Soul n D: Analyzing Diversification and Hedging Investment Risk

This report provides a comprehensive analysis of Soul n D, an Australian stereo manufacturer facing challenges due to currency depreciation and increased competition. The analysis focuses on two investment opportunities (Option A: Songs4All and Option B: Listen & Play), evaluating their potential to reduce production costs or improve revenues. The report assesses diversification strategies, ROI, and risk factors associated with each option, considering external factors like inflation, interest rates, and exchange rates. Scenario analysis explores optimistic and pessimistic outcomes for both options, while hedging strategies using financial derivatives are discussed to mitigate risks. Ultimately, the report recommends that Soul n D consider option B after implementing hedging strategies, as it offers potentially better and justifiable results despite the initial higher risk, this document is available for review and download on Desklib, a platform offering various study tools for students.

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Table of contents
1. Introduction...................................................................................................................................3
2. [Case Brief]................................................................................................................................3
3 [Diversification Analysis].......................................................................................................4
4 Changes in various external factors......................................................................................4
5. Scenario Analysis...........................................................................................................................5
6. Hedging the Risk............................................................................................................................6
7. Conclusion (or Conclusion and Recommendations).......................................................................7
Reference list.....................................................................................................................................7
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1. Introduction
Soul n D is a manufacturer of stereos located in Australia, which deals with the two
countries relation which being United States as well as Australian Dollar. The company faces
some concerns and on account of the same following elements are analyized in context to
the diversification analysis of international project in terms with ROI and risk, it further,
defines the viability of an investment. On the more, it explains the variability in terms with
various scenario, which explains the concept in terms with the designing scenarios, along
with the using financial derivatives that could be used as a hedge. The same is explained in
terms with the recommendation and the conclusion is accordingly drafted as per the Sound.
2. [Case Brief]
The Soul n D case has following brief and analysis
- Increase of 10% in its production costs
- Decrease in its revenue of 13 %
- Annual return on investment (ROI) decrease to 5%
- 6% annual standard deviation of the ROI
Investment opportunity are explained as follows: -
OPTION A
interest rates at a high level (15%)
curbing inflation (i.e. 8% last year)
an average annual ROI of 8% = last 5 years
Relatively low risk (i.e. 5% standard deviation)
ROI estimated increase = 10 %
Correlation is 90 %
Option B
average annual ROI of 20%
Time Period = 3 years
Interest Rate = 1 %
Inflation = 0.50 %
relatively high risk = 12 % SD
Correlation = 20 %
ROI = 6 %
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Capital Analysis
60 Percent of Equity
40 percent share of either Songs 4 All (Option A) or Listen & Play (Option B).
3 [Diversification Analysis]
The project is defined and explained in the perspective of portfolio analysis and evaluations,
it explains the perspective which explains that or helps in estimating the new product and
the project planning in connection with the corporate strategy. It explains as to how the
new market or industry will react as well as act on the current project analysis as well as
investment proposal. It explains the concept in terms with the Return on Investment or the
Risk on the investment (Boeri, T., 2019). In connection with the Roi it explains the whole
process in terms with the performance evaluation and measurement in terms with the
efficiency parameters. It is a percentage format which deals with explaining the interest
through comparison format. In Option A which being of the Songs4all is around 8 percent
for a period of 5 Years, on the other hand the Listen Play it around 20 percent for a period of
3 Years. The aspect of comparison is in terms with the equally margining the time period. In
true sense the latter one Listen Play provides that the return is about Twenty percent as
compared to 8 percent in connection with the Songs4all. It is evident that the latter is better
option as the value is also high. In terms with understanding the risk which is estimated in
terms with standards deviation the Songs4 all is computed on the 5 % Deviation Standard
where as the other shows the Listen Play is computed on the 12 % Deviation Standard. It
proves the factor that the former is much more stable and at minimum risk as compared to
the latter. It is evident that the lower risk will provide lower value of return whereas, higher
risk will deal with higher value on investment return (Boeri, T., 2019). On managing the whole
basis, the Songs 4 all is a better analysis and estimations as compared to the Listen Play
mainly because the risk and the return is well balanced and helps in achieving a lesser value
of volatility in various factor.
4 Changes in various external factors.
The concept in terms with the external factors are mainly account with the inflation
the interest rates, along with the exchanges rates. As a matter of fact, understanding each
element has its own positive impact as well as the negative impact. On a larger basis the
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impact is considered in terms with the inflation on an overall basis. The main reason being
that the inflation is definitely affects all the other variables with a multiplying effect which
deals the option A which being around 8 percent in inflation. On the other aspect where
option B deals with an inflation factor which being 0.5 Percent. Comparing both the
parameters an inflation with a lower value is much more helpful as the overall costs is
eventually reduced and so is the other allied expenses (Shvetsova, Rodionova, and Epstein,
2018). The inflation not only adds the cost on a short-term bases but also on the long-term
basis, thereby, assuring that the effect is cascading and exponential. In terms with other
expense the interest as well as the exchange rate, the former definitely plays a vital role as it
assures that the cost or expense is definitely affected through changes which is marked by
the increased or decreased with the budget expenses (Shvetsova, Rodionova, and Epstein,
2018). On the more, it is evident that the interest rate is much more lower adding more,
with the cost margin it is evident that the effect is mainly in terms with the simple
estimations and the analysis. The value added or effected will not have a cascading or an
exponential effect. This will surely impact the investment proposal and deal with an effect
and impact on a long-term basis. Looking at the terms of inflation it is stronger manner in
which the options must be weighed and managed. Thus, in connection with the all the three
variables the most essential is the inflation factor as this aspect exponentially increases the
interest cost as well as the other expense cost of choosing the investment proposal.
