PFM 201 Principles of Financial Management Assignment Help
Task 1: INTERNATIONAL FINANCIAL MARKETS
Your boss has asked you to assess the company's new financial management requirements because of new businesses the company wants to engage in. Please provide recommendations to assist him. Since your boss is a busy person and has little time to read lengthy reports, your submission for this task should be concise. You can also use graphs and charts to illustrate your points. You are an Australian based clothing and fashion retailer in Melbourne. Your boss intends to establish two retail outlets in Vietnam, one in Ho Chi Minh City (HCMC) and another in Hanoi. Vietnam is a fast-growing market and growing affluence. These outlets will be large, and their inventories will be imported primarily from Australia and China, but also from the rest of the world in addition to the products purchased locally. As the outlets are expected to make good earnings and there is also a need to remit the profits back to
Australia. Your boss is likely to start additional outlets in other major cities in Vietnam e.g. Danang, Hue etc. in the future.
For your boss, you need to explain: -
1. How the retail outlets in Vietnam would need to use the spot market in foreign exchange for the business
2. How the retail outlets in Vietnam would use the forward markets in foreign exchange for the business
3. Which are the possible payment mechanism which you can put in place for those outlets? Please elaborate why they are done as such.
4. Explain how the foreign exchange quotation works between AUD and Vietnamese Dong. If he sends some Australian goods over from Vietnam to Thailand, how would your advice of the settlement currency best to be and why?
5. Advice your boss how he could use the local and international banking / financial markets, including money and bond markets to finance the establishment and expansion of new outlets in Vietnam
Task 2: INVESTING RISKS AND RETURNS - EQUITIES
Your Aunty Stottie has some savings which she wants to invest in shares. She has asked for your advice because she knows you are doing a financial management unit in your university degree. Aunty thinks you are brilliant . She wants to invest all her savings in shares of the company on which you have surveyed and done some research (use any listed company on Australian Stock Exchange (ASX) - selected
share's name to be furnished to lecturer prior to the commencement of assignment) Your Aunty is ignorant on what and how to invest. You also know that investing in only one asset can be risky. You will need to explain this to Aunty. Your explanation to her should cover:
1. Possible macro-economic(country) and industry factors and risks of your (share) selection
2. Firm specific factors and risks that may be associated with the performance of your (share) selection
3. Indicate the historical and the expected return of your selection (try to distinguish between capital and yield or dividends components, if any)
4. What is the past trend (3, 5 or 10 years) of your selection?
5. Is your selection volatile over the period? Indicate the high-low price variation for the selection over the period
6. Explain the concept of diversification to Aunty. [In doing so, you should also explain using examples and refer to relevant charts or graphs to illustrate your point. Quote your sources of reference. You can use recent news releases about the company from Internet.
7. Indicate to Aunty she can also invest in other asset classes; you need to tell her the other alternatives.
8. Beta Coefficient is the measure of a share's volatility relative to the overall market. Indicate the selection's Beta. Briefly explain to your Aunty what it means and give an example, assuming the expected market return is forecast to fall by 10% in the coming year.
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INTERNATIONAL FINANCIAL MARKETS
1. Spot market in foreign exchange for the business with new out lets in Vietnam:
An agreement to buy or sell currency against another currency at a price agreed between buyer and seller for on the spot settlement is spot market in foreign exchange.
However, how the company's retail shops in Vietnam can utilize this option is the matter concerned and has been explained and presented below.
Inventory required to the two outlets being established in Vietnam are being imported from Australia and china apart from purchases made in the local market. All imports have to be paid through respective currency except for the local purchase.
Therefore, remittance on import can be made through the spot market in foreign exchange, either on placing purchase order or on the date of receipt of the goods, based on the prevailing rate of exchange on the respective dates upon agreement by both parties.
And in case of sales, since Australian Dollar(AUD) will always be strong against Vietnamese Dong (VND) it is advisable that pricing is being evolved based on prevailing rate of spot market of foreign exchange .
This activity is a continuous process, being carried out regularly and periodically or on daily basis considering foreign exchange market condition. This particular activity shall be carried out only to nullify:
1) Loss on unsold inventory due to foreign exchange rate fluctuation
2) Loss due to inflation, if any and
3) Loss due to depressed sales or seasonal slow down
2. Forward markets in foreign exchange for the business
A transaction that entered in to by two parties either to buy or sell currency at an agreed rate today but executed in future as mutually agreed by both buyer and seller and real foreign exchange happen on a date agreed up on .
This kind of transaction takes mainly due to 2 reasons:
1. To avoid and to lower the loss in case there is an adverse and unstable change in exchange rate
2. To make profit in a favorable market condition depending upon the kind of currency one holds.
However, AUD being constantly strong against Vietnam Currency, it is advisable that the retail outlet in Vietnam enter into forward market to remit import bills on future date at the rate agreed today.
This will avoid loss to the outlets in Vietnam from any loss that may occur due to unfavorable foreign exchange market condition.
3. The possible payment mechanisms
Usane bill is best suited method to be implemented in paying of import bills.
Usane bills are typically made for imports where the buyer promises the seller to remit bill amount on a particular day from the date of bill (bill of lading) or receipt (acceptance) of goods.
