Trade-off between Higher Interest Rates in Thailand and Delay Conversion of Baht into Australian Dollars

1. One point of concern for you is that there is a trade-off between the higher interest rates in Thailand and the delayed conversion of baht into Australian dollars. Explain what this means.

2. If the net baht received from the Thailand operation are invested in Thailand, how will Australian operations be affected? (Assume that Aussie Blades is currently paying 10 per cent on Australian dollars borrowed and needs more financing for the company.)

3. Construct a spreadsheet to compare the cash flows resulting from two plans. Under the first plan, net baht-denominated cash flows (received today) will be invested in Thailand at 15 per cent for a one-year period, after which the baht will be converted to Australian dollars. The expected spot rate for the baht in one year is about A$0.0361 (Ben Holt’s plan). Under the second plan, net baht-denominated cash flows are converted to Australian dollars immediately and invested in Australia for one year at 8 per cent. For this question, assume that all bahtdenominated cash flows are due today. Does Holt’s plan seem superior in terms of Australian dollar cash flows available after one year? Compare the choice of investing the funds versus using the funds to provide needed financing to the company. 

4. The difference between the Thai baht interest rate (15 per cent) and the Australian dollar interest rate (8 per cent) is 7 per cent. If you anticipate that the Thai baht will depreciate by at least 7 per cent in one year, which plan in question (3) (the first or second plan) is it better to exercise? Explain your recommendation.

5. Provide a brief background of each companies’ business, listing the countries where each have operations in. Determine the country where each of them derives the most revenue outside of Australia. From the company’s annual reports and other sources, explain in details how the company manage their foreign currency exposure to that country to reduce their transactions and translations risk.   

6. From question 1, plot the weekly chart of the foreign currency vs AUD exchange rate for each of the companies against its ASX listed share price for the past 2 years. Determine if there is any correlation between the exchange rate and its share price over that period. Explain your findings (provide an explanation based on the companies’ global operation and management of its forex exposure) in details specific to each company that you have chosen.  

Effect of Investing Net Baht Received from Thailand Operations on Australian Operations

7. Determine if the two companies have a separate listing on a foreign stock exchange. If they do, explain why you think the company has chosen to list its shares on that secondary stock exchange. Explain the benefits and downside to having that secondary listing. If the companies do not have a secondary listing, explain why it may be beneficial for them to do so and recommend which stock exchange the companies should consider a secondary listing. Explain your recommendation in details.

Apparently, the interest rate prevalent in Thailand is higher than Australia. The difference between the two returns is about 7% as the rate prevalent in Thailand is about 15% and in Australia it is about 8%. However, this also suggests the uncertainty that is present within the economy of Thailand. As a result of this uncertainty the value of its currency i.e. Baht will reduce in the near foreseeable future[1]. This implies that the company will get lesser amount of Australian Dollars in exchange of same amount of Baht in the future. Consequently it will be prudent for the company to not invest the excess funds earned in Thailand back in Thailand rather it should remit the amount back to Australia despite the lower rate of returns on investments. This will insulate the company from any depreciation in the value of Baht in the future.

In the present case, the company is faced with the requirement of additional for its operations back in Australia. The need of funds could be mitigated by two ways and they are either the company can remit the excess funds earned byte company from its operations in Thailand or borrow funds in form of debt at the existing interest rate of 10% in Australia[2]. If the company is not going to remit the funds earned by it, then it will have to borrow additional funds at the rate of 10%. Furthermore, it is highly anticipated the value of Baht currency is going to depreciate in the near future and if the same depreciation amounts to 5% then the company will get returns of only 9.25% from the funds it reinvests in Thailand. Hence, it will be highly detrimental to the financial interest of the company to reinvest the funds it earned in Thailand and not remit it back to Australia[3].

The above table are the mathematical comparison between the two options available with the company in respect of the excess funds it has earned in Thailand. The calculations factored in the economic benefits and the costs involved in both the options i.e. if the company reinvests the funds back in Thailand or remit them back to Australia[4]. After the analysis, it is revealed that the company will be better off if it uses fund to finance activity in Thailand.

Comparison of Two Plans for Investing Net Baht-Denominated Cash Flows

The calculation above indicates that under the revised circumstances it will be a better option if the funds are converted immediately for making investment in Australia.

The Australian company is engaged in operations related to extraction and production of petroleum. In fact, it is the largest oil and gas production company and also it is the largest dedicated oil and gas company of Australia which operates independently. It has its headquarters in Perth Australia[5]. The company is a public company and has itself listed on Australian stock exchange.

The geographical locations from where the company derives its revenue includes Australia, Asia, USA, Canada and some other countries which are together grouped under the category of other by the company. The company derives the highest revenue outside of Australia from Asia. The revenue that accrued to company in the year 2016 from Asia amounted to US$3513 million[6].

In case of the company the foreign exchange risks arises in respect of the future commitments made by the company, the assets and liabilities of the company which re not denominated by the company in US Dollars. The company gets exposed to foreign currency risk from both operating expenses incurred and the capital expenditures incurred by the company in currencies other than US dollars particularly in case of Australian dollars[7].

For the purpose of mitigating the risks of such nature or to hedge the risks the company entered into a cross-currency interest rate swap agreement with Swiss Franc denominated medium term note.

