Global Fund Management Limiteds Investment Strategy - Assignment Example

Report on GFML’s Investment Strategy Student’s Name: Institution: Lecturer’s Name: Course Date: CONTENTS Cover Page 1 Contents Page 2 Introduction 3 Problem statement 4 Recommendations 5 References 8 Report on GFML’s Investment Strategy Introduction Global Fund Management Limited is an Australian investment firm that majorly deals in debt and equity in Australia as well as other international markets. This company handles financial perils by coming into derivative agreements based on the management decisions. Regarding the equities, there is perceived volatility in the world equity markets as seen from the conflicting views arising from the Republic of china. Schönborn (2010), states that, this is attributed to the irregular nature of the outcome of the portfolio owing to the existence of debt predicaments in the Europe and USA. The essence of analysis of European and the USA markets is because they greatly impact the investment of GFML securities. The Australian dollar has continually been overvalued against the US dollar and other hard currencies. This in effect has led to the existence of duo speed economy. The falling of goods prices greatly affects the market expectations owing to the interest bearing securities (Chan and Wong 2009). The investors think that the effect of this would be a reduction in the interest fee and therefore they are not likely to invest. On the other hand, the US Federal Reserve keeps the interest at a low price and this stirs up the economy. This creates an anticipation of the rise of the interest price in the upcoming time (Yasmin 2007). The Australian dollar is projected to go up in value over a short duration of time. A decrease of the goods prices is also estimated to lower the A$. The persistent demand for the currency in the central banks worldwide has made the currency stronger in a span of a few years. Moreover, the cost of gold as well has an impact on the asset security. In recent times, the price of Gold has gone down against the US dollar and many investors in Australia are purchasing gold as an asset security. In a decision to hold the investment in Gold, GFML must consider the Chinese and US markets plus the investor’s decisions to opt for volatile assets like equities (Malz 2011). Problem Statement The various financial risk exposures that GFML face with respect to the asset categories include hedging risk, market risk, credit risk and operational risk. Hedging risk occurs as a result of the existence of the difference of prices in the portfolio market. This risk occurs as a result of the difference in the prices of shares in Hong Kong, gold prices and small period interests bearing securities (Miller 2012). Market risk occurs as a result of varying market situations of the portfolios. These consist of the market price risk with regard to exchange price, interest prices along with further market charges. This is mainly seen from the value of assets in addition to liabilities and liquidity threat. This risk occurs when some assets are unable to be liquidated in a timely manner devoid of attracting a market discount difference. Credit risk occurs due to altering credit circumstances in the portfolios market. The credit risk likely to be experienced in the Australian market includes default risk which is the risk of likelihood of changing impact of the asset or portfolio value. It also integrates the capacity to access collateral (Coleman 2012). Operational risk faced by GFML include the human factors, errors fraud, infrastructure and system failures, calamities, risks associated with operating organizations on the portfolio and risk process (Van Deventer, Imai and Mesle 2011). So the company has to incur some operating risk emanating from the firm’s hierarchical arrangement and the nature of the portfolios. Recommendations Considering the various market risks and weighing them against returns, GFML management should update their framework; that is the debt and equity securities. In the review, some considerations are supposed to be made on the most complex portfolios along with underlying guidelines. The report generally outlines the pros as well as cons of definite situation given the nature of the world market. The company ought to evade all the dangers. Fabozzi (2010) argues that this helps to keep the constancy of the A$ currency and for this reason there is stability in the country’s interest rate. Accordingly, interest abiding securities will be attractive to the local Australian investors. Hedging reduces the beta which is the portfolio threat (Tarantino and Cernauskas 2011). From the entry into the portfolio market, we can find that Hong Kong shares bear the highest value of beta 1.3 followed by Australia’s shares and gold at 1.0. The small term interest abiding securities allow no risk because it only serves a minimal term financial needs. The decision to hedge is due to the need to have a steady economic growth and high portfolio returns arising from a constant interest or minimal fluctuations (Christoffersen 2010). The initial investment in the Australian shares is much more expensive than Gold, Hong Kong shares and interest abiding securities. This implies that the return on this venture is much more than investing in high hazard security for instance the Hong Kong shares. The