This facilitates the buyer or importer to go for forward rate foreign exchange lowering loss due to volatile condition in foreign exchange market.
It also facilitates the outlets with credit period on the imports they make, thereby gives an edge to plan for free and uninterrupted cash flow.
And similar method should be brought in to make other payments and to establish controlled cash flow.
This will progressively enhance financial stability supporting smooth and efficient operation resulting in growth and profit.
4. Foreign exchange quotation between AUD and Vietnamese Dong and a sale of Australian goods to Thailand from Vietnam and advice on the best currency settlement
Cross rate Foreign exchange quotation will be applied between AUD and Vietnamese Dong.
Cross rate quotation is that the value of the both currencies is determined by comparing against a common third currency based on value of both currency against common third currency.
And this is how foreign exchange quotation is being addressed in case of AUD and Vietnamese Dong.
Currency settlement, when Thailand imports Australian good from Vietnam, is being done in Vietnamese Dong, unless, outlet in Vietnam prepares such bill in AUD.
And if the bill is prepared in AUD, currency settlement shall be done in AUD.
The best way of currency settlement in this transaction, I advice, should be in Vietnamese Dong and not in AUD.
The reasons are as follows:
A) At the very first is that the transaction is happening between two countries and the seller has its own currency
B) Outlet in Vietnam has already settled or is going to settle, if not settled already, in AUD
C) Cross rate quotation has to be done among 3 entities against common currency and accuracy in arriving at quotation can be disputable and hinder settlement.
Hence, I strongly advice that the currency settlement shall be in Vietnamese Dong.
5. Use of financial institution and financial products etc., for fund raising to expansion of new outlets in Vietnam
The methods of financial support that can be availed are as follows. And these are the best suited way to avail financial support and improve cash flow that supports an entity to expand and establish its various business interests throughout the globe.
The following are the various Financial institution, market etc., that are available to seek financial support.
1. Capital markets are such as Stock market, Bond market.
2. Commodity markets
3. Money markets. Where funding can be made by short term debt financing..
4. Futures markets also known as forward contracts for trading products at some future date.
5. Foreign exchange markets,that facilitate exchange of currency of different country and trading of foreign exchange.
6. Interbank lending market
INVESTING RISKS AND RETURNS - EQUITIES
As explained to Aunty Stottie
1. Following are the cause that may have adverse effect in the investment of share. They are: 1. Inflation, 2. Economic growth, 3.GDP and 4. Unemployment etc
These are factors that have significant influence on macroeconomics of the country.
Unfavorable conditions on the above factors will affect the make the investment in shares risky.
And industry factors and risks in selection of share are :
a) Loss of Capital
b) Volatile market condition,
c) Market risk or interest rate risk,
d) Sector Specific Risk
e) Timing Risk, where trading takes place in unfavorable time,
f) Exchange Rate Risk
2. It is very difficult to identify company-specific factors that can affect the share price.
However, there are common specific factors that influence performance of share. Some of them are;
1. Merger or takeovers,
2. Change of management,
3. Employees layoff etc.,
3. Historical return is explained based on available data in the financial statement of the company and the return that may be expected for the current period.
However, the difference between the Capital and yield and dividend components have been explained as that the percentage of the share price received is dividend and The distribution yield, as that of two components - dividends and capital gains.
4. Three years financial statement shows a robust growth in revenue and acquisition of assets for a better performance and good returns are expected for the current period.
5. The market shows a healthy scenario and volatile market condition is well handled through feedback from various corner of business associates.
6. To reduce any loss that may arise out of larger exposure to one specific asset, capital is being diversified so as to reduce risk by investing various assets. And that is the concept that works in favor of shares.
For example, Samsung, a tech giant, has gone for diversification from its high tech product to Textiles, Biopharmaceutical, medical equipments etc.
The chart relevant to diversification is annexed hitherto. From the annexed chart, significance of diversification can be understood.
The chart exhibits how a good diversification yields positive result.
7. The other alternative assets in which Aunty Stottie can invest her money are furnished here under. They are:
a) Real Estate,
b) Commodities like Gold and silver etc.,
c) Foreign exchange
d) Investment in securities and Bonds e) National saving scheme, if any and f) Hedge fund etc.,
8. Beta Coefficient. Its meaning, example with an assumption that the return on investment is diminished by 10% in the year ahead.
Beta coefficient is a form of regression analysis. It means the presence of risk factor due to market exposure. It will give an indication as to know whether or not an investment is with lower risk than the market, or is a risky investment that its market movements are not associated with the market.
For example, Investment in Government Bonds or investment in Government schemes are considered to be having lower risk since government is committed to pay the assured return.
Whereas an investment in gold or foreign exchange is a good example for a risky investment since the investment is considered to have volatile market movements and therefore considered as a risky investment. Any adverse condition in the market will result in reduced return.
For example an investment in foreign exchange, let us assume, that to boost and penetrate economy or to set off balance of payment, the government, in which investment in foreign exchange exists , release huge amount of money into the market.
Since the market has huge amount towards foreign exchange of such currency, demand for it is reduced and there by foreign exchange rate will diminish resulting in return on investment lower than expected.
Thus, if expected return is , say about, 25% and with the diminished 10% return, the expected return , now, is 15% only
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