Evaluation of a company’s foreign exchange risk exposure
Critical evaluation of a company’s foreign exchange risk exposure and risk management practices
Each group is free to choose ONE out of the following two topics:
• Critical evaluation of a company’s foreign exchange risk exposure and risk management practices Choose one local or foreign bank, institution, or firm and study the entity’s foreign exchange exposure. Critically evaluate how it has managed its exposure in recent 5 years. Make a recommendation for their strategy.
• Critical evaluation of a company’s offshore financing activities Choose a local or foreign firm and study the firm’s recent (last 5 years) major offshore financing practices. Provide your assessment of their financing practices and make a recommendation. Students are expected to demonstrate they are capable of collecting and using complex information and applying knowledge gained in FINC3011 (and other previous units) to a real issue – in particular, to understand and deal with the complexities in foreign exchange risk management practice or offshore financing activities. Extensive research on your chosen company’s recent activities (facts & data) are required. You are encouraged to start your research as early as possible. You are expected to discuss and evaluate the company’s specific practices; do not provide a general summary of content that merely repeats everything you saw in the lecture slides or textbook. You are expected to develop a recommendation in the context of the company’s needs and the broader economic environment. All arguments should be well supported by evidence. 3 Rubrics: Research (10 marks)
• Successful collection of all relevant information regarding the company and its current practice and activities, supported by data or/and facts. (3 marks) • In-depth discussion of the company’s specific business operation, in particular, the challenges and various risks at present and in the near future concerning your chosen topic (hedging or financing). (4 marks) • Demonstrate a solid understanding of the complexities involved in the context of the industry and economic environment. (3 marks) Discussion / Evaluation (15 marks) For the first topic, on hedging:
• Describe in-depth your chosen company’s recent FX exposure and the associated impact on the company based on the information you collect. (3 marks) • Critically evaluate its current practice of FX risk management. You should appraise the benefits & costs of its current practices based on the data you collect. Carefully articulate the major factors (possible micro and macro factors) affecting the success or failure of its current FX risk management practices. (3 marks) o Please note: this part is more challenging as companies might not disclose their FX risk management practice in detail. If there is insufficient information, you may assume that there is no hedging in place (if you have reasonable justification). A company can have complex exposures to various exchange rates; you should focus on the most significant one/s.
• Accurately analyze the possible outcomes of hedge vs. non-hedge scenarios for your company, and different strategies it may take, based on your projection of exchange rate changes – and include supporting evidence. (4 marks) • Clear logic and critical reasoning in arguments, supported by the literature (academic or other forms). (3 marks) • Sound conclusion and well-justified recommendation for the company’s practices in the short run and long run, in the context of its needs as well as the broader industry & economic environment. (2 marks) For the second topic, on offshore financing
: 4 • Describe in-depth the chosen company’s recent offshore financing activity and the impact on the company based on the information you collect. (3 marks)
• Critically evaluate the current financing practice of the company. You should appraise the benefits & costs of its current practices based on the data you collect. Carefully articulate the major factors affecting the success or failure of current practice. (3 marks) • Solid analysis of alternative financing methods, such as debt vs. equity, and onshore vs. offshore – and the potential outcomes and risks, the impact on the cost of capital and the company’s value, supported by evidence. (4 marks) o (Please note, this part of the assignment is challenging, and you might need to draw on knowledge from prior studies.) o (Note also: once again, if the exact information you are looking for is not revealed in your company’s reports, you can make reasonable inferences based on limited information you have – but you must state and explain these clearly.)
• Clear logic and critical reasoning in arguments, supported by the literature (academic or other forms). (3 marks) • Sound conclusion and well-justified recommendation for the company’s practice in the short run and long run, in the context of its needs and the industry and economic environment. (2 marks) Writing and presentation (5 marks) • Professional-quality presentation of executive summary, tables, & figures. (2 marks) • High-quality writing, featuring good clarity of expression and free of spelling & grammatical errors. (2 marks) • Correct referencing format (including correctly attributing all material drawn from a source) and use of at least five references of high quality. (1 marks) Tips on possible sources of information: 1. Company websites. Listed companies usually have their financial reports available on the “investor relations/investor center” page of their website. (For example, A2 Milk, an Australian company, has substantial exposure to CNY/AUD. https://thea2milkcompany.com/results) 2. Company stock price, key ratios, announcements, etc. are available in Yahoo Finance or other financial media/news websites. 3. Library databases. 4. Some related academic papers are available on Canvas “additional reading”. 5. …the rest is up to you!