Revised Corporate Finance And Investment In Australia

The rise in dollar value affects passengers mix:

Discuss about the Revised Corporate Finance and Investment.

Australia is among the few countries in the world regarded to have a good business environment. It has the most transparent and well-regulated business environments since the state has a stable economy, the high currency of the dollar employed by businesses and even political neutrality are among the reasons encouraging many companies to thrive in Australia. In Australia, various business entities have risen due to these factors for instance companies, trusts, partnerships, sole traders and joint ventures (Australian Bureau of statistics, 2010, p. 3).

Australia has a proven economic resilience and stability in growth has provided a more conducive environment for business activities. It is because of the low risks environment provided due to the above-mentioned factors. Also, the country has an open market that is highly competitive and diverse. Hence, enabling many businesses to thrive in the region. In addition, the country is located in rapidly advancing areas of the world which is Asia pacific region, with strong political, trade and economic connections. Studies reveal that Australia is ranked to be the best place globally to run business activities. In addition, the country also has a large sized population that has a capacity of providing adequate labor both skilled and unskilled labor force hence facilitating the thriving of many businesses, an example of the Business in the regard is Qantas Airways (Smith and Paglia,2005, p. 8).

 In this regard, a strong Australian dollar will reduce the costs denominated in foreign currency. The costs of international currency are in US dollar for instance used in acquiring external spare parts, capacity hire and air craft purchases. They affect all segments of business including domestic, regional and international sectors. Other sections involving the cost of production entails airport charges, navigation of route, and utilization of overseas airspaces and coordination of these offices (Eitenman, David, and Stinehill. 2007, p. 30).

Qantas an airway enjoys the benefit of a strong Australian Dollar such that most of the costs are paid in Australian Dollar which in this regard, has the highest rate of the exchange rate. Some of the expenses include those one paid on-road vehicles that are operated by Qantas (Moffete and Stonehill, 2009, p. 5)

Currency fluctuation involves a shift in the value of the currency which affects the operation of various businesses either negatively or positively depending whether the change in the money has increased in value or reduced in value. Currency fluctuation has led to rise in the Australian dollar value which has impacted companies like Qantas in a positive way. Reasons being; the Australian dollar is up there in amount in comparison to other currencies. Qantas being in Australia benefits positively in the regard (Bryman and Alan,2003, p. 44).

Approaches to managing currency risk

The total number of passengers in this regard is not affected by the mix of passengers. Rise in cost of Aussie dollar results to many travels from Australia than those coming in Australia. The process is good for the Qantas since the demand segment is strengthened that it has highest befits in revenue penetration.

Concerning the issue, the exposure to exchange rate determines critical elements such as fuel price and interest rates which have a direct impact on the way the airway is operated. The leadership has to be guided by these factors in determining the charges subjected to the Qantas basing in mind that at the end of the day, profits have to be realized (Levi and Maurice. 2005, p. 23)

The approach targets at converting long-term foreign currency borrowing to a shorter term of between 1 to 12 years. It is done to those currencies in which the company anticipates to have adequate net surplus cash flow. The revenue should be able to meet the actual deposit and debt utilized in the swap. Also, forward foreign exchange contracts are being used to hedge the currency from the foreign states. In the regard, the process has denominated borrowing with those currencies that have chances of creating a reasonable net cash flow. Also, both foreign exchange contracts and currency ways are utilized in the buying and selling of properties and equipment when denominated in a different currency (Sumbart ,2008, p. 18)

Qantas as an organization also considers the approach of employing ways such as interest rate swaps, rate agreements, and options in controlling and managing interest rate risk exposure. The methods are utilized accordingly to help in balancing floating interest rates.

To control currency risk, the company also has laid down policies that are strictly followed to the latter. It also carries out transactions with many customers from various regions targeting in reduction on the effect of risk in credit exposure. In this regard, studies show that in the year 2005, trade counterparties doubtful debt amounted to $1,027.9 million (Wilson and Alan, 2003, P. 32)

This is because variations in money affect production of costs such as energy prices the economy at large and its interests rates. It also has a profound effect on revenue effect.it is due to the fact that as long as other home airfares are not adjusted to the standard exchange rate movement the shift will be impacted negatively to the currency of Australia such that it has lowered the Australian Dollar revenue (Frankfort-Nachimas and Chava.2011, p. 32).

Fluctuation on currency has an effect on exchange complexities

Despite the fact that doing business outside the country is barricaded by fluctuation in exchange rate, Qantas Airways is not profoundly affected by the issue due to the reason being, the currency in Australia is up there in comparison to other countries’ money. Whenever the currency fluctuates, it results to fall in aggregate demand. In summary currency fluctuation in a reduction manner, have a negative impact on the cost of production such that the cost involved in production increases. Currency fluctuations resulting in an appreciation of the currency also impact the operation of a business such that the net exports decreases and also the cost of production are lowered in this process (European Commission, 2000:HTTP/ec.europa.eu).

