Foreign Exchange-International Finance (Coursework Sample)

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Topic
[Writer’s Name]
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International Business Finance
Analyze the diverse foreign exchange exposures each of the three mining companies have been exposed to in the last three years. Evaluate the different methods in which each of these three companies, managed such foreign exchange exposure while commenting on which of the three companies, in your expert opinion, have been the most successful in managing such exposure.
Introduction:
Mining companies around the world are battling many challenges and crossing many barriers for the sake of their businesses, but there are few companies who have been able to stand and deliver at the time when their organization needed the most. As an analyst point of view, if we talk about the challenges and risk which every mining company is facing today, most of them will agree upon the foreign exchange factors. The companies, who don’t know how to tackle these situations or how to encompass, surround and create a friendly ground for themselves lack in international markets and they might lose a huge amount of money. Although it’s not easy for any company to encounter these challenges, but to minimize the risk at the optimum level must be the aim for any organization.
Every Multinational design their own way of killing the risk factor and confronting it to the best of their capabilities, but the professional personnel have always stepped ahead of the situation and come up with a prompt answer. There are many techniques and methods to tumble the danger of foreign exchange risk and other possibilities. We will discuss about the foreign exchange exposure and their risks of the three major mining companies who are currently working on the biggest level which are Lonmin, Glencore and BHP Billiton.
Foreign Exchange Exposure:
The foreign exchange exposure can be defined as the barometer to analyze and determine the effect of exchange rate on the company’s financial position and performance. It is the medium to basically to segment the exchange rate effects on the firm’s health. The foreign exchange exposure is generally routed through these resources which are known as the other four exposures which in combine determine the foreign exchange exposure. The list is as follows:
1 Transitional exposure defines the happening of mismatching of the local currencies with the foreign currency, it is more of related and pertinent to the assets of the foreign companies.
2 Transaction exposure defines the changes in the cash flows, the future flows which might be affected by the foreign exchange exposure. For e.g. An Accounts receivable in the foreign country.
3 Economic exposure defines as the global picture of the firm in the physical circumstances in the offshore market. Economic exposure illustrates more of future transaction exposures which are not known in today’s world. It has an attractive impact on the market value of the firm in the foreign markets. It includes barriers in international market, competition, trends and other buyer’s preferences etc.
4 Operational exposure is defined as when the local and international markets returns the exchange rates. It is known as operational exposure.
5 Contingency exposure defines the situational dependency upon nature, politics and government policies. There are some contingencies which have an adverse effect on the exchange exposure for e.g. When there was a recession in the International markets in 2007. It was observed the worst foreign exchange operational exposure.
METHODS OF COMPANIES TO TACKLE THE FOREGIGN EXCHANGE EXPOSURE:
Lonmin Method to Manage Foreign Exchange Exposure:
The numerous methods applied by the companies to tackle the foreign exchange rates have been different because all these three companies Lonmin, Glencore and Billiton respectively, have different capitals, different investors and different markets, but one thing is common between all of them that they all have same businesses which is Mining.
If we discuss about the Lonmin which is originated in South Africa there operations department work there, but have different offices around the world. The foreign exchange exposure has adversely effected the Lonmin share price and its business because the commodity price and currency violation has increased the risk for the business.(Jack Tang, 2015) The exchange rates USD/ZAR has also effected the business because Lonmin deals in the local currency of South African Rand. This has left the severe impact on the shares of Lonmin as a result from past years, it has been recorded that, the price of shares is constantly decreasing. It has gone from low to bad, bad to worst and worst to awful position. The management and higher officials have put up deliberate effort to gain the market share, but the story is different for Lonmin these days because the US dollar is also not constant in it price and there are other factors too for e.g. few days later the workers of Lonmin went into strike of six weeks the work was paused and abandon, these things can’t be ignored while analyzing to invest the money on any organization.
He (Jack Tang, 2015) explained in the periodical that these economic and social matters which have been provoked and poked disturbance to the company cannot serve the cause to have a smooth run. It can be said that, one should be optimistic, but Lonmin share price as of today tells us the real picture, it depicts and shows that how foreign exchange rates have affected the organization as a whole.
Glencore Method to Manage Foreign Exchange Exposure:
Now we are discussing another big firm and trader of over 90 commodities worldwide. Glencore requires no introduction in this industry because they are one of the oldest, Glencore was founded in 1974 and then afterwards they started making oil products and now the company is listed on the London stock exchange, Hong Kong stock exchange and recently they registered in the Johannesburg stock exchange. They are one of the largest natural resource companies in the world.
The management of Glencore looks very anxious to address every issue to the next level and make it clear to the investors that, their investment is safe and sound in this company; these things do motivate and encourage stakeholders because they are also the boss of the company. The company has applied strenuous and hard efforts to manage the foreign exchange exposures, but still this foreign exchange risk lies in this industry because most the dealings are done in USD $. The company is anxious to control and monitor the currency rate equation that is why there is always an immediate response on this curtailing issue. The management has found the ways to neutralize the situation, but the foreign currency rates have retaliated in another manner. According to the sources, In July 2015 the performance of Glencore at the stock market as improving as it was showing commendable gains, but now as we move on the share prices have drastically fallen to 93.09 and the trading in Glencore share also has reduced to some level.
The Glencore operations are fully dependent on the debt, as you know the debt increases, therefore in today’s time the commodity prices have fallen to 40% which has adversely affected the Glencore share price too. Glencore competitors are doing better than Glencore itself and if this situation is not changed, it might create fear in the minds of investors.
This company has managed to survive the currency volatility and frequent changes in the foreign exchange rates, though their technique is unique, however, they will have a good going in the long term, but still as an investor point of view, the ambiguity and confusion must be cleared at all levels.
BHP Billiton Method to Manage Foreign Exchange Exposure:
This company also belongs to the same market, though they prominently deal with Iron and Steel. The BHP Billiton management seems to be flabbergasted after what have happened in the China Stock market, this has shown drastic and worst effects on the performance of the shares of the company. The people were hoping against the hope that China’s economic growth will continue and flourish, but it doesn’t happen either, the bank of Shangai increased the interest rate up to 20% which has discouraged the investors to look forward and business with the BHP Billiton.
This company has put up an effort on foreign exchange exposure, but the uncontrollable rates have freaked the economy and the business is little slow in terms of previous track record. The price per share reduced blatantly which have caused serious issues both for the stockholders and the management of the company.
It will travel its journey when the foreign rates will get stale and the China’s economic growth, which is presumed in plunge, will continue to grow when market shows some positive trends. Still, as an investor there are if’s and but’s to invest or to not, however, as a vigilant investor and analyst one should focus on the market trends and economic sustainability whereas the foreign exchange rate exposure factor will be visible in this industry.
Analyze and evaluate the most important financial decision each of the three companies has taken in the last three years while commenting on which of the three companies, in your expert opinion, has been/will be the most successful in their financial decision making.
Lonmin Financial Decision In Last Three Years:
If we analyze and determine the performance of Lonmin PLC. In the last three years, we can say that it has been a satisfactory performance by them. The CEO did mention in his interim report regarding the wage strike which held till the sixteenth week, it was the longest of strike Lonmin had...