The paper entitled 'How Interest Rates Affect BHP Billiton' is a wonderful example of a business assignment. BHP Billiton is one of the companies listed on Australia’ Securities Stock Exchange. The company is affected by interest rates in several ways. Therefore, this report assesses the company’ s hedging strategy given the existing exposure. The report addresses how interest rates affect BHP Billiton, the policies BHP Billiton used in managing interest rate risk, and the new interest rate hedging recommendations applicable to the company. How Interest Rate Risk Impacts on BHP Billiton Company The results of variance in interest rates from 1979-2009 are as shown in the Figure below.
These are the results that BHP Billiton can rely on generalizing the future economy and can utilize the information in controlling its investment portfolio as discussed herein. Interest rates are a major component in day to day activities of BHP Billiton. The company acquires loans from banks when they have insufficient funds and pays back the money with interest. When the company has extra cash, it is banked in savings accounts where they receive interest.
Similarly, interest is also charged on customers who purchase goods or services by the various forms of credit purchasing, for example, hire purchase. A change in the interest rates has a great effect on BHP Billiton’ s customers’ purchase trend. High-Interest Rates Rates of interest will have a direct relation to cash float in BHP Billiton’ s economic system (BHP Billiton 2005). It determines the floats held by banks, car, and house mortgage rates, interest rates charged on customers, the rate of giving out loans in banks and amounts loaned by credit cards. When the demand is high and the rate of cash flow is low, the cash tends will be more worth than under normal circumstances.
In these cases, banks charge a high-interest rate on loaned cash which reflects its scarcity. For BHP Billiton, this is the best time to make monetary investments like selling of shares that will gain them a lot of money compared to if they dispose of them in times of low-interest rate. Low-Interest Rates Low-interest rates mean that money circulating in the system is excess. In such cases, the banks have a lot of cash which they are ready to lend out which forces them to lower their interest rates charged on loans to attract customers.
Low-interest rates also affect the price of goods as operation and production costs of companies are relatively lower. For BHP Billiton, this is the time to make capital investments with anticipation of a good payoff when interest rates shoot up (BHP Billiton 2005). Business PlanningBHP Billiton can use the fluctuation of interest rates to their advantage. This is achieved by the company closely monitoring the trend of interest increase and decrease and planning an expansion of operations and opening of new branches in the periods of low-interest rates.
In periods of low-interest rates, operation costs go relatively low and the company also has a lot of cash in its possession.
ReferencesBHP Billiton. BHP Billiton sustainability report: Summary report. Melbourne, Vic: BHP Billiton; 2005.