Impact of Financial Risk on Medusa Mining Limited

Discuss about the Business Intelligence In Risk Management.

From the evaluation of the operations of Medusa mining Limited it could be identified that it has different levels of financial risk, which might directly impact its overall operational capability. The company is relatively focused on producing two specific metals such as gold and copper who is overall price in the market fluctuates adequately. from the evaluation it could be identified that there is different level of risk such as interest rate risk, commodity market risk, and foreign exchange risk affecting the operational capability the organization. The thorough elaboration on the financial risk of the company is effectively depicted as follows.

The commodity market risk is relatively affected by the changing prices of gold which is depicted in the above figure. The prices of gold have relatively changed during the past 1 year, as depicted in the above figure. This change and volatility in the prices of gold is directly affecting the overall revenue generation capability of Medusa mining Limited. the company is not able to identify a perfect price structure in which it could maximize profit from the gold production. the continuous decline in the prices of gold can be seen from April where a barrier is being set and the prices are not able to break a certain limit. this indicates a down trend in the overall prices of gold, which is relatively not effective for the Medusa mining company. the company needs to sell 14,200 ounces of gold by the end of December as it will be producing them during July to December. Furthermore, the prices of gold is relatively declined from the levels of $1,340 to $1,312, which indicates the overall down trend in price of gold. Therefore, adequate hedging measure needs to be imposed by the company for minimizing the risk from commodity price fluctuations, which might directly impact its overall profitability. this aging procedure which is relatively fix the prices of gold and minimizing the negative impact from reducing gold prices on its revenue generation capacity (McNeil, Frey and Embrechts 2015).

The above figure relatively States the overall changes in price of copper, which is relatively produced by Medusa mining company during July to December. the price changes in copper is relatively detected from the above figure, which could directly affect the revenue generation capability of the company. the declining prices of copper would reduce its revenue while the cost will remain same, which will directly hamper its overall profits from operation. The evaluation also indicate that the prices of copper has been declining since January of 2018, which is not a good sign for the Medusa mining company, as it produces lots of copper from its operations. This would directly impact its revenue generation capacity, while hampering the overall profit that could be obtained from investment. The company is relatively producing 3,800,000 pounds of copper from July to December, which is directly affecting the overall revenue generation capability of the company due to the fluctuations in copper price. Further decline in the, price would directly affect its profits, as the cost of producing the copper remains constant. hence the use of hedging measure would eventually help the organization to minimize the negative impact from commodity market risk and maintain its profitability (Titman, Keown and Martin 2017).

Commodity Market Risk

The change in US dollar LIBOR rate can be identified from the above figure, which has constantly increased over the period of 2 years. This mainly indicates the change in the overall interest rates of banks regarding the different types of loans provided to companies. the Medusa mining company has relatively accumulated loans from US bank, who is overall interest rates changes with the change in US dollar LIBOR rate. The changes in the overall bank interest rate would directly affect interest payments over the period of 12 months, where the high volatility in the US dollar LIBOR rate would increase the cash outflow of the organization, as interest payments. the company has taken a loan of $600 million for supporting its operations in the mind field, where the price fluctuations is affecting its profitability and this increment interest rate would hamper the maintenance of adequate profits. Therefore, using the adequate hedging measure will reduce the risk from rising interest rate that would minimize risk and improve profitability of the organization (Olson and Wu 2017).

The above figures 4 and 5 relatively represents the overall changing value of €1 against Euro and USD which is directly affecting the overall operational capability of the company. the company needs to conduct transactions on the value of USD while interest payments needs to be conducted on Euro. Therefore, the changes in the volatility and weakening AUD dollar directly affect its profitability in the long run. Consequently, adequate hedging measure needs to be implemented by the Medusa mining company to reduce the negative impact from currency exchange. the company needs to hedge its currency values to maximize the profit from operation while reducing the risk from reduction in AUD value (Taylor 2016). The company needs to provide interest to the loan provider in both Euro and USD, where relevant hedging measure needs to be conducted for covering the risk from the cleaning Australian dollar value against USD and Euro.

From the evaluation of the overall changes in gold prices adequate hedging measure needs to be implemented by Medusa mining company. However, the current price levels of Gold are adequate for the mining company, which needs to be hatched for minimizing its impact on future price changes. The company needs to hedge its gold exposure by 75%, which will fix the overall Prices for gold and the remaining 25% could be used for tapping on the opportunities of rising gold price. this overall measure would eventually help Medusa mining company to minimize the risk from volatile gold prices and maximize their profits in future. the production level can be continued by Medusa mining company as the exposure of gold prices has been hedged adequately for maximizing the profits even if the prices of gold the clients in future (Wolke 2017).

