6007LBSAF INTERNATIONAL FINANCE

COURSEWORK:
Weighting: 40%

This assessment is to be completed individually with a word count of up to 2000 words. You
are to complete the assessment in a report format

Issue Date: Week commencing 4th January 2020

Submission Deadline: Friday 26-2-2021

Assessment Feedback: Week commencing 22nd March 2021

Learning Outcomes to be covered:

1. Identify causality and equilibrium between financial markets and economic activity, using
appropriate theoretical models.
2. Use published market data in 'real-world' financial problems especially focusing on FX
markets in terms of risk taking as well as hedging risk exposures using appropriate
strategies and instruments.
“Rio Tinto – how to manage FX exposure due to investment to Australia”

Rio Tinto, the Anglo-Australian multinational and the world’s second largest metals and
mining corporation, has approved an AUD 98 million investment in a new solar plant at the
Koodaideri mine in the Pilbara, Australia, as well as a lithium-ion battery energy storage
system. The solar plant and battery are estimated to lower annual carbon dioxide-emissions
by about 90,000 tonnes compared to conventional gas-powered generation.

It is decided that part of the investment (AUD 50 million) will be provided by the UK company.
In February 2021, it is revealed that the injection of funds from the UK company is needed in
one year’s time.

The contract exposed the company to currency risks. In consideration of such risk exposure,
what actions should be taken to facilitate the deal? Or if no action, why?

You are required to produce an individual report (up to 2000 words, marking to cease
after +10% of the limit) which considers these decisions in the light of the market data
available. You should seek to incorporate the answers to the following questions in
your report to support your arguments.

 What type of currency risk exposure is this? What are the common principles and
tools in financial market for hedging this type of exposure? Compare the pros and
cons of them.
 First ignore the transaction costs and assuming that you want to hedge 100% the
currency risk exposure, can you numerically demonstrating the two similar hedging
strategies of forward and money market hedge? According to the current market data
you find online, can you tell which one is better? What if transaction costs of both are
taken into consideration?
 Analysing the historical currency price of AUD/GBP, what’s you expectation of the
future trend of AUD? Find analysts’ articles to support your prediction. With this
expectation do you want to change your hedging percentage?
 Use Google Scholar to do a simple literature review on the effectiveness of
operational hedge on exchange rate risk, and advise the company accordingly?
Marking Criteria for Assessment

Marking Criteria Marks out of 100

Format
5
Report structure, sequence and explanation of points
considered. The purpose of this report is to make the
hedging decision for the deal mentioned in the case.
Introduction sets the scene of the report. Middle sections
give reasons and evidence for your arguments.
Conclusion section gives your recommendations.

Research/Referencing
15
Evidence of wider reading with appropriate sources used
to support work. Correct and consistent style of Harvard
referencing throughout the whole of the report.

Content and Explanation

40
Provide reasons to support your arguments. You need to
at least answer the first two bullet points, and incorporate
the answers into your arguments and recommendations
in the end.

Analysis
40
Analyse the scenario with relevant theory, current market
data, and referencing. You need to at least answer the
last two bullet points, and incorporate them coherently
into your report.