Financial risk management of Oceana Gold is a multinational company

Executive summary of Financial risk management

In the study, researchers have to study about the company and its management related to financial risk. It means the management of the company has to adopt better options to minimize type effect of risk on the dealing of the company because if the company didn’t handle their financial risk the loss become the part of the company and it never runs in long terms. Different hedging strategies are going to use for the settlement of the problems related to financial risk. It also recommends the management of the company to set a hedging strategy for the loan to the company use for financing and mining. Risk of analysis also involves in the company. Strategy is going to selected according to the requirement and demand of the company. The main objectives are to manage the financial risk for the protection and safety of operating profits and business cash flow that support to manage fundraising and liquidity efficiently. Many different financial risks are normally concerned in the business like foreign currency risk, exchange risk, interest rate risk, liquidity risk, and refinancing and credit risk. The company handles them according to its requirement and need. According to researchers, the company can be used many different options as identified that derivatives instruments like options, futures contracts and futures that minimize the financial risk. Further, the researchers also settle hedging strategies for the company to minimize the financial risk that is going to involve in the business of the mining.

 Table of content:

Executive summary……………………………………………………………..2

Introduction……………………………………………………………………..4

Content

Section i………………………………………………………………………….4

Section ii…………………………………………………………………………6

Section iii………………………………………………………………………...9

Conclusion……………………………………………………………………….10

Reference………………………………………………………………………..10

Introduction of Oceana Gold is a multinational company

Oceana Gold is a multinational company who is working at the mining of gold by extraction and processing of gold. The company is facing many hedging problems and in this regard also faces many financial risks. For overcoming these financial risk, we have to discuss what are the methods company can be used to overcome these risks and also determine which option give more benefit to the company and also offer company to handle risk and obtain maximum profit ratio because foreign exchange also involves in their processes of the business. So carefully handle all the options and also determine what suits the best strategy for the business. The main objectives are to manage the financial risk for the protection and safety of operating profits and business cash flow that support to manage fundraising and liquidity efficiently. Many different financial risks are normally concerned in the business like foreign currency risk, exchange risk, interest rate risk, liquidity risk, and refinancing and credit risk. The company handles them according to its requirement and need.

Content on Oceana Gold is a multinational company

Section 1. (a)  As per the case study of Oceana gold, researchers found that company has taken a loan of USD 20 million from any bank and pay interest rate at 3-year maturity with all the settlement of interest price payment. The company also borrows a debt of AUD 50 million from the financial institution. Loan related to foreign currency also involves the financial risks of foreign exchange because borrowers have to pay the loan in foreign currency. In the current case, Oceana gold also pays the loan in US dollar. So when the company is paying the loan at the same time, the company also facing the exchange rate risk.

In this case study, we consider that the loan of the company has a term of five years, and the interest rate of the loan is floating in nature. It is also considered that the floating interest rate of loan considers a fixed and variable portion of interest rate, which depends on the LIBOR. So the company has to face the enhancement in the LIBOR rate in the future and due to rise in the LIBOR, the amount of interest rate also high which is paid by the company to bank against its loan. (bankrate.com, 2019)

If we consider the loan belongs to foreign currency, the company take the loan in Australian dollars. The amount of loan was AUD 50 million, which was borrowed a rate of a variable rate. In this scenario for variable interest rate, the lender has to pay interest on the outstanding balance, and the rate of interest is set out by considering the market interest rate. In the following context, if the market interest rate is going high, the company has to pay a higher amount of interest, so the company also facing the interest rate risk with other risks.

As we know that company is involved in the gold mining business, it has to extract and store gold mines which are internationally valued in US dollars. So the profit and loss of the company mostly depend on the international market as if the price of company product going to decrease at the international market, then the company has to face loss. With this company also face foreign exchange rate risk which is another crucial risk that affects the company in the future as a fall in the price of US dollars would result in an increase in the gold price and the price in Australian dollars. So the company would face the relative risk of enhancement in the US dollar price in the international market. With all of the above, the company also facing the price changing risk of its commodity in the international market as the company is going to involve in the process of producing gold. This type of risk related to the company also includes the commodity rate risk. So in operating the gold mining in New Zealand, the company is going to handle exchange rate risk, interest rate risk, and commodity rate risk and has to handle all these risks with effective strategies and policies related to hedge.

