International Money and Finance (Final stage 3) - Essay Example

The company’s annual report 2010 provides clues on the exchange rate risks. Operating Statistics Number of rental stores Staff numbers 31 October 30 April 31 October 30 April 2010 2009 2010 2010 2009 2010 Sunbelt Rentals 346 397 393 5,373 5,733 5,334 A-Plant 104 111 105 1,876 1,944 1,872 Corporate office - - - 11 12 12 Group 450 508 498 7,260 7,689 7,218 The operating statistics on the number of rental stores and staff strength provide a comparative view of the performance of the Ashtead Group in the years 2009 and 2010 respectively in Sunbelt Rentals and A-Plant (Ashtead Group Press Release, 2011).

Exchange Rate Risk Ashtead Group is exposed to exchange rate risk developed from translation risk emerging from most of the company assets, liabilities, income and costs written in the US dollars. The changes in the comparative value of Pound Sterling and the US dollar can impact on the financial strength and functioning of the company. All debt of the company is shown in the US dollars to secure to a certain extent the revenue stream, hedging against the translation effects erupting from the shift in the dollar exchange rate.

The company pays dollar interest on its debts to reduce the impact of any shift in the dollar exchange rate on its income (Ashtead Group Annual Report Accounts, 2010). Movements in the rate of the US dollar with respect to Pound Sterling has been having and crucial impact on our financial position and outcomes of operations as registered in pounds are because most of the company assets, liabilities, income and costs are represented in US dollars. Movement in the exposure of the firm against Pound Sterling or other currencies however, can create significant transaction exposure for the firm.

Higher level of exposure can affect the firm’s short term cash flows and therefore may force the firm to borrow to meet its short term cash requirements. (Moffett, Stonehill, & Eiteman,2009). Till 31 October 2010 all company debts shown in the US dollar were nearly 80% of the value of net assets shown in dollar. It proved out to be robust hedge against currency fluctuations. It reduces the impact of exchange rate fluctuations as interest is paid through dollar as well, thus, reducing the effect on pre-tax profits and income.

Based on the latest currency mix of Ashtead Group’s profits and on dollar debt levels, interest and exchange rates at 31 October 2010, a 1% change in the US dollar exchange rate would impact pre-tax profit by ?40,000 (Ashtead Group Press Release, 2011). The company has been benefitting from the strong dollar in the past, as is evident from the results of Sunbelt from stronger dollar in the year 2009 when revenues in dollar were short by 21% across the year to US$1450 million but in reality increased by 7% when shown in UK sterling (International Rental News, 2009).

Ashtead's Sunbelt results were boosted by the stronger dollar. Sunbelt's revenues in dollars fell by 21% over the year to US$1450 million, although actually grew by 7% when expressed in UK sterling. A-Plant's sales for the year fell by 2% to 208.0 [pounds sterling] million. Dollar exchange rate hedging worked well for the company in the year 2009 amidst reducing sales for both the companies of the group in the final quarter with 28% cut in income by A-Plant and 24% reduction in the income of Senbelt in local