Finance for Global Fund Managers Ltd - myassignmenthelp.com

Question: Discuss about theFinance for Global Fund Managers Ltd. Answer: Financial Risk Exposures Faced By Global Fund Managers Ltd Financial risk refers to a situation where a company experiences inadequate cash flow mainly when it uses debt financing putting the shareholders in a possibility of losing the money they had invested in the company (Allen 2013, p. 351-378). This usually happens because if the company becomes insolvent and it used debt financing, its creditors are repaid before its shareholders. In this case, the Global Fund Managers Ltd suffers from the following risks; Marketing risks-these risks are realized due to the changes in rates and market prices. Technological changes in the way of conducting business are majorly faced with this type of risk. Modern marketing structure has undergone significant changes of selling their goods and services. Some of the invented form of carrying out transactions is by online shopping. Customers keep orders through online website and make payments too. Firms that have not adopted this kind of marketing transition will have less competitive advantage in the market. These price changes will mostly relate to interest or foreign exchange rate movements. In this case, Global Fund Managers Ltd suffers this type of financial risk since the foreign exchange rates keep changing, US dollar in particular.This kind of risk can be handled by the use of asset and liability matching, together with a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates and may use fore ign exchange derivatives. (Soler et al. 2010) Credit risk-This is a risk that firms experience when they give offers to their clients on credit basis. The business entity may take up the role of buying commodities on behalf of the consumers using their own capital. This is aimed at making extra profit when the customers pay back. Such type of offer may put the company at a risk given that the clients fail to pay back. Global Fund Managers Company may face this kind of risk as seen in the scenario where short term interest securities are realized. This at times poses a great risk to the company where the cash given out on interest terms would have not been paid back. Such moves are critical to the success of GFML Company. However, every risk or challenge has got its remedies. GFML can handle the credit risk by making sure that there are enough funds available for transacting business even where defaults in repayment occur. Failure to do so may put the company in a situation of losing its investors. Australian investors who got sh ares in Global Fund Managers Company may shy away from investing more of their capital given that the company does not curb credit risks. (Figlewski 2012, p. 78-88) Liquidity risk-Liquidity is the ability of an enterprise to use some of its assets in form of cash. It is simply conversion of assets into capital for effective transaction of business. This may arise due to a decrease in cash flow into the business entity. Unpredictable occurrences may occur and put the business in this type of risks and hence the need for a Company to hedge this risk. Global Fund Managers Company may experience this type of risk when selling of its Australian and US shares. The question of concern here will be, how easy the Company will sell this shares when faced with an abrupt problem of cash flow. Will it be in a position to issue out shares and get capital in return swiftly or not? Managers should be able to critically analyze such questions and be cautious when buying or selling the shares to shareholders. This risk can be handled through proper management of cash in the company. (Ullrich 2009, p. 98-111) The idea of GFML Company investing in shares puts it at a risk. When interest rates increase, the value of bond prices always tend to reduce significantly. This will then mean that Global Fund Managers Company will undergo a loss when operating on bond basis as seen in the table. The table shows us how the company uses bonds as securities to the long term fixed interest issued. It is also seen that the Company accepted bills as a security of get cash on short term basis. A bill is simply used as a source of security to borrowed capital. Bills have the effect of being charged highly before issuing out. This is uneconomical and most of the Companies do not accept bills in trade. (Ridley 2014, p. 654-666) Recommendations on whether to hedge all the risks identified. It will be effective to hedge all the risks mentioned above. This is due to the high risks attached to them if not well solved to the later. No business entity finds it interesting to carry out activities that are not aimed at profit generation hence the need to hedge all the mentioned risk exposers. Firstly, we have credit risk as one of the major exposers to financial risks. Global Fund Managers Company needs to deal with this risk in order to maintain a consistent cash flow. Low cash flow into the Company will automatically lead to collapsing of it and this is the reason why credit risk must be hedged without failure (Skantze et al. 2015). Secondly, the Company must also hedge liquidity risk. Assets are part and parcel of investments that a business keeps. This means that it should also be in a position redeem these assets when encountering financial crises. The main purpose of having assets is for further securities in times of problems. GFML should hedge this risk in order to av oid uncertainties brought about by natural phenomenon. Lastly, financial risks are also a key thing that must be handled. A company cannot operate without cash hence the reason for hedging. (Bielecki et al. 2011) Derivative instruments Some of the derivatives that can be used are offering of lower interest rates on bonds and bills. Another derivative is hedging of decreasing rates of exchange. At times the US dollar conversion is always higher at the time of contracts and lowers when doing the contract. Prevention of this will be important to the success of GFML Company at large. Hedging of exports must be implemented by GFML because it deals with domestic investors who do more of the exportation than importation. (Mason 2013, p. 60-65) References Allen, S. (2013). Financial risk management: A practitioner's guide to managing market and credit risk. Hoboken, N.J: J. Wiley Sons. 10(6), 351378. Bielecki, T. R., Rutkowski, M. (2011). Credit risk: Modeling, valuation and hedging. Berlin: Springer. 54(76), 98-111 Figlewski, S. (2012). Estimation error in the assessment of financial risk exposure. New York, NY. 6(4), 78-88 Mason, K. (2013). Investment Management Applications. 12(7), 60-65 Ridley, M. (2014). How to invest in hedge funds: An investment professional's guide. London [u.a.: Kogan Page. 5(6), 654-666 Skantze, P. L., Ilic, M. D. (2015). Valuation, hedging, and speculation in competitive electricity markets: A fundamental approach. Boston: Kluwer Academic Publishers. 13(34), 54-55 Soler, R. J. A., Caribbean Development Bank, Inter-American Development Bank. (2010). Financial risk management: A practical approach for emerging markets. Washington, DC. 45(9), 56-60 Ullrich, C. (2009). Forecasting and hedging in the foreign exchange markets. Berlin: Springer. 54(76), 98-111