Hedging Strategy Analysis for Sims Metal Management

1830 WordsDec 20, 20128 Pages
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…show more content…
At the end of the reporting period (2011), none of the Group’s forward commodity contracts qualified for hedge accounting, despite being valid economic hedges of the relevant risk(SMM annual report, 2011). . When it comes to interest rate, credit risk and liquidity risk management, SGM has not used any derivative financial instruments. More precisely, interest rate risk is managed on the company’s net debt portfolio by providing access to diverse sources of funding, reducing risks of refinancing by establishing and managing in accordance with target maturity profiles, and negotiating interest rates with banks based on a variable pricing matrix which generally involves a LIBOR rate plus a margin. As for credit risk, SGM has set up credit limits for its customers. For certain customers, SGM purchases credit insurance to protect it against collection risks. Lastly, the company manages liquidity risk by monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities (SMM annual report, 2011). Figure 2 shows SGM’s risk management briefly. Recommendation of Hedging Strategies SGM is a company domiciled in Australia, but operates business internationally. Therefore, currency fluctuation in foreign exchange rates is a prominent challenge the company faces. SGM adopts a “local revenue, local

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