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25, 2012 Instructor: Vo Hong Duc Class 2.5 1. Nguyn Hong Minh Tr 2. V Tin Dng 3. Phm Duy Hng 4. Phan Th Trn Nga
5. Nguyn Anh Thi
Commodity price: when the Reserve Bank of Australia increases interest rates substantially, the price of commodity will increase. Therefore, the company will pay more for material that means the cost of company will increase.
The exchange rate: when the AUD rises if the company has exported the products, the revenue on AUD of company will decrease. If the company has imported the products, the cost on AUD of company will decrease. Therefore, a firm can use suitable hedging tool (put option, forward option, and future option or call option).
Question A.3 The exposures will this loan create both now and in the future: - The interest rate: the difference between interest rate in USD and interest rate in AUD now and in future will affect the cost of capital of company and influence the comparative of company. - The exchange rate: the difference between spot rate AUD/USD when the company brings those funds back to Australia and future rate AUD/ USD ( when the company paying USD interest rate annually for five years, at which time the loan will need to repaid) will affect the cost of capital of company. In this case, the company earns the difference between interest rate in USD and interest rate in AUD. In contrast, the company loses the difference between spot rate AUD/USD
Therefore, when 90-day interest rate in AUD is higher than 90-day interest rate in USD, the forward AUD/USD exchange rate will be higher than keeping returns at the same level. b. The 90-day forward rate price is calculated as below: Sfw= 1.0115 x (1+4%/4)/ (1+3%/4) = 1.0140 The 90- day forward price: 5000000 x 1.0140 = 5070000 AUD. Question A.5 a. Regarding this scenario, the type of risk here is foreign exchange risk because the exchange rate AUD/USD may be higher (payment with 6 months) than now. Therefore, the payment for this contract will be increased due to the increasing cost of equipment and this lead to lose the money for the company. b. The impact on the company can have 2 options below if the AUD fell to AUD/USD of 0.9995 in 6-month time. If the company did not decide hedging, the amount of AUD (the cost of equipment) would be paid 1.999.000 (2mil x 0.9995). Conversely, if the company decided hedging, the amount of AUD (the cost of equipment) would depend on the option company for hedging:
PART B:
Every company in its business activities always faces many uncertain and unpredictable things such as changes in exchange rates, interest rates, commodity prices, and so on, that can affect the company dramatically. If these changes badly tends, they can put the company in problematic situation. We can call the probability of loss is risk. Risk is the chance that unexpected outcome will occur (Besley and Brigham, 2008, p.307), and risk is the probable variability of returns (Horcher, 2005, p.2). To do business or to invest is to face risks. Besley and Bringham (2008) stated, The greater variability of the possible outcome, the riskier the investment (p.307), or simply as someone said more rick more return. Financial risk comes from many factors, it can occur in the processes of sales and purchases, investments and loans, or it happens as a result of using financial tools such as debt financing or financial leverage, or it comes from the activities of management, from the law and the regulations of the government or the policies of the company. Financial risk comes from everywhere and is unavoidable that any entrepreneur must face to it. Therefore, identifying risks to control and set for an appropriate financial risk management strategy takes a vital role to any business or any investor. In the limitation of this paper, we cannot cover all kinds of risk with an ambition of giving out all solutions to all kinds of risk but it is intended to help readers having a general view of what risks in business are and how to identify and manage financial risk in reality. Where is financial risk from? According to Horcher (2005), there are three main sources of financial risk: - Financial risks arising from an organizations exposure to changes in market prices, such as interest rates, exchange rates, and commodity prices - Financial risks arising from the actions of, and transactions with, other organizations such as vendors, customers, and counterparties in derivatives transactions - Financial risks resulting from internal actions or failures of the organization, particularly people, processes, and systems.
Exporting market: Hung Vuong is proud to be recognized as one of biggest processors and exporters of pangasius in Viet Nam. At present, Hung Vuongs product is exported to 60 countries in the world including Europe, Brazil, Mexico, Australia, the USA, Middle East and Asian countries. The chart below shows that how big is each export market share.
