Stulz, RM 2004, 'Should We Fear Derivatives?', The Journal of economic perspectives, vol. 18, no. 3, pp. 173-192.

After reading Stulz (2004) address the following question:

How is it that value can be added to a multinational corporation by using foreign exchange derivatives in risk management?

NOTES:

You are making an argument that needs to be supported with reference to the literature. The second part of this project is an analysis of a multinational corporation. Your report must include a current / recent example of a  multinational corporation which  has significant foreign operations and  uses derivative securities in their exposure management.

(1)  Review the literature in the area to support your argument

a.    Significant emphasis here – see marking guide

b.    Be concise and include only relevant literature

c.    You must include more recent literature to update your explanation (note that Stulz was writing pre-financial crisis – consider, did this event validate his approach or change it?)

d.    Explain any weaknesses in the argument for adding value (not just the strengths).

(2)  Discuss  an  example  of  one  (one  only)  multinational  corporation.  As  you  only  have  one company this is anecdotal evidence and should not be taken as proof. Instead, you should discuss whether this anecdotal example is consistent or inconsistent with your overall thesis.

a.    Describe the foreign exchange risk exposures that this company faces. What types of exposures are they and what are their magnitudes?

i.   You should try to be as specific as you can here.

1.   What are their assets? Where are they held?

2.    How are their cash flows being generated? In what currencies?

3.    How significant to the overall business are these exposures?

4.    In summary, can you explain the business model of the company and the exposures to which this business is faced?

b.    Describe how the company manages their exposures.

c.    Decide whether this has been successful.

i.   In deciding this you should include your own quantitative analysis

1.   This  section  is  open  to  your  imagination,  however  reading  the assigned textbook readings and reading Stulz (2004) may provide you with some ideas …

ii.   In deciding whether  it  has  been successful you  may also  include sources, whether external to the company, or from the company’s own reporting – however these must all be properly referenced!

Remember the primary overall question above. Structure your report as an answer to this question. The corporation is just an example. You will not necessarily be helped or hindered by finding a           corporation that matches the argument that you are trying to make. If your empirical example does not support the argument that you are making, then you have found something to discuss - similarly you should discuss if your example turned out to be consistent. You will not be judged by whether    your company matches your thesis. You will be judged by the strength of your discussion and the      consistency of your interpretations and conclusions.

•   The choice of company is important, spend time here early on to make sure you have chosen a company where you are able to source sufficient information.

•    Full marks may be achieved regardless of whether your anecdotal evidence is consistent with your overall thesis.

Written Report

Due date and Submission: 11:59pm, Oct 10, 2022, via Turnitin on LMS

NOTE: Only the student who submits the project will be able to view feedback on LMS. Please share the feedback file with the rest of your group. The marks will be manually allocated to all group members on LMS after SPARK adjustments.

Format: A4-pages. Font size: 12, double spacing, Normal margins (about 2.5cm top, bottom, left and right)

Maximum Length: 2,000 words (Appendices of tables & graphs can be added and are not in the word count – their  use  is  recommended!).  No  limit  on the  use  of appendices. Your references page need not be included in the word count.

Structure

You have two choices here. (1) You may approach it as answering the question with the use of an example, basically combine everything. (2) You may split the report into two sections: (a) Literature review – answer the question (b) A separate analysis of a multinational – but  you must discuss if your example is consistent with your overall hypothesis and why.

Reference – Reference your work! Use APA 7 referencing style.

https://guides.library.uwa.edu.au/apa

SPARK

SPARK will be used to provide peer feedback and mediate group marking.

Please    familiarise    yourself    with    the    SPARK    documentation    contained    in    the Assignment/SPARK-Information folder on LMS. In addition, a short summary is included on the final page of this pdf.

Groups

Must be formed within tutorials. Maximum members 4.

Marks Breakdown

•   Clarity  of  Report  (Writing  /  General  Presentation  /  Graphs  /  Tables  /  Use  of Appendices) (4 marks)

•   Literature   Review   (Coherence,   relevance,   comprehensiveness,   primarily   peer- reviewed) (5 marks)

•   Company   Qualitative   Analysis   (Company   research,   business   model,   exposure measurement) (4 marks)

•   Company Quantitative Analysis (3 marks)

o Explanation  of  whether  the  business  has  been  successful  in  their  foreign exchange risk management

o This must include an analysis appendix (not in the word count) clearly detailing:

▪   Your data sources

▪   Any modifications to your data before use

▪   Methodology – how were your outputs generated?

•   Overall cohesion, structure, and persuasiveness of your report (e.g., does it read as one submission, or as 4 reports stuck together the day before submission?) (2 marks)

•   Referencing (this will be strictly marked – reference correctly) (2 marks)