Risk Hedging

Risk Hedging strategies of Toll Holdings Limited

Rui Ren (311039219), Yun Li (311038948), ZhangYang Cai (310260388), Zhenghao Li (311069932)

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Abstract

This report investigates the three main risks of Toll Holdings Limited, and recommends hedging strategies to the company board. Report explains how to use currency warrants and forwards to overcome the currency risk, swaps to hedge interest rate risk and futures & options to manage the commodity risk in details; it also shows the trading information of these derivatives and discusses the advantages and obstacles of adopting these strategies.

1. Introduction (Part Ι)

1.1 Corporate Profile

Toll Holdings Limited (ASX: TOL), which was established in 1888, is the top transport and logistics supplier in Australia. As the unique integrated logistics provider in Australia, it operates a comprehensive network throughout Australia, New Zealand and Asia in 55 countries. Currently, TOLL becomes a leading supplier of integrated logistics in Asia, obtaining a substantial annual profit about AUD $8.2 billion in 2011. (Toll Holdings Limited website, 2011)

1.2 Main risks that face Toll Holdings Limited

Currency risk

Currency risk (also named as Exchange Rate Risk) is one of the financial risks deriving from the variability in the exchange rate between two currencies (Papaioannou, 2006). Currency risk occurs when investors or corporations have investments or loans that are denominated in foreign countries.

Toll Group faces the foreign currency risk when sales, purchases and borrowings in foreign currency rather than domestic currencies. As regards to Toll Group, the major currencies which cause this risk are Singapore dollar, HK dollar, US dollar and British pound (Toll Holdings Ltd Annual Report 2010-2011, 2011). A currency risk can typically give rise to a foreign exchange gain or loss.

Interest rate risk

Interest rate risk is a type of...