INTERIM ASSESSMENT -ACTIVITY Due By 11:55 pm Adelaide, South Australia time 28 March...

Question

INTERIM ASSESSMENT -ACTIVITY

Due	By 11:55 pm Adelaide, South Australia time 28 March 2019
Weighting	35% of total grade
Length	2000 words (plus or minus 10%)
Format	written assignment
Submit activity
Supporting files Activity requirements Grading criteria

Brief

BigSis a manufacturer of stereos located in New Zealand. The main parts used in its production line are imported from Canada, and due to the depreciation of the New Zealand dollar (NZD) against the Canadian dollar (CAD), the company has faced an increase of 10% in its production costs. Increased competition from foreign companies that have recently entered the New Zealand market has further aggravated the situation for BigS, forcing a mark down in prices that has led to a decrease in revenues of 15%. These events have caused BigS’ annual return on investment (ROI) to decrease to 6%, with no concomitant changes in the risk attached to the business (i.e. 8% annual standard deviation of the ROI). Based on this scenario, the company is on the lookout for options that could either reduce its production costs or else improve its revenues.

Two investment opportunities were recently identified:

Option A:

Birdiesis a local producer of stereos that enjoys a monopoly position in country A. Country A is characterised by low income and cheap labour costs, with the performance of its economy relying heavily on the global price of commodities since the country is a major exporter of oil. The central bank of country A has been keeping interest rates at a high level (10%) as a way of curbing inflation (i.e. 5% last year), with no changes of monetary policy being expected in the short-term. By way of acquiring Birdies and moving its assembly line to country A,BigSwould have access to a market that has yielded an average annual ROI of 9% in the last five years, at a relatively low risk (i.e. 6% standard deviation). Moreover, through a reduction in its operation costs,BigS’ ROI is estimated to increase by 7%. Since they are in the same industry, the correlation of Birdies’ business to that ofBigSis roughly 70%.

Option B:

Placardis a European producer of gaming headsets, in a market characterised by fierce competition that, nonetheless, offered an average annual ROI of 17% in the last 3 years (i.e. Placard only sells in Europe). The demand for gaming headsets is mainly determined by the popularity of online multi-player games, developed by technology companies mostly in the United Kingdom. Game developers have proliferated through cheap access to capital resulting from the Bank of England’s conduct of monetary policy (i.e. 0.5% interest rate), which will likely be reverted as soon as the political turmoil in Europe subdues and inflation goes beyond the current 1% level. Placard’s business has attached to it a relatively high risk (i.e. 13% standard deviation), with a correlation of 35% toBigS’ revenues. By investing in Placard,BigSwould have access to a new technology that could potentially enhance and differentiate its stereos, allowing it to charge higher prices in New Zealand and becoming less dependent on components imported from Canada (i.e. the estimated increase inBigS’ ROI would be 6%).

Required

Imagine you are hired as a consultant and asked to recommend one of the two investment opportunities described above toBigS. Assume that both require the same initial investment, and that either way the company decides to go, the new venture will have 60% of its total capital allocated toBigS’ current business, and the remaining 40% to either Birdies or Placard. Following AIB’s style guide, write a report addressing the following:

Provide a diversification analysis of international projects based on the estimated ROI and risk that an investment byBigSin either Birdies or Placard would entail.

Elaborate on how changes in inflation, interest rates, and exchange rates, would affect the viability of an investment in Birdies and Placard.

Create two scenarios (i.e. optimist and pessimist), that contain an outlook for inflation, interest rates, and exchange rates relevant to both companies thatBigSis consideringto investin, explaining how Birdies and Placard would perform in each of these scenarios. Be mindful of the impact of oil prices, political uncertainty, and labour costs on your variables when designing the scenarios.

Identify the main risks thatBigSwould be exposed to by expanding its operations as per options A and B. Elaborate on a strategy using financial derivatives that could be used as a hedge against those risks.

