Financial Risk Managment Term Paper - 1925 Words

Financial Risk Managment (Term Paper Sample) Content: FINANCIAL RISK MANAGEMENTAuthor nameFaculty of Business Environment and SocietyProfessor nameName of UniversityIntroductionThe report below analyzes the merits and demerits of hedging. This is in reference to FlyAir Airline that has over the years hedged the risk exposure of the ever changing fuel prices. Recent reports have portrayed that airlines that hedge their exposures of rising fuel prices could end up in losses in instances where there is a significant plunge in the oil prices. The CEO of FlyAir Airline is concerned over the likelihood that the company may suffer financial losses as a result of this.The report will rely on various studies that have been conducted in the past regarding this matter. The report will also address the concerns raised in one of the newspaper articles. The article had raised concerns that several airlines could suffer financial losses as a result of hedging.The report will also provide conclusions as to whether hedging provides any c orporate value on the business. The report will analyze hedging theories and assumptions to examine the extent to which hedging adds value to a firm.The use of derivatives such as futures, options and swaps has been on the rise since the mid-1980s (Mallin, Ow-Yong Reynolds 2001; Bartram, Brown Fehle 2009). The trend has increased, particularly, in countries with significant economies. The use of derivatives is crucial in managing the volatility of the financial market. Many firms, especially large firms, have increasingly used derivatives to manage price, interest, credit and other risks.The practice of hedging has also been on an increase in the airline industry. The airline industry faces many risks. Among the risks is the volatility of the oil prices. Since oil forms a major component of airline costs, its management is prudent in the aviation industry.In reference to the recent newspaper article à ¢Ã¢â€š ¬Ã‹Å"Fuel Hedges Seen Hurting Airlinesà ¢Ã¢â€š ¬, the report below will analyze the advantages and disadvantages of hedging in the airline industry. A recommendation will be made to the management of FlyAir airline from that point forward.Advantages of hedgingIn drawing conclusions as to whether hedging is good for a firm, various questions should be addressed. Among them include:-what is the motive of managers? Why are managers interested in hedging? What motivates managers to hedge? Does hedging increase the value of the firm and shareholders?There are various dilemmas that face a company that wants to engage in hedging. Among them includes whether the firm should hedge. Secondly, companies need to understand how much they should hedge. Thirdly, the risk management team should understand how they should edge (Judge 2006).According to Klimczak (2005), there is no clear justification as to why firms should engage in corporate hedging. This is despite the rapid increase in adoption of different risk management techniques. In airlines particularly, where risk management could bring losses or gains, critical evaluation is prudent.Firms use derivatives as a way of hedging for various reasons. The study conducted by Chris, Kean Martin (2000) compound the primary objectives for hedging. Many firms interviewed stated that the hedged mostly to manage economic exposures in the market.Firms do operate in an extremely volatile market (Stephens 2003). There are various risks in the market. These include inflation, interest risks among others. For an airline that is exposed to various risks, risk management is not an option. However, careful evaluation of the risk management strategy is paramount.Hedging is a valuable tool in profit maximization. Historically, this was the principal objective of risk management. However, profit maximization concept is a subjective criterion. It is not a feasible goal in a high volatile market.Value maximization is the other corporate goal for risk management through hedging (Judge 2006). The management shoul d consider hedging in its strategy to improve the corporate value of FlyAir Airline. Hedging wisely will lead to the firm increasing the value of the shares as well as the value of the debts. This becomes critical in choosing viable investment options.Hedging will also benefit FlyAir Airline because it will boost the confidence level of the management while making decisions. The management can prepare budgets and projections with a certain degree of confidence as a major part of the risk will have been solved by hedging. The company can invest in markets that it would otherwise not have invested.The company will also gain from tax shield benefit if it engages in hedging. According to the Modigliani-Miller (MM) paradigm (1958), hedging will add value to a company in cases where taxes exist. The assumption is that the company operates in an imperfect market. This is a realistic assumption as taxes are common in all industries. Hedging will enhance the companyà ¢Ã¢â€š ¬s debt capacity due to reduced borrowing costs (Judge 2006). It also increases the tax shield benefit for an enterprise.Companies gain two tax incentives from hedging. The company increases its debt6 capacity. The company also enjoys a reduced tax liability from corporate hedging. For a company to gain these incentives, the financial theory suggests that the market should have costly imperfections. Many empirical studies have been conducted to validate this.Hedging will help the management of the cash flows of FlyAir Airline. By the use of hedging, the company can manage the volatility in its accounting earnings. In the airline industry, companies are faced with numerous fluctuations in accounting earnings. Proper management is paramount in order to maintain consistency in the revenue flows (Bailly, Browne Hicks 2003).The management of FlyAir Airline can use hedging to avert risks of adverse cash flows (Fatemi Luft 2002). It is necessary for a capital intensive company to maintain a minimum cash flow at a given time. This ensures the company meets its financial obligations as and when required. Through hedging, the management of FlyAir Airline can mitigate the risk of low cash flows. This will save the company from borrowing emergency funds that have high-interest rates.Disadvantages of hedgingThe reasons hedging is not widely spread is