most suitable derivative tool that the firm is supposed to take should be hedging risk concerning future derivatives. This derivative is essential since it assists the company to foretell the prospective returns on a peril portfolio. Full hedging involving future derivatives is preferable so as to shun fluctuations in the interest charges (UNEP Division of Technology, Industry and Economics 2008). The GFML should use various hedging guidelines so as to curb various risks connected with various portfolio investments. Ardia (2008) agreed that the hedging approaches play the same role as the insurance. For that reason it’s crucial that the individual need to be alert of the dangers that it’s hedging gains. Hedging is a warning adjacent to the unpleasant effects of the risk on the portfolio income. Every hedging policy relies on the priority areas to hedge. The risks that arise from the market volatility need to be looked at by the corporation. This can be assessed by taking a survey on the market of the security when it is growing up and also when it was falling. To avoid market unsteadiness, the company should branch out on the various portfolios (Choi and Powers 2012). GFML should invest in portfolios that are not correlated so as to evade total loss arising from the effects of risk. The real assets and other communities are hedged using the futures derivative. The company should also hedge not in favor of credit risk. This is affected through varied currencies that include the US dollar and the Australian dollar in the market in both the treasuries through incorporating the debt. This makes GFML Company build up a stronger and a larger balance sheet than countries like Hong Kong (USA Dun and Bradstreet Corporation 2007). This is only possible though the future derivative as it meets an enduring objective. The company should build an all-inclusive financial arrangement that reflects on the length of the risk on the portfolio. The possibility arises only if the nature of the market works in favor of the investor. From the analysis, the proportion of the portfolio under risk that should be hedged is over 75% since the only portfolio without risk is interest bearing securities. Soler Ramos (2010) points out that hedging option is undertaken to caution the portfolio against undesirable effects of risk. The company may take the forward, option and swap with regard to the asset category as equity and foreign exchange derivatives. Forward swaps take an approximate of six months. Taking the hedge horizon to be mid-December and that one can use futures and options with a December expiration date for hedging. Wunnicke, Wilson and Wunnicke (2012) states that the use of derivatives aid to give leverage, contemplate for profits, alleviate risk, generate option and get hold of exposure to the basic portfolio. I recommend that GFML should buy a call option for the derivative commodity if the expected future price of the commodities or the securities is expected to rise. The procuring of call option gives the right to the buyer of the underlying future indenture at the stake price (Redhead and Hughes 2008). Speculation over the future increase in the commodity prices is the reason why most Australian investors prefer call option. References Ardia, D. (2008). Financial risk management with Bayesian estimation of GARCH models: theory and applications. Berlin, Springe. Chan, N. H., & Wong, H. Y. (2009). Simulation techniques in financial risk management. Hoboken, N.J., Wiley-Interscience. Choi, J. J., & Powers, M. R. (2012). Global risk management: financial, operational, and insurance strategies. Amsterdam [u.a.], JAI, an imprint of Elsevier Science. Coleman, T. S. (2012). Quantitative risk management: a practical guide to financial risk. Hoboken, New Jersey, John Wiley & Sons, In. Christoffersen, P. (2010). Elements of Financial Risk Management. Academic Press Dun & Bradstreet Corporation. (2007). Financial risk management. New Delhi, Tata McGraw Hill. Fabozzi, F. J. (2010). Financial Risk Management.Hoboken, John Wiley & Sons, Inc. Malz, A. M. (2011). Financial risk management models, history, and institutions. Hoboken, N.J., Wiley. Miller, M. B. (2012). Mathematics and Statistics for Financial Risk Management. Hoboken, John Wiley & Sons. Redhead, K., & Hughes, S. (2008). Financial risk management.Aldershot, Hants, England [u.a.], Brookfield [u.a.]. Solerramos, J. A. (2010).Financial risk management: a practical approach for emerging markets. Schönborn, J. (2010). Financial risk management of interest risk from a corporate treasury perspective in a service enterprise.Hamburg, Diplomica-Verl. Tarantino, A., & Cernauskas, D. (2011).Essentials of risk management in finance. Hoboken, N.J., Wiley. UNEP, Division of Technology, Industry and Economics. (2008). Financial risk management instruments for renewable energy projects: summary document. UNEP. VAN Deventer, D. R., Imai, K., & Mesler, M. (2011). Advanced Financial Risk Management Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Managements. Hoboken, John Wiley & Sons Wunnicke, D. B., Wilson, D. R., & Wunnicke, B. (2012). Corporate financial risk management: practical techniques of financial engineering. New York [etc.], Wiley. Yasmin Yusof. (2007). Managing financial risk for multinational companies in South East Asia. Milton Keynes, Author House. Read More