Corporate Finance Insights – May 2012

NAB’s Corporate Finance Insights reports utilise our expertise across a range of industry sectors to explore current issues, present forward […]

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NAB’s Corporate Finance Insights reports utilise our expertise across a range of industry sectors to explore current issues, present forward looking views and opportunities for growth and progression.  The report is published four times a year and explores topical issues facing Australian Corporates.

Welcome to the May 2012 edition of Corporate Finance Insights.

In this edition, we focus on risk management. In the lead article of the previous edition we highlighted how much more risky life for CFO’s and Treasurer’s had become since the start of the global financial crisis (GFC).

Our research showed that in the past three years, most financial markets have exhibited more than double the risk observed in the years prior to the onset of the GFC.

This increased risk has really tested many corporation’s risk management techniques and assumed market inter-relationships – otherwise known as “natural hedges”. A number of articles in this edition explore some of these risk management challenges and the effectiveness of natural hedging.

Many commodity exporters have assumed a natural hedge between USD commodity prices and the Australian dollar – eg. “if commodity prices fall I will be protected by a simultaneously declining AUD/USD exchange rate”. The reality has been much more complicated and in the first two articles we examine the need to question these assumed market behaviours and understand the consequences when these relationships do not hold.

There has been considerable press regarding the significant cost blow-outs of many major resource projects.

Managing the contingent currency risks on these major projects can be tricky, and we outline a methodology for identifying these risks and implement appropriate “contingent” hedging strategies.

The stellar rise in the gold price has received considerable attention, in this edition we look below the hype and explain it from a banker’s point of view.

“Real Option Theory”, the application of option based thinking to management strategies, is now a well developed business strategy tool. We apply this type of thinking to interest rate risk management by interest rate sensitive corporates and the desire for many commodity consumers to pursue vertical integration strategies.

Basel 3 is going to drive increasing use of collateralisation of derivative positions by both financial institutions and banks. We look into the arcane world of the “Credit Support Annex” to highlight the key issues for a corporate.

We are regularly asked by our clients on alternative means of measuring risk, we provide a summary of the techniques available.

Finally, while IFRS 9 will not be finalised until mid 2012, we outline why we think Australian corporates should be implementing it now.

Download the full report to find out more.