Home work3 Essay Example | Topics and Well Written Essays - 1250 words

Home work3 - Essay Example pend on weighted factors such as cost transaction and the amount of money vis-Ã  -vis the foreign exchange rate that is subject to probable risk of fluctuating. Hedging helps multinational firms mitigate losses from translational and transactional exposures. Unfortunately, it may end up reducing gains as well. If multinationals companies do not hedge their foreign exchange rate risk, they become vulnerable to a myriad of losses, which may affect devastatingly their financial performance across the world. Various determinants motivate hedging. One is factors surrounding the organization operation such as time minimization, cost reduction, and aligning business strategies. The other critical factor is the investment resources used in foreign exchange management, which is used in determining the amount of currencies transacted. The commercial (operational) exposures and financial exposures determine shapes the risks to hedge. For example, GM had to hedge against receivables and payable s, which are operational exposures of at the region and financial exposures such as paying dividend. General Motors foreign exchange hedging policy is streamlined to meet management objectives of efficiency and effectives in hedging e.g. minimize time, cost, and align foreign exchange management to automotive business. It is advantageous as it mitigates losses in transactional as well as translational exposures that are caused by fluctuating fx e.g. minimize cash flow as well as earnings volatility . The policy only controls fifty per cent of commercial exposure of a region as illustrated under the formula: The hedge policy appears to be insufficient to cushion from most exposures. With the implied risk calculated on an annual basis, it is advisable for the company to extend hedging to cover 12 months rather than 6 months. In addition, the company should upsurge the exposure risk to over $ 5 million especially in the regions that have high volatility of foreign exchange rate of their

Finance Essay Example | Topics and Well Written Essays - 2500 words

Finance - Essay Example Analysis of Short-run IPO under Pricing Phenomenon in Australian Stock Market The phenomenon of under pricing of Initial Public Offer (IPO) is often considered as an anomaly that is mostly visible in the primary markets throughout the world. But the degree or extent of under pricing varies from country to country and further from sector to sector. Under pricing is defined as the phenomenon when the offer price of a new issue is lower than the price of first trade. It is calculated as difference close price on the date of listing and offer price of issue expressed as percentage of offer price of issue. In the US market, the short run under-pricing is a well known phenomenon but in order to investigate whether this phenomenon exists in the Australian stock markets or not the researcher will have to measure the short-run IPO performance by analysing the returns of IPOs that were listed between chosen time frame and remained listed up to at least 2 year holding period (Rhee, 2002, pp.1-7 ). By carefully analysing the IPO data of Australian stock markets since 2011, with special reference to the issue price of IPO shares and the last trading close price of the IPO stocks at the end of first day of trading after listing, it can be said that short-run IPO under-pricing phenomenon does exist in Australian stock markets. This is because the issue price of the IPO stocks were significantly underpriced compared to last trading price at the end of first of trading after IPO and listing. A careful analysis of IPO under pricing reveals that when the offer price of new issue is lower than first trading price after listing, then the stock is considered to be under priced. Now, a stock should generally be under priced when there is lack of demand in the market and that the phenomenon should be temporary since under pricing will eventually motivate investors to hold shares which will increase the demand for the shares and thus will consequently increase the price of shares (Bansa l and Khanna, 2012, pp.107-108). But, in case of IPO under pricing in US market or Australian stock markets, it is often believed that IPOs are under priced on concerns of uncertainty and liquidity regarding the level of probable trade in the market after listing. Hence, in general any stock which is expected to be less liquid and less predictable will be under priced to greater extent for two primary reasons. The first reason is to compensate the investor for taking risk of holding the stock and secondly increase the liquidity of trading. The general explanation for such phenomenon is that since the issuing entity tends to have more knowledge regarding the stocks and their values compared to investors, the company must under price the stocks to motivate investors to participate in the IPO (Ritter, 1995, pp.1-4). When the firms issue their shares to public through IPO they incur both direct and direct costs. The direct cost includes underwriting fee, registration, legal, and audit f ees. The indirect cost includes cost associated with under pricing. In the calculation of under pricing, the first day’s closing price represents investor expectation regarding what they are willing to pay for holding the firm’