Overview of OZPRTS in the Commodity Market
Discuss about the Planned Cessation of Global Supply Market.
From the overall evaluation, the prices level of aluminum could be identified, which trades in USD in the global market. In addition, USD is the major accepted current, which has been used after the demise of GBP, as the world currency after world war 2. Moreover, the aluminum market mainly trades in USD, which increases the exposure of OZPRTS in USD currency. Therefore, OZPRTS needs to increase their exposure in USD/AUD trading for conducting relevant trades in commodity market. In this context, Li, Ng and Chan (2015) stated that the exposure of currency market needs to be maintained by adequate hedging process, which helps in reducing the volatility from the currency market. However, OZPRTS needs relevant aluminium in the current pricing to fulfil the commitment of producing 200,000 aluminium transmission casings per annum. Hence, it could be understood that OZPRTS needs to increase its exposure in USD, which is used to trade aluminium in the global market.
The above chart mainly helps in depicting the oval aluminum prices from March 2015 to 2018, which provides an in-depth price movement of the commodity within the range of three years. In addition, the evaluation of chart mainly depicts the rising price of aluminum in the global market, which is due to the high demand of the commodity with in the automobile industry. From the overall evaluation the prices of aluminum have increased by 12.34% in 3 years, which directly indicates the demand of the community with the consumers. In this context, Renz and Herman (2016) stated that use of hedging measure could also companies to reduce the excess cost of their community, which is used in their production system. The current price of aluminum has relevantly increased over the period of 3 fiscal years, which indicates the relevant loses that might incur by the company. The rising prices of aluminum in the period of three year depicts an estimation of future prices, which could increase due to the continuous demand of the commodity in the international market.
The above figure mainly depicts the overall volatile currency validation of AUD/USD, which has strengthened over the period of three years. The AUD has gained ground over USD, which it lost within the period of 3 years. This relevantly indicates that current trend of AUD/USD might increase the chance of loss, which might increase profits of the company. In addition, from the overall evaluation it could be understood that value of AUD/USD over the three period is at the level of 0.95%. This indicates that steadily USD has increased its valuation against AUD, which raises the level of expenses that will be conducted by the company for obtaining aluminum commodity for its production process. Hillson and Murray-Webster (2017) argued that without the evaluation of current market the trades conducted for hedging against the volatility exposure can hamper the actual financial performance of the company. The combination where aluminum pricing rises in valuation and USD strength increases in comparison to AUD directly affects the actual cost of aluminum over the period.
Evaluation of Aluminum Prices in the Global Market
The above figure mainly depicts the overall expenses of the company, which could be conducted over the period of three fiscal year from March 2015 to 2018. In addition, the price of aluminum on USD has relevantly increased over the period of three fiscal years, as depicted in the above figure. The calculation is mainly conducted to understand the actual change in prices of commodity over the period of three fiscal year. This could help the company understand the relevant changes in cost, which needs to be conducted when trading aluminum and completing the manufacturing process. Kendrick (2015) stated that companies with the help of currency valuation can detect increment in price of their commodity, which will incur during the fiscal year. On the other hand, Rubin et al. (2017) criticizes that this continuous rising price through currency volatility might hamper profit of the organization. Therefore, OZPRTS could adequately use hedging measure for reducing the relevant exposure in the commodity market and currency market. The prices of aluminum in AUD has relevantly increased from 2,.345.87 to 2,610.69, which indicates high demand of the product over the time.
There are three types of derivatives-based hedges, which could be used for commodity purchases that is needed by the company over the period of three years. In addition, the hedges are depicted in diagram format over the period of time.
The above diagram mainly depicts the overall payoff and layout of future contract, which could be used by the company to hedge its exposure in the market. Future contracts mainly help in reducing the risk from investment, which could generate high level of returns from investment. Therefore, with the help of future contract companies are able to reduce the risk from changing volatile commodity prices and fix their actual cost for the purchase. this helps in maintaining the level of returns and profits that is estimated by the organization before commencing the production. Hence, with the help of future contracts aluminium purchases can be conducted adequately by fixing the price of the commodity before the Purchase date. This could help the company to reduce the excessive burden on capital, due to volatile prices of aluminium. The spread generated from future contract would eventually help in reducing the excessive cost of aluminium by purchasing the product from the international market. Pfaff (2016) stated that with the help of futures contract companies can hedge their exposure in the commodity market by fixing the overall purchase price and reducing the negative impact of price volatility.
The above contract depicts the option hedging process that could be used by organizations to fix its overall purchase of aluminum commodity. The contract could eventually help in reducing the excessive prices of aluminum in the international market by using hedging measures. The option contract would eventually help in going the loss that might be incurred by the company due to the changing prices of aluminum in the international market. Brooks (2015) mentioned that option contracts mainly help multinational corporations to conduct hedging process by providing below premiums on the trade in comparison to future contracts.
The long-put option diagram is represented in the above figure, which could be used for hedging the overall currency exposure that is faced by OZPRTS. In addition, this contract would eventually help in reducing the laws that is generated from currency conversion that needs to be conducted by the company for buying aluminum from the international market (McNeil, Frey and Embrechts 2015). Buying a long-put option would eventually help in reducing the loss that increases from strengthening USD against AUD.
