Hedging Strategy Analysis for Sims Metal Management
Hedging Strategy Analysis for Sims Metal Management
The Risks Faced by Sims Metal Management
Sims Metal Management (SGM) is a global Australian-based company that specializes in metal recycling, operates business in North America, Australiasia( Australia and Asia) and Europe, with North America being the largest market. The company’s activities expose it to the three major parts as financial risks: market risk, credit risk and liquidity risk.
Market risks consist of interest rate risk, foreign exchange risk and commodity price risk. Firstly, SGM’s main exposure to interest rate risk is its borrowings at variable interest rates. As a result, the value of their financial instrument or cash flows will fluctuate. This risk constantly exists and is of significant importance to the company’s cash flows. Secondly, SGM operates internationally, so it is exposed to foreign exchange risk, primarily with respect to transactions settled in US dollars. Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Lastly, SGM is also exposed to risks of market price fluctuations. While SMG strategically focuses on recycling, more than 70% of its revenue comes from producing recycled ferrous and non-ferrous metals. The fluctuation of the price of both the raw materials and the recycled metals will affect the group’s revenue and cash flow directly (SMM annual report, 2011).
On the other hand, credit risk and liquidity risk are also challenges that SGM faces. As for credit risk, which refers to the case where the counterparty will not complete its obligations under a financial instrument and cause a financial loss to the company. So far, SGM has exposure to credit risk on all financial assets and transactions in derivative contracts. Liquidity risk also arises when SGM has insufficient access to capital to fund growth projects or settle a transaction on the
The Risks Faced by Sims Metal Management
Sims Metal Management (SGM) is a global Australian-based company that specializes in metal recycling, operates business in North America, Australiasia( Australia and Asia) and Europe, with North America being the largest market. The company’s activities expose it to the three major parts as financial risks: market risk, credit risk and liquidity risk.
Market risks consist of interest rate risk, foreign exchange risk and commodity price risk. Firstly, SGM’s main exposure to interest rate risk is its borrowings at variable interest rates. As a result, the value of their financial instrument or cash flows will fluctuate. This risk constantly exists and is of significant importance to the company’s cash flows. Secondly, SGM operates internationally, so it is exposed to foreign exchange risk, primarily with respect to transactions settled in US dollars. Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. Lastly, SGM is also exposed to risks of market price fluctuations. While SMG strategically focuses on recycling, more than 70% of its revenue comes from producing recycled ferrous and non-ferrous metals. The fluctuation of the price of both the raw materials and the recycled metals will affect the group’s revenue and cash flow directly (SMM annual report, 2011).
On the other hand, credit risk and liquidity risk are also challenges that SGM faces. As for credit risk, which refers to the case where the counterparty will not complete its obligations under a financial instrument and cause a financial loss to the company. So far, SGM has exposure to credit risk on all financial assets and transactions in derivative contracts. Liquidity risk also arises when SGM has insufficient access to capital to fund growth projects or settle a transaction on the