(b) Recommendation on Oceana Gold is a multinational company

According to the above discussion, researchers also explain that as a primary risk, the company has to face interest rate risk and foreign exchange rate risk. By using hedging strategies, the company could avoid the financial risks as hedging strategies minimize the risk related to interest rate and mismatch of currency exchange. In the same scenario, researchers have to mention that different hedging strategies are going to be used by the company to minimize the risk that the company is going to face. In this regard, the researcher explains that the interest rate of which depends upon the LIBOR, the company has taken a loan in foreign currency. Company has to hedge this risk as to avoid the risk of enhancement in the LIBOR accordingly. It is also recommended to the company to take the future interest rate as a strategy of hedging to minimize the above risk and its effects. As the loan is taking for 5 years, then the LIBOR is going to high, and the company has to manage all the risk by using the hedging strategy.

It is also mentioned on the other side that the company take a loan of AUD 50 million at the variable interest rate. In this scenario, researchers explain that in the case of fixed interest rate, the hedging strategies are irrelevant as the rate of interest is predetermine in the fixed interest rate regime. So the variable interest rate increase the risk of enhancement of interest burden as the interest rate depends on the condition of the market. The interest rate in Australia depends on the RBA cash rate as the commercial banks have to borrow fund at the rate of liquid cash rate of reserve bank of Australia and according to this condition, the researcher explains that cash rate of reserved bank of Australia shown a trend of decreasing over the last twenty years. So the company may face a decline in the cash rate in the future, and in this case, the company has no need to hedge this risk of variable interest.

Researchers also found that the gold value of the company is determined in US dollars and explain by researchers that any change in the US dollar price will definitely affect the profitability of the Oceana gold organization. So in this regard, the enhancement with gold price in term of US dollar would be profitable for the company. And on the other hand, the profit is also going to decrease when the gold price is going down.

 Company is not recommended to make hedging strategy for the commodity price as according to researchers, the price of gold has increased over the last forty years. In this scenario, researchers also mentioned that the company traded its commodities in US dollars and company adopts hedging strategies for the exchange rate risk to minimize its effects. An increase in the USD price in the term of AUD would result in normal profit at a super level for the mining companies in Australia. So this would also say that any decrease in the US dollar due to Australia dollar become the reason for expected loss for the company. Also, researchers found that a fluctuating trend is going to appear in the AUD and USD exchange rate. So there is a chance of facing the risk of the exchange rate in the near future. So the company has to hedge the exchange rate risk to minimize the future loss of the company.

Section ii. (c) recommendations of Oceana Gold is a multinational company

In the above discussions, researchers explain that the company has to use hedging strategies to lessen the effect of risk related to foreign loan interest and foreign exchange rate. In this, the researcher also explains that the company has to follow the interest rate of future strategy to minimize the risk of the floating interest rate. In this regard, the company can also use interest rate SWAP strategy for floating interest for minimizes its risk. So the company has to use the interest rate swap strategy to mitigate the risk of floating interest.  Company has to contract with a bank that uses swap interest rate floating to a fixed rate. It is explained that the fixed rate of interest in Australia is 5% for a term of above 5 years, so the company has a top ay interest at the rate of 5% per annum instead of the floating interest rate at the rate of 2.5% plus LIBOR. On the second side, the company has to recommend hedging the exchange rate risks, and it is better to make a forward agreement with banks. It is also explained that the forward agreement made with banks by the company to exchange US dollars at a specified exchange rate. This rate must be settled by the company. At the time of exercising the forward agreement, the company have a right to exercise the option of accomplishing the contract.