On the more, it is evident that the option b is a better option as the inflation rate is
lower and being on a number of years it is evident that they will have a lesser impact on the
overall cost of investment while choosing the investment proposal.
5. Scenario Analysis
The situation which is predicable is of two options which is pessimistic option and the optimistic
option, in connection using option A the current variables are as follows:
Interest rates at a high level (15%)
curbing inflation (i.e. 8% last year)
an average annual ROI of 8% = last 5 years
Relatively low risk (i.e. 5% standard deviation)
ROI estimated increase = 10 %
Correlation is 90 %
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THE Adverse situation will be when either of the variables act and react in a negative value and adds
on a higher cost to assure that the add on the burden with much a high value mainly because the
inflation and the interest cost will be shot up doubling the value of project.
THE Optimistic situation will be when either of the variables act and react in a positive value and
adds on a lower cost to assure that will have a fair effect on the overall basis mainly because the
inflation and the interest cost will decrease with just fair value over the project (Hansen,2016).
Option, in connection using option B the current variables are as follows:
average annual ROI of 20%
Time Period = 3 years
Interest Rate = 1 %
Inflation = 0.50 %
relatively high risk = 12 % SD
Correlation = 20 %
ROI = 6 %
The Adverse situation will be when either of the variables act and react in a negative value and adds
on a higher cost to assure that the add on the burden with much a low value mainly because the
inflation and the interest cost will be shot up by some nominal cost the value of project.
The Optimistic situation will be when either of the variables act and react in a positive value and
adds on a lower cost to assure that the effect is very large and huge (Hansen,2016). On the overall
basis mainly because the inflation and the interest cost are higher as compared to option a and
therefore, the project can provide rewarding results .
6. Hedging the Risk
In real terms the risk can be mitigated however, the same can be done till a level as well as at a
substantially level. The major aspect is that the hedging controls the element of risk and also allows
the company to invest in a proposal which is much more rewarding and challenging. As a matter of
fact, the set of measures designed to minimise the risk of adverse movements in the value of assets
or liabilities. It manages the element of the foreign exchange analysis as well as the interest rates as
well as the inflation rates (Ederington, 2007). On a larger scale hedgeing analysis can be done on the
basis of the factor that the company cam protects its various variables in terms with the interest cost
as well as the inflation factor, along with the correlation elements and the percentage value. As the
transaction is in terms with the Australia and the United States of America. The transactions in terms
with the curbing of inflation as well as the pricing on account of the labour costs. The major expense
in the project is in terms with the machinery value as well as the oil value along with the price on
commodities. The strategies build can be on derivatives options which was on options methods as
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well as the contract value. On a larger scale the currency is mapped and managed with reference to
the contract value as well as the option value. The reason being that the foreign exchange profit as
well as the losses must be controlled in a manner, that provides benefits in terms with the
investment value. The options which are best suited can be definitely going on for the put options
as the exchange value will be much more reasonable and sensible. As a matter of fact, this will be
effectively having two major effects one on the oil prices and the cost and expenses and the further,
it helps in managing the interest expenses and the percentage value of the foreign exchange
management (Ederington, 2007). Soul n D has limited money and expense therefore, choosing
between option A and Option B must be done wisely so that the opportunities must be correctly
managed and the risk is completely minimized. On a general scale and a general business dealing the
hedging strategies which account in connection with the option analysis. Thus, the option which can
provide a fair enough justification on proposal is option b as after hedgeing as well the Investment
will lead to better and justifiable results.
7. Conclusion (or Conclusion and Recommendations)
Hence, the paper is an over all summary as to various things and description in context to the
investment proposal analysis. The paper provides an in-depth and a statistical analysis of the
investment proposal and how the things work and the investment is weighed, Further, the paper
explains the analysis and how beneficial with either of the Option A or Option B will be on a larger
basis. The paper explains the variables in terms with the allied features and the risk associated with
them, it also defines the segment in terms with the estimating the financial derivates and how the
hedgeing needs to done. Actually, after reviewing the both project analysis it is evident that the
company must opt for option b as the same will help the better working and analyzing in terms with
sensitivity working. Further, the paper summaries the factor that the process on account of the
Pessimistic as well as optimistic ideas which explain clearly that the option b is a much better and a
reasonable option in comparisons with the results achieved and analysis made. Mainly, because of
the factor that in both options and variations the best suited advice and valid analysis proves that
the option b must be selected. Henceforth, on a larger basis this is a better suited option as it
provides a reasonable level of understanding about the project and its successful and how it will
reach the level of better revenues as well as the better return and estimates. On the more, it will
lead to assure that the benefits are well deserved and much more fruitful. In order to assure that the
opportunity is best suited and well managed and therefore, the project is selected for best results.
Reference list
Boeri, T., 2019. Beyond the rule of thumb: Methods for evaluating public investment projects.
Routledge.
Ederington, L.H., 2007. The hedging performance of the new futures markets. The Journal of
Finance, 34(1), pp.157-170.
Hansen, B., 2016. A Study in the Theory of Inflation. Routledge.
Shvetsova, O.A., Rodionova, E.A. and Epstein, M.Z., 2018. Evaluation of investment projects under
uncertainty: multi-criteria approach using interval data.
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