ASSIGNMENT
In August 2014, crude oil price averaged at $100 per barrel. As of August 2015, crude oil prices have plummeted to about $50 per barrel throwing the economies of many oil-exporting countries into disarray. Large oil-producing companies have likewise faced various financial and budgetary constraints as a result of the tumultuous changes in global oil prices. To combat the effects of the fluctuating oil prices, oil- importing countries such as Malaysia have taken to fixing petrol prices at the pump to introduce some element of stability in the economy.
As a manufacturer of oil and petroleum-based products in Malaysia, Lu Bang Gali Bhd. faces a disproportionate amount of uncertainty, at least over their next fiscal period. This is particularly so since on Monday, 3rd August 2015, they signed an agreement with a U.S.-based oil-producing company to purchase 1 million barrels of oil per year for the next five years. The sale price of the first 1 million barrels has been agreed at USD49.00 per barrel with payment due in six months. The MYR/USD exchange rate on 3rd August 2015 was 3.82. The price per barrel of the next four shipments of 1 million barrels per year will be negotiated before 31 January of each subsequent year and will be highly dependent on world crude oil prices at the time of negotiation.
Part 1
As the financial controller of Lu Bang Gali, submit a detailed financial projection of how the company can manage its risk exposure over the next fiscal period.
Through your contacts in the Malaysian financial market, you have managed to obtain the following information:
i) Six-month forward rate for MYR/USD is 3.42 - 3.45
ii) Six-month investing/borrowing interest rates in Kuala Lumpur are 7.00 / 8.00 % per annum
iii) Six-month investing/borrowing interest rates in U.S. are 3.00 / 4.00 % per annum
Due to financial regulatory restrictions in Malaysia, currency options are not available. The closest liberalized foreign exchange market is Singapore that has provided the following:
i) Six-month put option on USD is priced SGD0.02/USD at a strike of SGD1.35/USD
ii) Six-month call option on USD is priced SGD0.03/USD at a strike of SGD1.35/USD
iii) Six-month forward rate for MYR/SGD is 2.79 - 2.82.
Given the above information, what is your recommendation to the Board of Directors of Lu Bang Gali and why?
Part 2
Due to the short-term nature of foreign currency derivatives, the Board of Directors are unconvinced that your projections in Part 1 are suited to manage the company's risk exposure after the first 1-million barrel shipment.
In an academic essay of no more than 1,000 words, provide a long-term strategic plan to manage Lu Bang Gali's risks. Because this is a compulsory unit for the International Business major, you are highly encouraged to draw on your knowledge from multiple business-related disciplines.
Notes
1) In the operations of any business, ambiguity always arises. There is no such thing as perfect information. As such, should you find any ambiguity from the scenario above, you are allowed (in fact, expected!) to make reasonable and well-justified assumptions to support your response. Strong communication and reasoning skills are highly prized by employers.
2) Additional credit will be awarded for work that is presented in a systematic and professional manner that is free from spelling and grammatical errors.
3) Remember that this is an individual assignment. See the University's policy and guidelines on assignments here: https://www.buseco.monash.edu.au/qmanual/qmanual.pdf
ADDITIONAL INFORMATION ON THE ASSIGNMENT
Part 1
As the financial controller of Lu Bang Gali, submit a detailed financial projection of how the company can manage its risk exposure over the next fiscal period.
Through your contacts in the Malaysian financial market, you have managed to obtain the following information:
i) Six-month forward rate for MYR/USD is 3.42 - 3.45
ii) Six-month investing/borrowing interest rates in Kuala Lumpur are 7.00 / 8.00% per annum
iii) Six-month investing/borrowing interest rates in U.S. are 3.00 / 4.00 % per annum
Due to financial regulatory restrictions in Malaysia, currency options are not available. The closest liberalized foreign exchange market is Singapore that has provided the following:
i) Six-month put option on USD is priced SGD0.02/USD at a strike of SGD1.35/USD
ii) Six-month call option on USD is priced SGD0.03/USD at a strike of SGD1.35/USD
iii) Six-month forward rate for MYR/SGD is 2.79 - 2.82.
iv) The spot rate for MYR/SGD is 2.78 - 2.79.