Managing Financial Risks With Derivatives Uk Telecommunications Industry Finance Essay

In concern universe today many companies are faced with the addition in volatility of fiscal markets which has lead to increase in fiscal monetary value hazard. Many companies are faced with exposure to fiscal hazard which are caused by unforeseen exchange rate and involvement rate motions. These unforeseen motion in exchange rate which is caused by international competition can consequences into big addition or loss if the hazard is non managed decently. Exchange rate motion generate concern hazards which can change the current foreign assets and liabilities and involvement rate motion can hold indirect impact on company ‘s value on its hereafter hard currency flows.

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Domestic and transnational companies who are faced with these sort of hazards must guarantee that they control these hazards otherwise if they are unmanaged so this can ensue into entire failure of concern. Financial Institutions have introduced different merchandises to assist companies in hazard direction. These merchandises are Forward contracts on exchange rate, Futures contracts, Interest rate barters and Options. Forward contract being the oldest merchandise to be introduced to pull off both foreign exchange and involvement rate hazards.

Changes in concern environment and addition in motion of involvement rate and exchange rate has resulted into rise in fiscal hazard exposure. These motions can impact non merely company ‘s net income but besides company ‘s endurance in indirect manner. Financial risks direction has turn to be a important country of pertain for UK corporations.

Therefore this proposal attempt to happen out how UK Telecommunications industry manage fiscal hazards in an increasing concern hazard environment.

Research purpose and aims

Purpose

The chief purpose of the survey is to find how houses in UK Telecommunications industry manage involvement rate and foreign exchange fiscal hazards by looking into usage of derived functions.

1.3 Research Aims

The primary aims of the research will be ;

To find how companies manage hazard

To find whether derived functions are used or non

To find which derived functions are used and for what intent

Disclosure of fiscal instruments

1.4 Research Questions

The undermentioned research inquiries will steer this research

How companies manage hazard?

Are derived functions used or non used?

Which derived functions are used and for what intent?

What are the revelation of fiscal instruments?

2. LITERATURE REVIEW

Derived functions are fiscal instruments whose values are deduced from some underlying assets or rate/price. Derived functions are now of paramount importance to the concern universe, with fanciful value of more than $ 200 trillion of these derived functions are being traded on coordinated and over the counter markets in 2004 ( Bank for International Settlements, 2004 ) .

The fiscal merchandises which are provided by FinanciaI Institution are options, hereafters contract, frontward contract and involvement rate barter. The common Interest rate derived function is Interest rate barters and others are future contracts and involvement rate options while for foreign exchange derived functions are forwards contracts, currency barters, foreign exchange hereafters and options. Forward contract gives the proprietor the duty to purchase an plus at set monetary value and adulthood day of the month as agreed in the contract. Future as similar forward but in hereafters are public traded while forwards are private contracts. Unlike future and frontward, options give the proprietor the right but non duty to purchase or sell an plus at a fixed monetary value on or before specified day of the month ( Prevost et al, 2000 ) .

Derived functions are used to cut down hard currency flows and net incomes volatility caused by alterations in foreign currency exchange rates, trade good monetary values, involvement rates and other hazard factors ( Barton J, 2000 ) .

Use of fiscal derived functions is widespread, particularly among big publically traded companies and is still increasing aggressively.

For illustration, in a survey done by Guay and Kothari, ( 2003 ) based on one-year studies information of 413 largest houses in the U.S revealed that 57 % were utilizing derived functions. In another survey of 314 Fortune 500 houses showed that 72 % were utilizing derived functions ( Barton J, 2001 ) . Mallin et Al. ( 2001 ) did study analysis on the usage of derived functions in hazard direction, he mailed questionnaire to 800 UK non fiscal houses listed on London stock exchange. Consequences showed that of 231 respondents 32 % were using at least one derivative instrument. Another research workers Bodnar et Al ( 2003 ) studied derivative use in pull offing hazard to 167 non-financial Netherlands houses and revealed 84 useable responses which is 50.3 % . In India a survey was conducted to analyze derived functions usage in pull offing foreign exchange hazard to 640 companies which were faced with foreign exchange exposure and consequences showed that 70.4 % of respondents used foreign exchange derived functions to pull off hazard ( Anand and Kaushik 2007 ) .