The different types of problems that could be identified while implementing the derivative based hedging strategies identified in the above segment. Moreover, for starting the hatching process OZPRTS will need to have adequate trading account and other amenities to hedge its overall exposure. The problems such a accuracy of the trade can be a major problem for the hedging process, as losses incurred from commodity and currency market could be hedged. However, the profit that could be generated from reducing commodity prices and strengthening AUD will also be lost from the hedging process. Therefore, the accuracy of identifying the accurate hedging price is the major problem faced by companies. Cost of the hedging could also increase relevant losses for the organization if price remains stagnant, which could increase expenses of the organization. The combined hedging process needs adequate strategy which could help in reducing the losses of the organization. using futures and option contracts would immensely increase the capital requirement of the company, which will be used as a Collateral for the trade, as mandated by maximum exchanges (Bessis 2015).
Impact of Currency Exposure on OZPRTS
From the overall evaluation of different ages future contract could be used for aluminum purchase, while option contract such as long put can be used for hedging AUD/USD. The Futures contract for Aluminum purchase might help the company in controlling the extra cost, which might increase due to demand and supply of the commodity. On the other hand, with the use of Option Contract-Long Put for hedging AUD/USD the company could adequately reduce the losses, which will incur with the strengthening of USD against AUD. This option contract would eventually help in controlling the excess payment that could be conducted by the company due to low AUD power against USD (Markets.businessinsider.com 2018).
The evaluation of case study helps in identifying the exposure of currency on revenue side that is faced by OZPRTS. The company will mainly sell the aluminum transmission casings to EU-based automotive manufacturer. Therefore, the exposure of euro currency is relatively high, which could help in generating high level of returns from investment.
The above figure mainly helps in identifying the overall currency valuation for EUR/AUD from March 2015 to 2018. This evaluation of the historical currency valuation could eventually help in depicting the selling price, which will generate high level of returns for the company. Valuation of Euro currency is relatively increasing in comparison to AUD, which indicates the profits that could be generated by OZPRTS from selling aluminum transmission casings to EU-based automotive manufacturer. From the evaluation chances of increasing AUD value against euro is estimated from the graph represented in figure 7. Therefore, with the help of adequate hedging instruments any kind of loss that might income from Currency conversion might be reduced (Titman et al. 2017).
The above figure represents the overall diagram that could be used for hedging the relevant exposure to Euro currency. In addition, the use of long put option would eventually help in controlling the damages that might be conducted from volatile currency market. The use of long put option could eventually help in protecting the revenues of OZPRTS, which is generated from EU-based automotive manufacturer. The payments will mainly be conducted on Euro, which will be converted to AUD by OZPRT. Therefore, the use of long put option would eventually help in reducing the risk from declining AUD value against Euro. Hence, decline in conversion rate from euro to AUD could be hedged by long put option to reduce the losses from currency conversion. Consequently, using option contract is much viable for the company against future contract, as there will be option for the company to exercise or not to exercise the contract after expiry. Furthermore, the option contract could also help in reducing the capital blockage that will be needed for future contract (Chance and Brooks 2015).
There are relevant conditions under which the currency exposure may act, as an offset on the input cost side. The rising currency value of AUD against Euro if increases then the actual revenue that is generated from the currency conversion could decline. Therefore, using the long-put option for hedging purposes could hampers the rising profitability that could be obtained by the company due to currency conversion. In addition, recurrent exposure of euro is relatively declining all over the world due to the substantial increase in inflation in Eurozone. Hence, the decline and the currency valuation of Euro today directly hamper the actual profitability of the company. However, from the figure it could be identified that valuation of euro is increasing against AUD. As a buffer to the increasing profits that could be generated from currency conversion would limit need for full exposure of EUR/AUD, as it might allow the organization to increase their profits over the period. Moreover, the only condition where Euro value increases in comparison to AUD could force the company to not completely hedge its exposure from the revenues generated by Exports (Wei 2018).
References:
Au.investing.com. (2018). Aluminium Futures Historical Prices – Investing.com Australia. [online] Available at: https://au.investing.com/commodities/aluminum-historical-data [Accessed 1 Apr. 2018].
Au.investing.com. (2018). AUD USD Historical Data – Investing.com Australia. [online] Available at: https://au.investing.com/currencies/aud-usd-historical-data [Accessed 1 Apr. 2018].
Au.investing.com. (2018). EUR AUD Historical Data – Investing.com AU. [online] Available at: https://au.investing.com/currencies/eur-aud-historical-data [Accessed 1 Apr. 2018].
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Brooks, R., 2015. Financial management: core concepts. Pearson.
Chance, D.M. and Brooks, R., 2015. Introduction to derivatives and risk management. Cengage Learning.
GmbH, f. (2018). Aluminium History | Markets Insider. [online] markets.businessinsider.com. Available at: https://markets.businessinsider.com/commodities/historical-prices/aluminum-price/usd [Accessed 1 Apr. 2018].
Hillson, D. and Murray-Webster, R., 2017. Understanding and managing risk attitude. Routledge.
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Rubin, J., Ottosen, A., Ghazieh, A., Fournier-Caruana, J., Ntow, A.K. and Gonzalez, A.R., 2017. Managing the planned cessation of a global supply market: Lessons learned from the global cessation of the trivalent oral poliovirus vaccine market. The Journal of infectious diseases, 216(suppl_1), pp.S40-S45.
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Wei, S.J., 2018. Managing Financial Globalization: Insights from the Recent Literature (No. w24330). National Bureau of Economic Research.
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