• Macquarie group limited:

The group is a multinational investment banking company that provides financial services to a wide range of customers like retail clients, institutional and corporate. It services include investment and funds management services, banking and financial advisory. It has its headquarters in Sydney[8]. It is the largest investment banking service provider in all of Australia. Its staff members amount to around 14000 and it has well over 70 office locations in 28 countries. It has its listing done on Australian Stock exchange[9].

The various geographical locations it derives its income are Australia, America, Europe, Middle East and Africa and Asia pacific. The highest revenue accruing in respect of company outside of Australia comes from America that amounts to US$3989 million in the year 2016.

The company faces foreign currency risk in course of its normal operations and the investment made by it in the foreign operations. For the purpose of managing the risk the company efficiently hedges the non-trading foreign currency exposures and the company makes sure that in respect of trading foreign currency exposures the same remain within the limits set up by RMG[10]. Under the provisions of Australian Accounting standards, the forward foreign exchange contracts and borrowings in the same currency as the exposure are assigned as hedges.

Business Operations and Foreign Currency Exposure Management of Two Companies

The analysis of the relationship between the weekly share prices of two companies for the last two years and the exchange rate of USD and AUD yielded that both the companies share prices have a negative correlation with the exchange rate. The negative relationship between the two implies that if the exchange rate increases the share prices of the companies rises and similarly if the exchange rate decreases then the share prices of the two companies reduces[11]. In terms of the degree of correlation Macquarie group limited is more sensitive to the changes in the exchange rate. On comparison to the effect on the share prices of Woodside petroleum.

None of the two companies has a secondary listing on any stock exchange outside the state of Australia. This is seriously detrimental to the financial interest of the company. The reason being that the company will lose the benefits of getting a secondary listing. The added advantage being the flexibility the companies will get in respect of raising of capital in different currencies and different time zones. Both the companies have significant revenues coming out to them from overseas operations. The secondary listing would enable them to build their goodwill in that market further by adhering to various statutory requirements put up on them by the country’s statute regarding various disclosures and activities on this periphery. The adherence to statutory requirements will ensure the companies media coverage and they will be able to leverage the new found image to further increase their market share in the respective countries[12]. The shareholders will connect well with the companies due to their already existing market footprint within the country. As per the revenue, accruing to Woodside petroleum it will be prudent for the company to get listed on the stock exchange of the country which it derives the most revenue from in Asia. In case of Macquarie group limited it will be prudent for the company to be listed on the New York stock exchange as the most revenue accruing to the company comes from America

Reference

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Com, M., and Sem II. “International Finance.” (2016).

DAILY, JAMES E., F. SCOTT KIEFF, and ARTHUR E. WILMARTH JR. “Introduction.” In Perspectives on Financing Innovation, pp. 13-16. Routledge, 2014.

Deresky, Helen. International management: Managing across borders and cultures. Pearson Education India, 2017.

Hodge, Graeme. Privatization: An international review of performance. Routledge, 2018.

Kothari, Stephen P., Natalie Mizik, and Sugata Roychowdhury. “Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation.” The Accounting Review 91, no. 2 (2015): 559-586.

Lasserre, Philippe. Global strategic management. Palgrave, 2017.

McNeil, Alexander J., Rüdiger Frey, and Paul Embrechts. Quantitative risk management: Concepts, techniques and tools. Princeton university press, 2015.

Porter, Michael E., and Mark R. Kramer. “Creating shared value.” In Managing Sustainable Business, pp. 327-350. Springer, Dordrecht, 2019.

Porter, Michael E., and Mark R. Kramer. “Creating shared value.” In Managing Sustainable Business, pp. 327-350. Springer, Dordrecht, 2019.

Shenkar, Oded, Yadong Luo, and Tailan Chi. International business. Routledge, 2014.

Titman, Sheridan, Arthur J. Keown, and John D. Martin. Financial management: Principles and applications. Pearson, 2017.

[1] Titman, Sheridan, Arthur J. Keown, and John D. Martin. Financial management: Principles and applications. Pearson, 2017.

[2] Deresky, Helen. International management: Managing across borders and cultures. Pearson Education India, 2017.

[3] om, M., and Sem II. “International Finance.” (2016).

[4] Hodge, Graeme. Privatization: An international review of performance. Routledge, 2018.

[5] Kothari, Stephen P., Natalie Mizik, and Sugata Roychowdhury. “Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation.” The Accounting Review 91, no. 2 (2015): 559-586.

[6] DAILY, JAMES E., F. SCOTT KIEFF, and ARTHUR E. WILMARTH JR. “Introduction.” In Perspectives on Financing Innovation, pp. 13-16. Routledge, 2014.

[7] Brewster, Christopher, Elizabeth Houldsworth, Paul Sparrow, and Guy Vernon. International human resource management. Kogan Page Publishers, 2016.

[8] McNeil, Alexander J., Rüdiger Frey, and Paul Embrechts. Quantitative risk management: Concepts, techniques and tools. Princeton university press, 2015.

[9] Porter, Michael E., and Mark R. Kramer. “Creating shared value.” In Managing Sustainable Business, pp. 327-350. Springer, Dordrecht, 2019.

[10] Porter, Michael E., and Mark R. Kramer. “Creating shared value.” In Managing Sustainable Business, pp. 327-350. Springer, Dordrecht, 2019.

[11] Lasserre, Philippe. Global strategic management. Palgrave, 2017.

[12] Shenkar, Oded, Yadong Luo, and Tailan Chi. International business. Routledge, 2014.