Management

2. ABC Bank has just issued its forecasts and expects the Reserve Bank of Australia to increase interest rates substantially next month and the AUD to rise.

Explain the financial risk management concepts relevant to ABC Bank’s outlook.

Maybe to hinder further credit growth in the country, the RBA needs to increase int rate to attract more depositors to put money into the banking system. Higher int rate will in turn lure investors to exchange from foreign currency (i.e. USD with lower int rate) into AUD. As demand for AUD increases, AUD appreciates. This is a short-term effect however. The underlying reason why RBA makes such a move (like high CPI) will surface and FX rate will adjust accordingly.

Interest rate of AUD increased -> AUD devalue, USD and some foreign currency will increase the price. Some risk that this banking facing:

* Price for mobilize (Giá huy động) increase

* Debt in the other currency will increase pricing -> we must pay more.

So, the structure of balance sheet must be changed:

* Increase the timing for payment, decrease the timing of assets (selling bond, long term debts, buy credits, gởi tiền ngắn hạn, huy động vốn dài hơn) -> interest sensitive asset/interest sensitive liability <1.

* Strengthen buy assets by foreign currency, pay debt by foreign currency.

Some tools:

* Swap interest AUD, payment with fix rate, ,receive float.

* Swap AUD/USD, long USD now, short USD later.

* Borrow USD and long AUD 

3. An Australian company has raised funds in USDs. It needs to bring those funds back to Australia but it will then be paying USD interest annually for five years, at which time the loan will need to be repaid. What exposures will this loan create both now and in the future?

--> Foreign exchange exposure. If it is a floating rate loan, the company is further exposed to market risk (interest rate risk)