Source: Hung Vuongs Website : http://www.hungvuongpanga.com/en/our-market.html Revenue and cost structure - Revenue structure: VND Billion No. Items 2009 Amount % 3,087.28 94.66% 2,375.29 72.83% 660.54 20.25% 51.46 1.58% 0.00 0.00% 165.00 5.06% 9.31 0.29% 3,261.59 100.00% 2010 Amount % 4,431.59 93,28% 2,636.12 55,49% 1,773.82 37,34% 16.00 0,34% 5.65 0,12% 311.75 6,56% 7.63 0.16% 4,750.97 100.00% 2011 Amount % 7,835.25 97.00% 4,728.24 58.53% 3,050.03 37.76% 9.46 0.12% 47.53 0.59% 187.46 2.32% 55.25 0.68% 8,077.97 100.00%
I. Revenue from main activities Revenue from export sales Revenue from local sales Revenue from cold store revenue from supplying services II. Incom from Financial activities III. Incom from other activities Total: - Cost structure:
VND Billion No. Items 2009 2010 2011 Amount % Amount % Amount % 2,573.00 93,87% 3.822,88 92,33% 6.580,79 94,34% 1,496.80 54,61% 2.550,65 61,60% 3.887,62 55,73%
Source: Extracted from Financial statements of the company. Identifying Financial risk of the Company and suggesting strategies for financial risk management As the above introduction, Hung Vuong group is known as one of the Vietnamese leading corporations in seafood processing and exporting, especially in producing and exporting Pangasius. They own the closed system from produce breeds, feed to raising farm, processing, cold store, and exporting. All of these create the high quality series of products from Pangasius, and then serve to the consumers all over the world. With these scopes, Hung Vuong Corporation could meet financial risks as followings: 1. Market prices changes Market prices changes are the first financial risk, which for most of processing and exporting Corporations meet. They include interest rates, exchange rates, and commodity prices. Hung Vuong Group do not except, they also have experienced difficulties in fluctuation of domestic interest rates, foreign exchange rates, especially FX rate of VND/USD, and Pangasius, shrimp price in domestic and foreign market such as The United States of America, Europe, Japan. - Interest rates: According to World Bank data (2012), lending interest rates in Vietnam were not stable, and changed so much from 2008 to 2010. In January 2008, interest rate was 15.78% per year, it yet decreased strongly in 2009 just 10.07%/year. Then, it gained but not much to 13.14% in 2010 that released from report in 2011. According to Business Times (2011), lending interest rate of VND increases so high reached to nearly 20% annual year. Then, the below chart will show the changes of lending interest rates VND from 2008 -2011 clearly.
Figure 1
Unit: Million VND Content Short - term Loans Long - term Loans Total loans Difference Loans (+/_) Difference Loans (%) Interest expense Difference interest expense (+/-) Difference interest expense (%) Equity Difference equity (+/-) 1,498,805 2008 927,222 18,000 945,222 2009 1,548,377 84,870 1,633,247 688,025 67% 74,139 15,908 27% 1,758,134 259,329 Source: Financial statement of Hung Vuong Group Any business operates in the market bear influence by changes in interest rates. Hung Vuong Corporation was also affected by these changes. In 2008, interest expense was 58 VND billion, and up to 74 VND billions, meant up 27% in 2009. It yet was up dramatically to 193 VND billion and 266 VND billion in 2010 and 2011. Whereas, loans included both short term and long term, that increased a little. In 2009, total loans ending balance was 1,633 VND billion (MLD) and it went up more 688 MLD than 2008, equivalent 73%. The situation reversed in 2010 and 2011, when total loans was up 40%, but interest rose 162%, and even loans just was up 8%, yet interest raised 37%. Therefore, the main reason of paying high interest expense was the increasing interest rates so high. This is the first risk caused from interest rate. 2010 2,171,551 63,113 2,234,664 601,416 40% 194,308 120,169 162% 1,858,517 100,382 2011 2,337,239 26,915 2,364,154 129,490 8% 265,719 71,410 37% 2,052,873 194,356
58,231
Foreign exchange rate VND/USD from 2008 2011 Resource: Bloomberg, Citi investment research and analysis
It moved up to the trend higher and higher in the next period. The main reason caused the fluctuation of exchange rate was the financial crisis which started and has been happening from July 2008 until now. In that, the top exchange rates were in July 2008, October 2009, and December 2010. Because of the instable felling of business and individuals when seeing the increasing USD in international market, which made inspectors hoard USD. Addition, the demand USD for export import enterprises to pay maturity liabilities was much too high and increasing USD to import gold due to the large difference between inland gold price and international one. With Hung Vuong Group, a specified processing and exporting pangasius enterprise, has been affected by this changes. In 2009, total revenue was 3,087 VND billions, included 2,375 VND billion of export, equivalent 77%, and this proportion declined to 60% in 2010 when total revenue 4,432 VND billion, in that amount for export was 2,636 VND billions. In 2011, total revenue went up nearly double with 7,843 VND billions and revenue from export also grew up 4,779 VND billions, occupied 61% per total revenue. From this information, we can see export revenues proportion accounted for the large part in Hung Vuongs total revenue. Therefore, when exchange rate VND/USD increased continuously year by year that helped Hung vuong get benefit for export so much, but not profit, even loose for import. This is the risk caused by exchange rate. According to the state bank of Vietnam, the interbank average rate of VND versus USD at the end of year from 2008 to 2011 as the following chart.
