Multinational Business Finance Assignment

Task 1: Risk Management Proposal

Risk is a significant part of the business environment that is associated with the fear of losing something during conducting business activities. In order to minimize the loss, companies take the help of the aspect of business management. Risk management contains an understanding of the risk, analysis of the risk, addressing risk to achieve the organizational goals and objectives in an effective manner. In the same concern, the risk management proposal in the context of QSL, first analyses and identify the risks faced by the firm. After this, it provides a comparison between each risk (Lam, 2014). In the context of the QSL, some hedging risks are identified. In this, it is found that financial risk is associated with the context of the change in the rate of the foreign exchange.  Every country has its own currency and the value of the currency changes according to myriad factors in the environment that affects foreign exchange rates.

In this, it is found that Currency Crisis is one of the potential risks of QSL. In international business, it can be seen that value of the Australian dollar changes every day. It can become the cause of the loss if the change is seen in a big amount. If the value of the currency declines then customers have to pay more. It can be known as a foreign exchange risk that is associated with fluctuation in the value of the currency of the country. Due to changes in the currency value and exchange rate, companies, markets and customers have to face its negative and positive effects. In this, it is also possible that the result of the change in the exchange rate may occur in a positive manner (Fanoe, et. al. 2014). The available information shows that QSL deals in the international market and business activity in the international market depend on the currency price of two relevant countries.

In order to minimize the level of risk in Australian raw sugar exports, the QSL would like to use the hedging strategy. There are lots of effective hedging strategies that can be used to reduce the market risk. These hedging strategies depend on the assets or portfolio of assets being hedged. For this, the risk manager will use tools to reduce market risk. In this, SQL can suggest to delivery of sugar in the portfolio.

(i) Implications for using the spot market and not hedging;

In the business environment, spot price refers to the current market price in which value the assets and goods are sold and purchase. It is separated from the future price of the goods and assets. In this, it is certain the price of the goods will change in the future according to change in the different associated factors. With the implication of spot market strategy, the company will be able to deliver the raw sugar at the current price of USD26.00 as dated 09/09/2017. But, at the same time, the company should focus on the deal in the spot market. It will provide the company with a chance to keep the value of sugar constant till the delivery of raw sugar at the current price. At the same time, in this strategy, the Australian raw sugar exports will avoid the hedging strategy that is based on the future price (Bromiley, et. al. 2015).

(ii) The implications for using futures contracts to hedge over the time period

As an implication of this strategy, Australian raw sugar exports will consider the future price of the raw sugar in the market. In this, Australian raw sugar exports will make future contracts to deliver the raw sugar for the time period 08/11/2017. In the duration of between 09/09/2017 to 08/11/2017, each day has different price expectations in the market. In this contract, Australian raw sugar exports will deliver raw sugar at a certain price and will not change until 08/11/2017.

(iii) The implications for the perfect hedge

Under the implications for a perfect hedge, Australian raw sugar exports will eliminate the risk of loss due to the exchange rate. In order to implement the perfect hedge, Australian raw sugar exports will need to have a 100% inverse correlation to avoid the potential risk (Venkatesh and Patwa, 2015).

Task 2: Advice to CEO

Futures contracts in order to hedge risk

The airline is going to expand its business line over the world. That is why it will face financial risk in the context of the market price of oil. In the international business environment, it can be seen that the prices of oil change rapidly. Along with this, a change in the price of the oil leads to a change in the cost of the Airline service. In order to minimize this kind of risk, it is advised to the CEO of the airline that it should concern about using the future contract (Salem, et. al. 2014). A futures contract is a kind of contract that is used by two particles to buy and sell goods and services at a particular price for a certain time period. The main reason for developing the future contract is to reduce the risk that can happen due to continuous changes in the price of the product. At the same time, focusing on the strategy of futures contracts is to offset their risk.

Advantages and disadvantages of using futures contracts to hedge risk

The use of the future risk involves some advantages and disadvantages that can be faced by the airline. In this, the main advantage of focus towards the future contract can to a reduction in counterparty risk. It mitigates the risk of loss due to exchange in the price (Meng, 2017). It is not helpful only one country but also it provides the benefit to both countries in an equal manner. Hedger refers to those products in the market which come to a future exchange for controlling the risk of reducing the price. In the same concern of this, another benefit of the futures contract is to low execution cost. A deal under the future contacts allows the investors to earn a huge profit on the products (Meckling, 2015). This kind of benefit can be earned at the time of increasing the price of the product in the market. The future contract also improves the liquidity position of a firm. It is because it allows maintaining the inventory in a huge amount. At the same time, it also contains some limitations such as exchange rate mostly measure in the USA exchange rate. Additionally, full benefits of the futures contract are possible by a professional trader.

Potential impacts on business liquidity affecting ongoing operations

A trading contract as a futures contract has a great impact on the liquidity of the company. It is because there are lots of amount of contracts traded each day and there is a chance for airlines to earn the revue by their service. Due to this reason, the airline will be able to pay its short term liabilities in an effective manner (Rhodes and Mény, 2016).

References

Bromiley, P., McShane, M., Nair, A. and Rustambekov, E. (2015) Enterprise risk management: Review, critique, and research directions. Long-range planning, 48(4), pp.265-276.

Fanoe, S., Kristensen, D., Fink-Jensen, A., Jensen, H.K., Toft, E., Nielsen, J., Videbech, P., Pehrson, S. and Bundgaard, H. (2014)  Risk of arrhythmia induced by psychotropic medications: a proposal for clinical management. European heart journal, 35(20), pp.1306-1315.

Lam, J. (2014) Enterprise risk management: from incentives to controls. USA:  John Wiley & Sons.

Meckling, J. (2015) Oppose, support, or hedge? Distributional effects, regulatory pressure, and business strategy in environmental politics. Global Environmental Politics.

Meng, M. (2017) Recent China Food and Drug Administration reform: impact on the present and future of bioanalytical contract research organization laboratories in China. 

Rhodes, M. and Mény, Y. eds. (2016) The future of European welfare: a new social contract?. Springer.

Salem, M.R., Khorasani, A., Saatee, S., Crystal, G.J. and El-Orbany, M. (2014) Gastric tubes and airway management in patients at risk of aspiration: history, current concepts, and proposal of an algorithm. Anesthesia & Analgesia, 118(3), pp.569-579.

Venkatesh, V.G., Rathi, S. and Patwa, S. (2015) Analysis on supply chain risks in Indian apparel retail chains and proposal of risk prioritization model using Interpretive structural modelling. Journal of Retailing and Consumer Services, 26, pp.153-167.