD -95,120.00
Particulars Value
EUR/AUD Spot 1.295336788
Payment 1 € 40,00,000.00
Strike price call option 1.312335958
Spot after 120-days 1.265822785
Premium 2.38%
Premium AUD 95,120.00
Loss from Hedge AUD -95,120.00

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After analysing the overall strategy A and B, it could be identified that using strategy B is
more profitable for EagleEyes Ltd, as it allows the organisation to minimise their risk exposure.
The use of options strategy will only allow the organisation to incur loss of the premium from
the trade, which is used for hedging the risk exposure. The use of forward contract will increase
the risk of EagleEyes Ltd, if bid is not successful, which will increase the losses from the
contract, where the company has to bear the losses at the fixed rate. Hence, the use of option
contract will minimise the risk attributes of the bid, where if not successful then the company
will incur the maximum loss of AUD 95,120. Bessis (2015) mentioned that with the help of
hedging process companies can reduce the negative impact from volatile currency conversion
and secure the benefits from overseas income.
.

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References and Bibliography:
Bank, E. 2019. Euro area yield curves. [online] European Central Bank. Available at:
https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/
html/index.en.html [Accessed 3 May 2019].
Bessis, J., 2015. Risk management in banking. John Wiley & Sons.
Greenwood, R., Hanson, S., Rudolph, J.S. and Summers, L.H., 2014. Government debt
management at the zero lower bound. Hutchins Center on Fiscal & Monetary Policy at
Brookings Institution.
Hopkin, P., 2018. Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. Kogan Page Publishers.
Lam, J., 2014. Enterprise risk management: from incentives to controls. John Wiley & Sons.
Schiller, F. and Prpich, G., 2014. Learning to organise risk management in organisations: what
future for enterprise risk management?. Journal of Risk Research, 17(8), pp.999-1017.
Xe.com. 2019. XE: AUD / EUR Currency Chart. Australian Dollar to Euro Rates. [online]
Available at: https://www.xe.com/currencycharts/?from=AUD&to=EUR&view=1Y [Accessed 3
May 2019].
Ycharts.com. 2019. 10-Year Eurozone Central Government Bond Par Yield Curve. [online]
Available at:
https://ycharts.com/indicators/10year_eurozone_central_government_bond_par_yield_curve
[Accessed 3 May 2019].