Financial Risk Management Group Assignment 1B

Cherag Kalra(FT191022)
Navraag Sharma(FT191049)
Venkateshwaran V(FT191100)
Mayank Taneja(FT192048)
Keshav Dogra(FT194036) Group 11
You are a treasurer of a Chinese Electrical Machinery Manufacturing company with
Exports to all over the world. Your biggest export partner is USA, accounting for 30% of
your overall sales, while domestic sales are 25%. You have significant long term debt on
your books both in US dollars and CNY with floating interest rates. You do not have any
currency hedges. Being an active Treasurer you also run a short term investment book and
you take position in Chinese Stocks and high yield papers.

1. What major financial risks are you facing in your business in 2019? (Try and classify
different types of risk)
Market Risk:

• Market Risk due to the exposure of company’s funds in the Chinese stocks
• The company has major exports to US and is exposed to concentration risk since 30%
of the sales are exports to only US
Interest Rate Risk:

• Company is exposed to Interest rate risk as it has taken long term loans in both USD
and CNY at a floating rate of interest
• Change in the interest rate in any of the countries might affect the debt obligations
of the company
Liquidity Risk:

• The company might run out of cash for the operations/working of the business
• The company is under the risk of running out of cash to service the short term debt
obligations
Currency Risk:

• Foreign Exchange risk as the company is exporting about 75% of its manufacturing to
other countries and also as the company hasn’t hedged its currency
Credit Risk:

• Counterparty risk as the company’s customers can default on the credit given to
them
Country Risk:

• Since the company operates in multiple countries with base as China there is
possibility that it is subjected to the change in regulations and policies of the country
that might affect the expected return from operations
• The Company has invested in stock market of China which is highly influenced by
regulations and political decisions exposing it to the financial risks
2. How are you planning to respond to the risks that you have identified? Specifically talk
about the Financial risks

Market Risk:

• Market Risk can be reduced by diversifying the company’s exposure to various

Chinese stocks and bond papers of various sectors/industries (basically non-
connected businesses)
• This can also be mitigated by expanding the business across the geographies thus
reducing concentration risk
Interest Rate Risk:

• Company can mitigate the Interest rate risk exposure by entering into Interest Rate
Swaps with some sound financial institutions
• They should try to enter into contracts with fixed interest rate agreements
• Company can take loans from countries which have relatively lower rates of interest
Liquidity Risk:

• The company should invest surplus cash into liquid mutual funds or instruments
• The company should tighten their line of credit policies given it does not impact their
business
Currency Risk:

• To reduce the exposure to the Currency risk the company should invest in hedged
overseas assets such as hedged ETFs
• Use instruments such as Currency forwards, Currency Futures, Currency Options,
Currency ETFs, etc
Credit Risk:

• Enter into business with companies having good credit score

• They should tighten their credit policies with suppliers and customers
Country Risk:

• The company can invest in stock exchanges of different economies to avoid exposure
to only Chinese markets
3. One of the biggest business risk you face is increased Tariffs in USA. How has
that impacted your financial profits in 2018 and how do you see its impact
going forward?

• The imposition has led to reduction in exports affecting the company’s topline
severely since 30% of the sales are to US
• Furthermore, reduction in exports will lead to depreciation of domestic currency
leading to reduction in profits
• Since the domestic currency has depreciated it places the company in a
disadvantageous spot to pay the foreign currency loans because the debt obligations
would have increased
• The domestic currency depreciation will also lead to reduction in company’s
bottomline after conversion
• For the next foreseeable 3 to 4 years the tariffs won’t come down thus leading to
further reduction in sales in US or operating profit
• Since Chinese follow a fixed plus floating peg system of currency pricing the
domestic currency price will stabilise in some time thereby reducing the FOREX loses

4. What do you think about the credit markets position in China and do you perceive any
difficulty in rolling over the debt you have in 2019? What implications your view on credit
market has for Chinese & Global stock markets
• China reversed the course on securitization in 2012 to allow asset backed bonds.
Since then the market size has hit 2 trillion yuan making China second issuer globally
last year
• Chinese economy is currently facing a slowdown and hence they are trying to attract
investments which is indirectly leading to a boom in Chinese credit markets
• Therefore, as a treasurer, we see no difficulties in rolling over the debt in 2019
through securitization
• Structured debt and residential mortgaged backed securities have been the primary
issuance in Chinese credit market and this makes the market pretty secure to invest
in
• Comparing investment in Chinese credit market to Global stock markets, investing in
Chinese credit market will be a better off option