Based on your previous analysis, provide a recommendation toBigS

Sarabjeet · Accepted Answer

Diversification Analysis
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3/22/2019
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Contents
Diversification analysis of international projects based on the estimated ROI and risk that an investment by BigSin either Birdies or Placard would entail.	1
Exchange rate, interest rate and inflation changes will affect the feasibility of Placard and Birdies investments	2
Create two scenarios (i.e. optimist and pessimist)	5
Birdies Pessimistic Scenario	6
Main risks that Big would be exposed to by expanding its operations as per options A and B	7
Recommendation to BigS	8
References	10
Diversification analysis of international projects based on the estimated ROI and risk that an investment by BigSin either Birdies or Placard would entail.
With the developing worldwide economy, understanding universal financial exchange connections has turned into an essential instrument for speculators wishing to broaden their portfolios on a worldwide premise. For financial specialists to have viable worldwide portfolio expansion it is imperative to decide the nations whose stock costs move together, those who’s stock costs move in inverse ways and those whose stock costs are disconnected all together. So as to examine the effect of financial exchange relationships, this paper will concentrate on securities exchange files in the U.S., Shanghai and the European Union. As indicated by hypothesis, keeping up portfolios basically in exceptionally emphatically associated markets considers superfluous portfolio chance because of the nearness of diversifiable hazard in the portfolio. Through direct relapse, results have demonstrated that business sectors generally move together, particularly in the midst of high unpredictability. Nonetheless, broadening of universal stock records can decrease chance. With the consistently developing worldwide economy, understanding universal financial exchange relationships has turned into a crucial instrument for speculators wishing to broaden their portfolios on a worldwide premise. In this way, for financial specialists to have compelling universal portfolio broadening, it is vital to decide the nations whose stock costs move together, those who’s stock costs move in inverse ways and those whose stock costs are disconnected all together. Nations whose stock costs move a similar way  are considered decidedly related while nations whose stocks move in inverse ways are adversely associated. As indicated by the standard of enhancement, a portfolio containing basically emphatically associated resources holds the portfolio at a higher hazard than a portfolio with stock costs that are contrarily corresponded. What's more, financial specialists wishing to enhance a hazardous venture, for example, stocks in a developing business sector, through global expansion, would have more accomplishment in nations observed to be adversely corresponded too. The absence of precise assurance of securities exchange value developments holds any portfolio at a higher hazard level than would normally be appropriate because of the nearness of the diversifiable hazard.
Exchange rate, interest rate and inflation changes will affect the feasibility of Placard and Birdies investments
Exchange rate, interest rate and inflation changes are concern for the investors as well, as changes in interest ratesand inflationaffect several asset forms in diversemanners. This is a particularly important matter for persons living in fixed income, for example, retirees(Viebig, 2015).
The influence of the inflation on Placard and Birdies portfolio depends upon the kind of securities BigSis hold. If BigSis only capitalize in stocks, worry that inflation should not make companies unable to rise at night, because the stock market has historically hedged inflation. In a long run, the company's earningsand incomeshould grow at roughly the similar rate as inflation, thus the price of the stock should increase with overall price of the producerand consumergoods. The exemption is stagflation; combination of economic downturn and increased costs is not good for the stocks. Not entire companies are the similar as inflation - for instance, companies with large amounts of the cash will perceive the value of a cash decline as inflation rises(Siskos, 2013).
A more common problem with inflationand stocksis that the returns of company are often exaggerated. In times of high inflation, when real inflation is the cause behind significant growth, the company may look prosperous. When evaluating financial reports, it is significant to consider that the inflation may cause serious damage to revenue, depending upon what technology the business uses to estimate inventory (for instance FIFO vs. LIFO).
Fixed income (i.e. bonds) investors are most affected by inflation(Simpson, 2014). Suppose investment firms invested $1,000 in Treasury bills a year ago and the yield is 10%.

INTERIM ASSESSMENT -ACTIVITY Due By 11:55 pm Adelaide, South Australia time 28 March 2019 Weighting 35% of total grade Length 2000 words (plus or minus 10%) Format written assignment Submit activity...