Researchers also explain that the company has to pay a premium if they take derivative options like futures and options. The company should not use the take any strategy related to the risk of enhancement in the interest rate in the local market of Australia. If according to future strategy, a company is planning for future strategy, then he has to pay a premium to banks. As the profitability of decline in the interest rate is going low, then the hedging strategy related to variable interest rate consider as irrelevant. If a company uses future strategy to minimize the risk, it will pay interest on banks that also show a loss for the company. If a company is going to used future or options contract for the risk of minimizing the price of the commodity, as the profitability of the decline in gold price is low because it would have to incur a loss. It is recommended to the company to not using the future strategies related to the risk of the price of a commodity.  (robitgroup.com, n.d.)

Researchers explain that the company has to use the strategy to minimize the risk of the exchange rate as the exchange rate of the AUD and USD reflected a fluctuation over the past decades. That recommends that adopt the proper strategy related to the exchange rate as the company is evaluating the outputs in US dollars. So the company has to make future currency contract with the banks. Company has to pay a premium when they are going to enter into the currency future contract because this type of contracts includes exchange rate risk. So the company has to incur premium (future) when they are going to enter in the future contract.  And the fluctuation in the exchange rate is going very high; it would be profitable for the company to enter into the currency contracts future for the company and manage all its risk in a better way. A combination is an options trading strategy that includes the purchase and sale of the call and put option on the same underlying options. The put options is a good way to reduce the risk. The key terms of the options contract include the type of option, the date of expiration of the option contract, the month of the option contract, the strike price of the option and the term of exchange.

(d) Hedging schedule of Oceana Gold is a multinational company

a. hedge risk: according to a case study of Oceana gold , researchers have found the currency exchange rate risk and interest rate risk. In simple words, the researchers explain that the company has to face two types of risk while they're dealing with business. The interest rate risk that happens due to the factor that the company has taken a loan at the US dollar, and it handles the commodities whose prices also handle in USD.

b. a number of futures/options:

We can calculate the number of contract by calculating the fund to be hedge as the numerator and the notional value of contract taken as the denominator. The calculations are given as under:

1.      Interest rate risk= USD 20/(AUD 0.74*20*100)= 74

2.      Currency exchange rate = USD 0.74/0.70 =1

C. The Reason of Choosing Futures & Options

The key advantage of utilizing options is that it reduces the price decline risk up to a lot of extents. For managing price risk put option is considered quite appropriate. Input option, no margin is mandatory, which is another benefit of the put option.

D. the contract months of Oceana Gold is a multinational company

As the current interest rollover in 3 months, for 3 months, the company has to form the contract of interest risk future contract. On the other side, the company is to make 4 months currency exchange forward contract as it is the minimum term of the contract.

E. position of the contract of Oceana Gold is a multinational company

In the hedging interest rate, the company has to be n short position as the company is to sell the floating interest rate against the fixed interest rate and on the other side, the company has to be in long position in the forward contract of the currency exchange risk as the company would buy foreign currency from banks.

f. option strike price of Oceana Gold is a multinational company

In case of a short futures contract, the company shall consider the strike price of AUD 0.74 against US 1 and in case of long term contract; the strike price would be AUD 0.70 against USD 1.

Section iii. (e):

Oceana gold has to face financial risk related to the currency exchange rate and the interest rate risk, the researchers as to set the strategy  the get rid of the financial risk of the company. In this regard, if the management of the company wants to set two different options strategies as belong to above-mentioned risks, then the researchers suggest that strategy for the currency exchange rate risk and interest rate risk. A combination is an options trading strategy that includes the purchase and sale of the call and put option on the same underlying options. In other words, a combination trade is an options strategy where both options call and put the position taken by the trader for the stock in the same underlying. (theoptionsguide.com, 2019)

 There are normally many different types of combination trades going to use in the market, but here we are going to discuss the long straddle in which the investors will purchase on the same stock with both call and put. And these two have a unique strike price and expiry dates related to their mutual understanding of trader and contract. First of all, the company is required to enter in a put option to sell the company’s commodities in the market. Through put, option  company could make a selling contract, and this option provides an option to the buyer the underlying asset to the option seller or right to sell the commodity. So if the price falls below the current spot market, then the company could sell the gold through the option agreement. (/investinganswers.com, 2019)

In the second option plan, the company is going to use the interest rate option that provides facilitation to the company in paying interest at a fixed rate. It is also mentioned that the company is to put a buy option and the company could exercise the option to pay lower interest for the loan. There are many key advantages of the put option, and that is why many organizations or institutions prefer to put options for reducing financial risks. It has been seen that due to globalization, many multinational organizations have expanded their business in different parts of the world. It means that the level of foreign exchange risk has also increased up to a lot of extents. In different countries, economic situations are different, which means that there will be fluctuation in the foreign exchange rate. Due to the fluctuation, the profitability or overall revenue of the companies experience a decline.

