Innovative Financial Instruments to Mitigate Foreign Exchange Exposure

The assignment delves into the complexities of foreign exchange risk management for companies with international operations, focusing on two cases: AGL Energy Ltd. and AdAlta Ltd. It begins by examining how these companies manage currency exposure, particularly through domestic-currency invoicing and hedging strategies. The document provides a comparative analysis of their overseas operations to illustrate differing levels of exchange rate risk. Innovative financial instruments like forward contracts, options, and swaps are discussed as potential solutions for mitigating such risks. Additionally, it outlines the advantages and constraints of dual listing in diverse markets, considering regulatory requirements and capital access opportunities. The assignment concludes with practical recommendations for optimizing transaction management and enhancing corporate resilience against currency fluctuations.

Finance
Table of Contents

Question 1:.......................................................................................................................................1
Question 2........................................................................................................................................1
Question 3........................................................................................................................................1
Question 4........................................................................................................................................2
Plan B...............................................................................................................................................2
Question 1........................................................................................................................................2
Brief Background of each companies' business:.........................................................................2
Question 2........................................................................................................................................3
Question 3........................................................................................................................................5
REFERENCES ...............................................................................................................................6

Question 1:
Ans: If the Thailand Baht- denominated cash flows are converting into Australian dollars today,
Then in that case, Blades is not subject to the forecasted depreciation of the baht, that will
emergence in conversion of the baht in to the Australian dollars. Although, if the baht are
changing into Australian dollars today, they will be invested in Australia and get get a interest at
6 percent. On the other hand, if amount would be invested in Thailand in that case, 15% interest
will be earned.
Question 2
Ans: If the earnings earned in Thailand are invested in Thailand, then Blades would
required to borrow extra amounts in the Australia at an interest rate of 10% for supporting its
Australian operations. In addition to this, Blades would not invest few of the remitted amount
which have earned from Thailand and invested in Australia.
Question 3
Plan 1: Invest funds in Thailand
Calculation of baht-denominated earnings:
Price per pair of “Speedos” THB 4594
* Pairs of “Speedo” *1,80,000 pairs
=Bath denominated revenues =THB 826,920,000
Amount invested in Thailand at a rate of 15% per Annum= 826,920,000*15%
=124,038,000
Amount received after one year = 826,920,000+124,038,000=THB950,958,000.
Conversion of THB into Australian dollars=THB950,958,000*0.0361=Australian
$34,329,583.8.
Amount received after 1 year in Australian dollars= $34,329,583.8.
Plan 2: Converts funds immediately
Calculation of baht-denominated revenues:
Price per pair of “Speedos” THB 4594
* Pairs of “Speedo” *1,80,000 pairs
=Bath denominated revenues =THB 826,920,000
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Conversion of THB into Australian Dollar =THB 826,920,000*0.0381= Australian
dollars 31,505,652
Amount invested in Australia at 8% and interest achieved =31,505,652*8%= 2,520,452
Total amount received after 1 year in Australia = $34,026,104
Interpretation: Henceforth, company would choose Plan 1 is exercised as this earned more
amount than the plan 2.
Question 4
If the interest rate is reduced in the Thailand and Thai Baht would depreciate at least 7%
in the one year. If baht would depreciate by 7% as it is currently anticipated, then Thai
investment would earn of =6.95% (1.15*0.93-1). then in that case, Plan 2 will be exercised.
Plan B
Question 1.
Brief Background of each companies' business:
AdAlta Limited emerges biological drugs for treating of underserved chornic diseases.
This company concentrates on emerging its lead i-body drug candidate, AD-114, for treatment
of idiopathic pulmonary fibrosis and other fibrotic diseases. AdAlta limited was formed in 2006
and is relied in Melbourne, Australia. AdAlta Limited is a pharmaceutical and research company.
While on the other hand, AGL company is selected for helping shape a sustainable
energy future for Australia. This is the country's largest electricity generation portfolio company.
This also is a largest ASX-listed investor in the renewable energy which have 3.6million
customer accounts. This company have have more than 180 years of experience, this is the
obligation to render sustainable, protective and affordable energy for company's customers. Our
aim is to prosper in a carbon constrained world and customer advocacy as our industry
transforms. AGL energy Ltd is an Australian Listed public company which covers in both of the
production of electricity and gas for the residential use. Company comes under energy industry
which exist in 1837 as the Australian gas light company.
There are basically various ways through which the foreign currency risks can be reduced by
way of managing transaction risk:
Ignore it: Few of the company's are trying to reduce transaction risk and normally
addressing it as a part of their business organisation.
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Asset and liability matching: There are various companies which strive hard to control
transaction risk. This is received by matching currencies of the assets and liabilities on group's
balance sheet. This simply means that the subsidiary's operating currency depreciates needs to
group's reporting currency, then assets and liabilities denominated in that currency would
depreciate by the similar value.
Translational exposure could be controlled by entire matching assets and liabilities in the
foreign currencies, if possible. Although, this might emerge in losing control of merged gearing.
There is also an issues of trying to cope up assets to liabilities in countries where there are no
sophisticated capital markets. This could be said that this can be complex in nations along-with
less converting currencies. Treasurers don't want to enhance funds in lower liquid currencies, as
cost of these finance might well enhanced potential translation loss. Organisations sometime
trying to eliminate this issues by grouping exposures and implementing a proxy currency or a
basket of currencies in order to get a close match.
Question 2
3