Hedging Procedure for Commodity Market Risk

The changes in price volatility of copper also indicates that the organization needs to conduct and hedging procedure where the security of profits from copper production is maintain. The company directly needs to Hedge 60% of the overall copper values to effectively minimize the negative impact from changes of copper price. This would eventually provide the organization with adequate heading provisions to minimize the risk from arising copper prices. The Other 40% of the copper value is not, as the rising prices of copper could allow the organization to tap into the new profit that would be generated from positive value.

Moreover, the interest payment rates conducted by the company needs to be held fully for reducing the negative impact rising LIBOR rates. hatching the whole interest repayment of 3-month US dollar LIBOR that would eventually help the management to minimize the possibility of extra interest payments by the organization.

Lastly seeing the overall fluctuations in the currency market, the Australian company needs to hedge its currency exposure on USD. the company relatively received revenues in USD and any decline in the overall USD value would negatively impact the income of the organization. Therefore, hedging 60% USD value would eventually allow the company to minimize the negative impact from currency volatility (Hopkin 2017).

From the valuation of above risk identified for Medusa mining company Adequate hedging procedure needs to be conducted with the help of derivative instruments. these derivative instruments would eventually help in minimizing the negative impact from changing prices and improve profitability of the organization. The first hedging measure that need to be implemented by Medusa mining company is on gold. where shorting the future contracts of gold consisting of 75% of the overall production would eventually help to fixate the selling price of the product. This would eventually help the organization to mitigate any kind of risk from future declining prices of gold. The other 25% of the of the gold value is to tap into the rising prices of gold and improve profitability of the organization. The future contracts of gold need to be sold by Medusa mining company for effectively controlling its hedging measure and minimize any risk from volatile commodity market (Ho et al. 2015).

Moreover, advertising measure on copper prices needs to be conducted by Medusa mining company for effectively improving the level of profit from operations. The company directly needs to hedge copper value by 60% of the total production that will be conducted from July to December. The declining prices of copper needs to be hedged by shorting the future contract, where the overall prices of copper will be fixated, while minimizing the risk from overall operation. The remaining 40% of the overall copper value will not be hedged, as the organization needs to tap into the rising prices of copper in future. This would eventually allow the organization to minimize the negative impact of declining prices while improving the level of profits that could be generated from copper production.

Interest Rate Risk

Medusa mining company also needs to hedge adequately in the Australian dollars where its volatility is it directly affecting its capability to generate revenue from operation. the volatile Australian currency value is directly affecting the ability of the organization to acquire the required revenue by selling gold and copper in the commodity market. Furthermore, 50% of the overall currency value that will be converted from USD needs to be hedged by Medusa mining companies using put options where the strengthening of Australian dollars would directly affect its operations. Therefore, any kind of increment in the values of AUD negatively affecting the USD would be hedged and the organization would you receive adequate payment from its export. In this context, Chance and Brooks (2015) stated that with the use of adequate hedging measure organizations are able to minimize the risk from operation and maximize the profit that could be generated in future.

The above table relatively represents the overall hedging procedure that is conducted for the copper production of December and November. This relatively represents the maximum profits that could be generated from the overall hedging operations. In addition, the prophets that is generated relatively reduces the overall of that might and if the company did not use any kind of hedging procedures for their copper production. DeAngelo and Stulz (2015) mention that with the help of nursing procedures companies are able to minimize risk from volatile prices while increasing returns from investment. Hence, with the help of above hedging measure the overall profit from the operations of copper can be conducted, as there is an anticipation of copper prices to decline in future. Therefore, the hedging process would eventually help Medusa mining company to maximize the profits that could be generated from its operations by minimizing the negative impact of declining copper prices.

From the evaluation of above table, the measures used by Medusa mining Limited for serving the risk from copper prices is effectively depicted. The overall future contracts are used for minimizing the risk that might incur from the declining copper prices. The table also indicates that the number of contract that needs to be placed for conducting the hedging process and the overall impact it will have on operations of the organization.

The above table relatively represents the overall hedging contract that needs to be conducted by the organization for minimizing the negative impact of changing prices and maximize their profitability. The use of Bull spread strategy could be one of the adequate measure that would allow the organization to maximize its profitability from corporate. The strategy requires the continuous selling and buying of future contracts and making adequate hedging measures to effectively rely on the rising prices of a particular commodity. The buying of September future contracts and selling the December future contracts was eventually help in curbing the losses that might in go from future copper prices. Investors and companies directly use the method to effectively rely on the rising prices of a particular commodity and nullify any kind of downtrend movement. the difference between the overall buying the future contract and selling the future contract is the relevant profit that is obtained by the organization. Therefore, with the help of bull spread strategy the overall hedging procedure of copper can be conducted by Medusa mining company and effectively improve its overall profitability (Lam 2014).

Hedging Procedure for Interest Rate Risk

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