Hung Vuong group is famous for not only processing and exporting seafood but also aquaculture. Along with the upgrading of existing production lines and developing of new processing plants, Hung Vuong Corporation currently operates more than 350 hectares of Pangasius farming in many provinces of the MeKong Delta such as Tien Giang, Ben Tre, Vinh Long, Can Tho, SaDec, Dong Thap, An Giang. In Hung Vuong's farms, the fish are only fed by the floating balls feed which is high quality product from Hung Vuong - Tay Nam Join Stock Company and Viet Thang Join Stock Company (www.hungvuongpanga.com). Due to the input to produce seafood feed is imported mainly (SGTT, 2012), so when exchange rate went up, it meant growth of input cost because the importer have to pay more VND for the same quantity and lead to cost of processing material up. Then the cycle repeats as mentioned in interest rate. In order to decrease pressure of raising input cost for manufacturing feed, Hung Vuong should find out domestic material to replace or limit the import. Because seafood feeds are made mainly from agricultural products that Viet Nam is agriculture country, producing them can do. If Hung Vuong can conduct, they will fall down the dependence on foreign feed as well as reduce input cost of processing. Commodity selling price: This is important factor, which affects to the financial risk. As mentioned in the introduction, Hung Vuongs major output markets are EU, Australia and America which occupy 70% over total exporting value. However, the global financial crisis happened from 2008, especially in EU countries and America that made these regions pangasius demand has dropped down and leaded to selling price fell. Hung Vuong exporter as well as famers producing pangasius has many difficulties in finding to output market and the fund to re-production. At that time, to solve this problem, Hung Vuong has found a new market and Japan is considered as a
5. Financial leverage risk (FL risk) Description Liabilities Equity Financial leverage (FL) ROE Vinh Hoans FL Minh Phus FL 2008 1,180,098 1,503,892 1.78 48.36% 3.04 2.36 2009 1,974,564 1,756,811 2.12 75.26% 2.28 2.01 2010 3,170,463 1,819,350 2.74 12.77% 1.89 3.13 2011 3,898,131 2,052,873 2.90 22.42% 1.92 4.08
Base on the above data, Hung Vuong has strongly use financial leverage in 2011, increasing from 1.18 in 2008 to 2.90 in 2011 while the ROE went down from 48.36 % to 22.42%, and the FL & ROE trend will more fluctuate in the next coming years. Hung Vuong has to control the expenses in order to lower the costing, trying to collect money from receivable account (87.140 billions VND in 2011), and be carefully when using FL tool to finance the capital in case the market went down or global crisis (2011). 6. Short term payment risk: (Millions VND) Description Turnover COGS Cash Debtor/receivable account Inventory Short term investments Current liabilities Current ratio Quick ratio Cash ratio Debtor days=360/(Turn over/Avr. Receivable account) Inventorydays= 360/(COGS/average inventory) 2008 2,985,865 2,265,623 79,989 1,455,252 433,179 91,741 1,160,284 1.78 1.70 0.07 1,294,976 3,084,034 1.71 1.71 0.08 170 76 1.20 1.20 0.07 150 90 2009 2010 2011 7,792,023 6,580,794 303,638 2,724,919 1,967,950 1,570,194 977,119 50,530 3,839,618 1.21 1.20 0.08 115 77 1.47 1.45 0.07 144.72 81.10 1.91 1.2 Average Industrial index
Sources: http://www.hsx.vn/hsx/Uploaded/cttc_ctny http://www.cophieu68.com/category_finance.php?quarter=4&year=2010&search=Xem According to data listed above, the short term payment risks from Hung Vuong seem to be safety when comparing with the average Index in the same filed. But Hung Vuong has to control the bad debt from foreign customers. 7. Coefficient of Variance on ROA of Hung Vuong: Decription 2008 2009 2010 2011 Notes
5,388,129 6,366,284
The Coefficient of Variance from Hung Vuong when comparing with Minh Phu Seafood Corporation (Minh Phu) and Vinh Hoan Corporation (Vinh Hoan) who are the top ten biggest companies in seafood or fisheries sector. We have data as under:
Base on the CV, Hung Vuong also have risk. When comparing with Vinh Hoan, Hung Vuongs CV is bigger than Vinh Hoans CV. ROA dramatically decreased from 27.17% in 2008 to 7.73% in 2011 due to the increase of cost of goods sold (COGS) (+ 72.14%) and Administrative and selling expenses (+42.51%) are bigger than the increase of Revenue (+75.83%).
Conclusion Risk is living around the Companies that cannot either avoid or eliminate the risk. Companies have to live with risks, high risk high return. The very important factor is to identify and manage the risk in order to lower the risk. Hung Vuong is one of the top 10th biggest exporting companies in fishery sector therefore they suffered from fluctuation of the markets and also face with many kind of risks as we mentioned above. Hung Vuong has to enhance the role of sections, which control the risk such as financial department, department of internal risky control, etc. Those departments has to analyses data or information from the market then feedback to another sections, hence Hung Vuong can predict and indentify the risk in the future such as debtor risk, commodity risk, interest rate risk, govern risk which is riskiness incurring in Hung Vuong.
Financial risks arise from an organizations exposure to financial markets, its transactions with others, and its reliance on processes, systems, and people. To understand financial risks, it is useful to consider the factors that affect financial prices and rates, including interest rates, exchange rates, and commodities prices. Since financial decisions are made by humans, a little financial history is useful in understanding the nature of financial risk. Risk management takes a vital part in the administration strategy of the company. Having good strategies The risk management process involves both internal and external analysis. The first part of the process involves identifying and prioritizing the financial risks facing an organization and understanding their relevance. It may be necessary to examine the organization and its products, management, customers, suppliers, competitors, pricing, industry trends, balance sheet structure, and position in the industry. It is also necessary to consider stakeholders and their objectives and tolerance for risk.