Whilst many houses use derived functions in pull offing hazard, abuse of it may ensue into major losingss. This was proved by Karpinsky ( 1998 ) who revealed companies like Sumitomo Corporation lost $ 3,500 million in 1996 because of Cu hereafter.

On the other manus El-Masry ( 2003 ) collected informations from questionnaire mailed to 401 non fiscal companies listed on London stock exchange, 50 % of respondents did non utilize derived functions because the hazard exposure was non substational. Likewise suryey done by Bodnar et Al ( 1995 ) revealed lower usage of derived functions and the ground being low insignificant exposure.

Sing to largely used derived functions to pull off hazard exposure, study done by Marshall ( 1997 ) pointed that options, barters and forwards were usually used to pull off involvement rate and foreign exchange hazards. In El-Masry ( 2003 ) study of UK non fiscal houses, consequences indicated that houses use options at 29.4 % , forward/future at 23.7 % and trade 23.1 % .

3.0. RESEARCH METHODOLOGY

Research design

This survey will be conducted as a quantitative study

Beginnings of informations

The chief beginning of informations will be the one-year studies of 10 companies in the UK telecommunications industry for the past three old ages.

Documentary beginning

Bell ( 1999 ) province documental beginning involves the reading of relevant information from library beginning such as text books, diaries, newspapers and cyberspace. Secondary beginning will enable a research worker to carry on wide probe and aid corroborate the dependability of the findings given that the findings may be subjective and this beginning will be used every bit good to cut down trust on the one-year studies as the chief beginning of informations used in the survey.

Sampling choice

Choice of sample will be based on the public information information of the companies and the eligibility standards will establish on following factors ;

The company must be in the telecommunication services industry

The company must be either a Domestic or a Multinational one which is exposed to fiscal hazards as an result of international competition

The company should be among of the listed London Stock Exchange companies

Datas analysis

Data collected will be analysed utilizing Statistical Package for Social Sciences ( SPSS ) and presented utilizing frequence tabular array.

4. Decision

Measuring and pull offing fiscal hazard exposure are important maps in cutting down companies ‘ exposures from major exchange and involvement rate motions.

Fiscal derived functions are really of import in hazard direction of corporations

5. Reference

Anand m. , Kaushik k. p. , ( 2007 ) . “ Management Motivations for Use of Foreign Currency Derivatives in India ” , IIML Working Paper Series.

Bank for International Settlements. ( 2004 ) . Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2004. hypertext transfer protocol: //www.bis.org/publ/rpfx05.htm.

Barton, J. ( 2001 ) . Does the Use of Financial Derivatives Affect Earnings Management Decisions? The Accounting Review, 76, 1-26.

Bell, Judith. ( 1999 ) . Making your Research Undertaking: A usher for first clip research worker in Education: 3rd Edition Buckingham, Open University press.UK

Bodnar g. m. , de jong a. , macrae v. , ( 2003 ) . “ The impact of Institutional Differences on Derived functions Usage: a Comparative Study of US and Dutch Firms ” , European Financial Management vol. 9, No. 3, pp. 271-297.

El-masry a. , ( 2003 ) “ A study of derived functions use by UK non fiscal companies ” , Social scientific discipline research web Manchester Business School pg.455.

Grant, K. and Marshall, A. P. ( 1997 ) , “ Large UK companies and derived functions ” , European Financial Management, vol. 3 no. 2, pp. 191-208.

Guay W & A ; Kothari, S. P. ( 2003 ) . How Much Do Firms Hedge with Derivatives? Journal of Financial Economics, 70, 423-461.

Hentschel, L. , & A ; Kothari, S. P. ( 2001 ) . Are Corporations Reducing or Taking Hazards with

Derived functions. Journal of Financial and Quantitative Analysis, 36, 93-118.

Mallin c. ; Ow-yong k. and Reynolds m. , ( 2001 ) “ Derivatives use in UK non-financial listed companies ” , The European Journal of Finance Vol. 7 ( 2001 ) , pp. 63-91.

Saunders, M. , Lewis, P. & A ; Thornhill, A. ( 2007 ) . Research Methods for Business Students. 4th Edition. Pearson Education Limited UK.

Prevost, A. K. , Rose, L. C. , & A ; Miller, G. ( 2000 ) . Derivatives Usage and Financial Risk Management in Large and Small Economies: A Comparative Analysis. Journal of Business Finance and Accounting, 27, 733-759.

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