because of inadequate knowledge and the high transaction costs involved. The use of hedging includes various tax and legal costs (Bailly, Browne Hicks 2003). If the management is not keen enough, the costs of hedging might outweigh the benefits. The management should hire highly qualified risk experts that should help FlyAir Airlines make credible decisions in regard to hedging.A study conducted by Chris, Kean Martin (2000) pointed out that as good as mitigating financial risks is essential; it has severe effects on cash flows of a company. A hedge involves high contractual costs. In airline industry, for example, the aspect of hedging oi l prices may hinder the company from enjoying reduced prices in oil. As seen from the article, a drop in oil prices may not be experienced by airlines that have hedged.Another disadvantage of hedging is that it does not adequately cover the risk in question (Eun Resnick 2010). Hedging provides a surety of what the company will obtain in future but does not state the purchasing power of the same currency in the future. This affects the financial projections of a company.Hedging is a complex process. It requires hiring of highly qualified staff. This increases the administration costs of the company. To hedge successfully the risk managers must fully understand the future markets. Companies have to hire trained personnel that include brokers and hedging experts.Does hedging increase corporate value?Hedging as a means of risk management should be concerned with three components. These include value maximization, risk return trade off and the non-arbitrage principle. The value of risk management can be judged by using the three paradigms. The management should prepare a cost-benefit analysis to evaluate the value of hedging in the firm.The advice to the management of FlyAir Airline is that hedging as a way of managing risk increases the corporate value of the firm. As a means of risk management, hedging increases the corporate and the shareholdersà ¢Ã¢â€š ¬ value.The management of FlyAir Airline should adopt hedging if and only if it increases the value of the firm and that of the shareholders. At no point, should the value of the firm and shareholders be compromised because of the choice of risk management.RecommendationsFlyAir line has used hedging in mitigating the risk of volatility in oil prices. As much as this is a good measure to protect itself from exposures, there are adverse effects that may arise from hedging. The airline may incur losses as a result of buying oil at the hedged price instead of the spot price which is lower. To avoid the Airline from suffering the consequences such as those of Cathay Pacific, selective hedging would be preferable. By selective hedging, the company would offset a portion of uncertainties in prices. Consequently, the company would also enjoy partially in instances of low prices.In addition to hedging, it is advisable for the company to take an insurance cover to protect itself from a drop in oil prices. This means that since the company has hedged selectively, the insurance cover will indemnify the airline in cases where the company suffers financial losses due to high oil prices. Additionally, the airline should take insurance cover for other risks outside the increase in oil prices.It is advisable for the management of FlyAir Airline to hire a skilled team that is knowledgeable enough to assess the costs and benefits of hedging and other risk management techniques. Poor planning cou...

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The Energy Consumed By The United States - 1153 Words

Roughly 81% of the energy consumed in the United States in 2015 was produced by fossil fuels including coal, natural gas, and petroleum oil (EIA, â€Å"U.S. Energy Facts Explained†). A study on the consequences of coal revealed that the burning of coal produced over 100 million tons of solid waste, and the readying of coal to be burned creates nearly 90 million gallons of slurry, a muddy waste product, in the United States every year (Sierra Club 2011). In 2015, 2,413 petroleum oil spills were reported to have spilled a total of just over 300,000 gallons in U.S. waterways (U.S. Department of Transportation). Hydraulic fracturing, or fracking, for oil and natural gas can contaminate groundwater, induce earthquakes, and release air pollutants.†¦show more content†¦Wind energy, one of the oldest forms of renewable energy used by humans, is produced simply by harnessing the power of the wind with wind turbines and generating electricity. Geothermal energy is energy from the heat of the Earth, and is drawn from locations with naturally heated water like hot water reservoirs and geysers or areas deep within the Earth accessed by drilling (NREL, Learning About Renewable Energy). Hydroelectric power, in simplest terms, uses the power of water rushing downwards to rotate a propeller attached to a generator that in turn produces electricity (Perlman). Another form of renewable energy is biomass, such as wood, biofuel, and bio-waste, which is burned to produce energy; however, it is not clean energy. Shifting the majority of energy consumption in the U.S. to clean energy would affect people and businesses both in and outside of the nation. This inevitably creates concern surrounding the topic and causes delays due to necessary controversy and questioning. While plenty of concerns are valid, others have been answered by studies and reports by various organizations but have yet to reach the public in masses. 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Marketing Strategies for Digital Generation †Free Samples to Samples