The put options is a good way to reduce the risk. The key terms of the options contract include the type of option, the date of expiration of the option contract, the month of the option contract, the strike price of the option and the term of exchange. In order to compete with the competitors and sustaining for a longer period of time, it is highly important that the companies should manage their risk. Otherwise, the companies will be unable to gain competitive advantage, and the profit of the company will not grow effectively.

The key advantage of a put option is that it reduces the price decline risk up to a lot of extents. For managing price risk put option is considered quite appropriate. Input option, no margin is mandatory, which is another benefit of the put option. If the organization is going to utilize put option, then buyers can be more accessible. The put options usually follow formal procedures therefore if any dispute arises, it can be handled professionally. Put option proves leverage in gaining credit as well. If all the discussed benefits are analyzed, then it can be said that put option is a good way for managing risks.

The major drawback of the put option for the business is that the premium payment will be required. The quantity is also fixed along with the fee which has to be paid to brokerage. In other words, if put options have several advantages, it has disadvantages as well. Therefore before making any decision, it is important to analyze the risk mitigation strategies efficiently.

Conclusion on Oceana Gold is a multinational company

This study includes many different aspects of the Australian market related to management frisk belong to hedging opportunities of the company. According to researchers, the company can be used many different options as identified that derivatives instruments like options, futures contracts and futures that minimize the financial risk. Further, the researchers also settle hedging strategies for the company to minimize the financial risk that is going to involve in the business of the mining. And further, researchers also recommend that it is better to select the forward contract or agreement to mitigate the risk belongs to the currency exchange rate and interest rate.

There are normally many different types of combination tradesgoing to use in the market, but here we are going to discuss the long straddle in which the investors will purchase on the same stock with both call and put. And these two have a unique strike price and expiry dates related to their mutual understanding of trader and contract. First of all, the company is required to enter in a put option to sell the company’s commodities in the market. The key advantage of a put option is that it reduces the price decline risk up to a lot of extents. For managing price risk put option is considered quite appropriate. Input option, no margin is mandatory, which is another benefit of the put option. Researchers also explain that as a primary risk, the company has to face interest rate risk and foreign exchange rate risk. By using hedging strategies, the company could avoid the financial risks as hedging strategies minimize the risk related to interest rate and mismatch of currency exchange.

Oceana gold has to face financial risk related to the currency exchange rate and the interest rate risk, the researchers as to set the strategy  the get rid of the financial risk of the company. In this regard, if the management of the company wants to set two different options strategies as belong to above-mentioned risks, then the researchers suggest that strategy for the currency exchange rate risk and interest rate risk. A combination is an options trading strategy that includes the purchase and sale of the call and put option on the same underlying options. In other words, a combination trade is an options strategywhere both options call and put position taken by the trader for the stock in the same underlying.

Reference of Oceana Gold is a multinational company

/investinganswers.com, 2019. Combination Trade. [Online] 

Available at: https://investinganswers.com/financial-dictionary/optionsderivatives/combination-trade-1348

bankrate.com, 2019. Variable-rate loan. [Online] 

Available at: https://www.bankrate.com/glossary/v/variable-rate-loan/

robitgroup.com, n.d. Financial Risk Management. [Online] 

Available at: https://www.robitgroup.com/?investor=corporate-governance/financial-risk-management

[Accessed 15 2 2018].

theoptionsguide.com, 2019. Options Combinations. [Online] 

Available at: http://www.theoptionsguide.com/combinations.aspx