Our group identified that foreign exchange risk and credit risk is the main two risk the client facing from the potential payoff of investment. Structured financial products are the example of portfolio investments included fixed income products and the options. Fixed income products reduce the risk of losing money. Option investments can increase the potential growth of earnings. Foreign exchange risk is the major risk in this case, the company on input and borrowing in GBP (UK). The risk exists when convert GBP revenues to Australian dollars. Moreover, the revenues will change before received in the currency, it is necessity that to exchange the foreign currency for AUD when dealing the revenues from the investment and other receivable, if the value of GBP rise is mean the values of Australia dollars is decline. This is an inverse ratio. In the result, the cost of foreign currency will increase. Meanwhile, the revenues will decrease.
Furthermore, structured products are made secure or safe debt from investment banks. It is one risk that the counterparty unable or unwilling to meet their commitments about the trading or other transaction cause the company incur loss. (Spuchľáková, E., Valašková, K. and Adamko, P. 2018). The portfolio risk not only make up by internal factor, also the external factors. The external factors, such as the government policies and trade restrictions, all of them are company can’t not control part and it is easily to make company have big lost. The internal factors may the deficiencies in appraisal of borrowers’ financial position (Spuchľáková, E., Valašková, K. and Adamko, P. 2018)…That why the credit risk also be existed.
To mitigate the losses from exchange rate fluctuations, the company would adopt either a cash flow hedge or a fair value hedge strategy based on the type of commodity being paid for. In addition, take option and forward contracts also are the good selection.
Firstly, a cash flow hedge or a fair value hedge strategy, where the company owes payables from asset purchases and the payments are one-off, the fair value hedge would come in handy. This may be where an asset is bought through a purchase agreement from another country and payment is done at a later date.
Secondly, client may take an option. An option is stated at a price that is a bit lower than the current price. If the investor think the price will fall, then they should buy puts option or sell calls. On the other hand, sell put options or buy calls if think the price will rise in the future. Al...