4

Finding: From the above mentioned report, this can be said that the AGL Energy Ltd have least
overseas operations but on the other hand, Adalta Ltd have more overseas operations as this have
various operations in many of the countries. That is why, there is more exchange risk for the
Adalta Ltd as compare to the AGL Energy Ltd.
Domestic-Currency invoicing and hedging enables globally active operations in order to
limit their exposure to exchange rate variations. This will help out with exchange rate exposure
in terms of transaction risk, translation risk and higher economic risk. This research explained
that domestic-currency invoicing and hedging with exchange rate derivatives enables an
adequate straightforward transaction management of transaction and translation risk and
elaborates under which condition their usage is optimal.
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Question 3
Here, this can be said that dual listing vary from company to company and are normally rely
upon the multitude of factors specific to each, although, at a “high level' crucial advantages and
disadvantages covers:
Advantages:
 Access to more pool of potential investors.
 Enhanced liquidity derived from operating in higher than the one market.
 Higher access to capital, more specifically in more market like as Europe or North
America.
 Ability to 'tap in to' diverse markets at diverse times, relied on the macroeconomic
situations ectt.
 More public profile.
 Enhanced opportunities for the M&A.
Constraints:
 Initial listing costs linked with the second listing.
 Continuing costs linked with the second listing.
 Enhanced liability rendered diverse regulatory needs.
 Needs of specialists.
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REFERENCES
Books and Journals:
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic Management Journal. 35(1). pp. 1-23.
Footman, J., 2014. The Court of the Bank of England. Bank of England Quarterly Bulletin.
54(1). pp. 28-36.
Midrigan, V. and Xu, D.Y., 2014. Finance and misallocation: Evidence from plant-level data.
The American Economic Review. 104(2). pp. 422-458.
Murphy, A.L., 2016. The Bank of England and the genesis of modern management. eabh Papers.
3(2). pp. 127-156.
Nixon, D., 2015. Markets and operations: 2015. Bank of E
Subrahmanyam, A. and Titman, S., 2013. Financial market shocks and the macroeconomy.
Review of Financial Studies. 26(11). pp. 2687-2717.
Online
AGL energy Ltd. 2018 [Online]. Available through:<https://au.investing.com/equities/agl-
energy-chart>.
AdAlta Ltd 2018 [Online]. Available through:<https://au.investing.com/equities/agl-energy-
chart>.
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