You are required to select one company from the provided list,… 1 answer below »

You are required to select one company from the provided list, and conduct the following case study. You are a consultant at Best Advice Ltd., and trying to win a consultancy contract with the company that you have selected. You had an opportunity to meet the CFO of this company and during the meeting he was worrying about the foreign currency risks that the company is exposed to. His concern was from a recent increase in the foreign exchange market volatility. The CFO told you that he is happy to sign a contract if you can provide comprehensive advice on the direction (over the next 12 months) of foreign currencies that its shareholders believe the company is exposed against, and on how the company can manage such a type of risk. In addition, you found out that the company is also seeking an opportunity to invest its excess cash in hand to the stock market. In particular, during the meeting the CFO mentioned, “We are considering to invest some of our money into the ASX200 since we are an Australian company but do you think we should also invest into one of the stock markets in the U.S., Japan, Germany or a home country of those currencies that we are exposed against?” Your task is to win a contract by preparing a professional advisory report covering the company’s foreign currency exposure and its investment strategy. In the report, you need to (1) identify up to three currencies that the stock market believes the company is exposed against, and provide the exchange rate forecasts and the recommendation on its hedging strategy, and (2) advise the company whether it should diversify its stock market investment. Note: Your goal is to win a contract by persuading the CFO of the company. It is important to demonstrate that you have in depth understanding on the company’s business activities and where the exchange rate risk might be arising from. Thus, in the introduction, you need to briefly explain the business activities and environment of the company from the perspective of foreign currency exposure. The following are some suggestions to prepare the report (you do not have to structure your report in the order of the suggestions); however, students may cover beyond these suggestions in order to obtain higher marks: (1) Select foreign currencies that you believe are important to your client and rationalise your selection Check the company’s website and/or annual report to obtain relevant information (students can also use Bloomberg to obtain relevant information). (2) For the foreign currency exposure, you may Obtain foreign exchange rates of the selected currencies against AUD (in the notation of “foreign currency/AUD”) from Jan/2010 to Jan/2017 in a monthly basis (if the selected company only has a shorter data period, then only use the available period). Obtain the stock price of the selected company for the same period in the same basis. Compute monthly returns of those market data. Then, (a) prepare graphs having the stock returns and the return of each currency rate, and rationalise the results (includes discussion on why or why not your initial hypotheses are supported). (b) conduct a regression using the monthly stock return as a dependent variable and the monthly change in the foreign exchange rates as the independent variables. Explain the results.


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