The paper "Financial Risk Management" is a great example of an assignment on finance and accounting. Foreign exchange risk - GMFL has a high investment in foreign currency. In the case of $ US currency, the company faces risks associated with an exchange between $ US and A$. The exchange rate is been influenced by the demand for Australian commodities or demand by central banks around the world. It’ s favorable for the company to invest in Hong Kong where the exchange rate between HK$ and US$ is relatively fixed. Credit risk - GMFL may be unable to make payments to its shareholder’ s in the form of dividends in the long run and also meet the company’ s financial obligation.
The company is highly geared i. e. the ratio between debt and equity is high. Liquidity risk - GMFL may be unable to buy or sell its assets if it holds on to its gold reserves at the Australian current market price. The company may be unable to meet its short-term obligations considering the number of funds held in short term bearing securities to meet its liquidity needs is small compared to the amount held in equities and gold.
Also, the company cannot be able to access short term credit from financial institutions because it is highly geared. The financial institutions e. g. banks are likely to shy off due to the high gearing of the company. Market risk - There is an exchange rate risk due to dealing in foreign currency and fluctuating in interest rates. The Australian dollar is overvalued this means that commodities are very expensive leading to low demand hence commodity prices are likely to fall.
When the interest rate is cut the returns generated from short term interest-bearing securities will go down. There are speculations regarding the fall of interest rates in Australia where the company is based. This leads to uncertainty in the market. The investments are financed using debt and equity instruments. The debt instruments are fixed and variable amounting to A$164.56m. The equity instruments amount to A$260m which are invested as securities in the stock market of Australia.
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