The organization has employed both external and internal approaches to managing the impacts to mitigate the risks. Some of the external methods include the use of:

These external approaches are based on the financial derivatives. Organizations in this regard are proactive focusing on the future economic changes that might occur in the process of carrying out their routine activities targeting to realize achievements. They are therefore able to conduct both pre-selling and buying exercise of a given amount of currency at a defined rate in the future to avoid any changes that might occur in future that otherwise could affect the operation of the business. The company in this sense uses the current currency value in carrying out the future business activities hence when the time comes, whether changes have been manifested in the currency of the business or not affected by those changes (Pike and Richard.2013, p. 66).

On the other hand, there is the utilization of international strategies in the business. They are used by an organization with the target of minimizing the currency risk group in the organization sphere itself. Companies in this sense have been able to utilize the features of its trading relationships without impacting the external money markets which prove that the process is natural to achieved by the organization. Some of the commonly employed approaches that are external in this regard entail; netting, matching and the choice of invoice currency (Bryman and Alan., 2007, p. 13).

Organization facing sharp fall, are said to be unstable due to the fact that previous sales vary profoundly to the next new sales. In this regard, the sales registered in the next period to fall to a great extent and sharp reduction. In Swire group, studies indicate that the severity of the global economic downturn had a negative influence on Cathay Pacific from the second part of 2001 onwards and, while recently, it has impacted the level of property rentals. In this regard, a high debt of HK$16,756 million has been registered, according to the research conducted. The report on the company further reveals that gearing had also remained low at 22% despite a HK$6,802 million drop when the evaluation of the properties was conducted. Studies show that organizations such as Kiwi Group had the same crisis. In this regard, the organization had reported a net profit of $ 58 million, a large margin drop from the previous year $131 million profit (James, 2005, p. 12).

Creates unstable position for a business

 Sharp fall has led to cut costs of production and even loss of jobs. Research also indicated that Qantas underwent a similar crisis which forced the organization to make a significant restructure of systems. The organization was forced to cut 500 jobs and also signaled for the shutting down of some parts of the company. The company encountered a drop of 83% drop in comparison to last year. Hence, need to make adjustments to save the company from collapsing (Gunther, 2010, p. 1).

Other companies have been able to offer stiff competition to the Swire group. Swire group is facing stiff competition from Chinese airline due to sharp fall instances by the organization. The organization also has encountered fewer premium class passengers (Steve, 2013, web; HTTP/en.m)              

Whenever a sharp fall has been registered, there is need to carry out hedging to control more losses from being incurred. Methods in this consideration aim at managing the risks of finances of an organization to minimize the risks. Various approaches are used by different companies as an approach to the issue of hedging. These methods are as discussed below:

To begin with, organizations have adopted the strategy of back to back hedging that involves an open position in the business in which the company is immediately closed. The approach is achieved by, for example, purchasing the commodity on the direct market. It is usually utilized in the case.

Another approach to hedging is tracker hedging. The method involves a pre-purchase strategy employed by the organization where the open position decreases as the date of closer maturity become closer. An appropriate example is the retail price of the commodity when it is influenced by its longtime wholesale price subjected to it (Elizabeth, Oltheten and Wasp, 2012, p. 353).

Thirdly, delta hedging is another approach utilized to mitigate the financial risk of an option. The commodity in this instant is acquired with an inverse price movement. The organization may also employ risk reversal approach that entails buying a call option and releasing a put option. Business may even approach on hedging process by using an investment that targets at decreasing undesired risks through matching of cash flows (Jorion and Philippe, 2009, p. 45).

Conclusion

To conclude, Swire group in investing in the Qantas will only succeed if adequately managed,  dealing with issues to do with currency fluctuations and functional approaches to risk management. Also, the matters to do with hedging need to be put into consideration. Mechanism needs to be put in place to ensure that the organization does not encounter the issue to do with sharp fall that otherwise may result in the collapse of the business.

References

Australian Bureau of Statistics. 2010, Doing business in Australia. Hong kong: Australi Bureau of statistics.

Bryman and Alan. 2004, Managing Risk in international Business Finance. Thomson: Thomson business press.

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European Commission 2008, an organization for economic Development and corporation. Business report. New york European Commision.

Frankfort-Nachimas and Chava, 2011, New Research methods in social sciences. New York: S.t Martins press.

Gunther, Kalenbock.2010, New Approaches to hedging. Armsterdam: Brill.

Jorion and Philippe.2009, Financial Risk manager handbook. New York: John Wiley and Sons.

Levi and Maurice. 2005,  International finance. New York: Routledge,

Moffete, Michael, and Arthur, 2009. Stonehill. Fundamentals of Multinational finance. Boston:Addison-Wesley.

Pike and Richard. 2013, Revised Corporate Finance and investment. New York: Prentice hall

Smith, Williams, and John. Paglia. 2005, The link between price and profit Margin in the globalmarket. Business Report. New York: The Glozialo Business Report.Steve, Creedy.2013, Qantas to Hike fuel charges. Hongkong: web.

Summary, Daniel.2008, Corporate strategies of currency risk management. New york: Changshuschool.

Thomas, Ian. 2003, Reseach methods and organizational studies. Unwin Hyman: oxford University press.

Wilson and Alan. 2003, Marketing research, an integrated approach to marketing. McGraw Hill:Pearson Education.