Question: Discuss about the Marketing Strategies for Digital Generation. Answer: Introduction: The Smith Family has been found to come up with a new marketing strategy in order to widen its community among the Australian children in order to give them better education and life support to the disadvantaged children. The organisation also focuses on digital marketing but the main intension always remains to get the best return of their investment. It has been evident that the Smith Family has been engaged in the digital marketing platform where their marketing activities are also spread throughout the social media networks like Facebook and Twitter (Thesmithfamily.com.au 2017). The main idea behind this particular activity is to attract as many consumers as possible and to get as much amount of donation or contribution from the target group of people. This is the unique way of getting return of the investment made by the organisation. This way the organisation is able to get many consumers who could directly contribute towards the charity and in turn the organisation will be ben efited. The donors can be easily targeted with the help of the social media (Thesmithfamily.com.au 2017). In fact, there remained the scope of increasing the community for the organisation that would eventually lead to the situation when the organisation will be automatically benefitted from the overall marketing activities. This is indeed a unique marketing and advertising strategy that they are seeking that is creating a positive result in the overall activities over the organisation. The success of the organisation is known to all and its marketing strategy can be given the credit for it. As evident, Billabong offers huge information to the visitors of the website related to the type of activities that the company is engaged with. However, the company has not been found to get engaged with the promotion of the products that the company sells. This can be regarded as a negative aspect of the marketing process as carried on by the organisation (Chaffey et al. 2013). However, it has to be understood that one of the important criterion of the digital or the website based marketing is content based advertising. In such cases, when the consumers search about the particular sports or activities, Billabong comes up with the information related to these. This is when the visitors can be able to know about the particular product. In addition to this, when the information is found to be effective enough for the visitors or the consumers, there remains a chance that they would automatically direct their way to the products available in the particular website. In this way, a relat ionship is created between the consumers and the company. This in turn will automatically lead to the situation where organisation will be able to market their product directly to the consumers (Armstrong et al. 2015). In fact, this can also be considered as a unique way of marketing the products and target the right group of people because people will be searching about the sports or events and then would redirect their search to the particular product. The last news published on 21st August in the website of Nestle gave good news to the Lolly lovers because Allens Green Frogs were found to return back to the stores with the whole Frog Family with them; the wait of the Lolly fans were over. From the website of Peters Brand, it has been found that Barney Banana is the new product that the company has launched in the recent time (Peters.com.au 2017). The promotional campaign that has been undertaken by this company is related to the quality of product and focus has been made on anti-allergen and the nutritional facts about the product in order to promote about the product (Nestle.com.au 2017). In both the cases the target group of people for the product are the ice cream lovers between the age groups of 20 and 45 years. In this respect, it has to be mentioned that the products that are sold by Peters are mainly targeted to the children or those who are more concern about their health (Peters.com.au 2017). The packages or the ads that pop out whenever the website is opened clearly gives the indications that the products are full of nutrients and are best in quality. Thus, the advertisements are for this particular group of segment only. These products are aimed at the retail sectors. If the case of Nestle is taken into consideration, it has been found that the web page is very much organised and any visitor of the web page can easily get all kinds of information available at the website or the web page (Nestle.com.au 2017).. On the other hand, when it comes to the web page of Peters Brand, it has been found that the page is mostly filled with the images of the products of t he company rather than any kind of information. Moreover, when it comes to Nestle, it has been found that the website also include news and activities related to the brand or the product that is completely absent in case of Peters. Thus, there arise certain questions related to the promotional activities as carried on by Peters. Reading Mooney and Slobodian (2016), it has been evident that when it comes to digital marketing or web page marketing, it is very important to carry out different types of activities through the web page in order to keep the consumers updated on any kind of information and at the same time keep promoting their products and services. Similar things have been rightly observed in case of Nestle but it is missing in the web page of Peters. In such cases, it can be clearly stated that the website of Nestle will be more successful in terms of marketing but the similar situation would not be effective enough for Peters (Ryan 2016). Thus, it is recommended that this particular page needs to be taken care of and more information related to the brand has to be included that would serve as a means of marketing the product. References: Armstrong, G., Kotler, P., Harker, M. and Brennan, R., 2015.Marketing: an introduction. Pearson Education. Chaffey, D., Smith, P.R. and Smith, P.R., 2013.eMarketing eXcellence: Planning and optimizing your digital marketing. Routledge. Mooney, M. and Slobodian, S., 2016. Seeing the wood for the trees: Fixing large undefined problems in digital marketing.Journal of Digital Social Media Marketing,3(4), pp.294-303. Nestle.com.au 2017 Allens makes it oh so easy to be green! Available at: https://www.nestle.com.au/media#itemPerPage=20 Accessed on: 29-8-2017] Nestle.com.au 2017 Nestle Available at: https://www.nestle.com.au/ Accessed on: 29-8-2017] Peters.com.au 2017 Peters Available at: https://www.peters.com.au/brands/ [Accessed on: 29-8-2017] Ryan, D., 2016.Understanding digital marketing: marketing strategies for engaging the digital generation. Kogan Page Publishers. Thesmithfamily.com.au 2017 About us Available at: https://www.thesmithfamily.com.au/get-involved/partnerships/corporate-social-responsibility Accessed on: 29-8-2017] Thesmithfamily.com.au 2017 Our People Available at: https://www.thesmithfamily.com.au/about-us/our-people Accessed on: 29-8-2017]