Suppose you are working as a risk management consultant and are approached by a client from an
Question:
Suppose you are working as a risk management consultant and are approached by a client from an ASX-listed firm (PKF Ltd) who is seeking your advice on whether they should hedge their equity (market), interest rate and currency risk. The client provides you with the following information:
PKF Ltd are a listed firm with very little debt finance. PKF Ltd have;
- $1m of listed equity (with a beta of 1.2).
- $1m invested in corporate bonds with a duration of 5 years and
- USD800,000 in cash holdings at the current exchange rate of 1AUD = 0.80USD.
- Your calculations suggest that the Australian equity market will appreciate by 7% over the next year, interest rates will rise from 5% to 6%, and the value of the Australian dollar will fall to 1AUD = 0.75USD.
Required:
Using the risk management framework we discussed during the semester as a guide, what hedging strategy would you recommend your client take? In your answer, briefly explain what factors you would consider in providing this advice to your client and also any other information that would be helpful to you in making your decision. NOTE that no calculations are necessary for this question (use only the information provided). Use dot points where necessary
Auditing A Practical Approach
ISBN: 9780730382645
4th Edition
Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton