Summary Of Australias Direct Foreign Exchange

Published Date: 02 Nov 2017

Programmed Maintenance Group is a result of the vision of two men; Norman Miles, the founder of Programmed maintenance Services in 1951 and John Whittle, founder of Integrated Workforce in 1992. Programmed arrange people, tools and expertise help businesses grow. The company’s business model is built around the ability to recruit, maintain and deploy a skilled workforce. It is one of the most respected organizations in Australia and has built its reputation on providing quality service and innovative business solutions to workplaces across all industry sectors.

It majorly operates in Australia, New Zealand and United Kingdom with the extensive network of over 100 branch and offices. It employs over 10,000 skilled and semi-skilled employees and over 7,000 customer relationships running successfully. Programmed has delivered a range of services both in government and private sectors. Services include infrastructure, education, manufacturing & logistics, commercial/retail & tourism and recreation markets.

Programmed competitive advantage lies at the heart of its business model - the ability to recruit, deploy and maintain a large scale, directly employed workforce of professional, skilled and semi-skilled staff across a range of diverse industries. From the placement of an individual into a customer’s workplace, through a facility management solution complete with all the best people, equipment and systems.

II – Company’s exposure to foreign earnings as a percentage of total revenue - Spreadsheet

Description

2012

 

2011

 

2010

 

2009

 

2008

 

 

$'000

$'000

$'000

$'000

$'000

 

New Zealand

60,632

52,865

65,339

87,677

71,068

 

United Kingdom

-

7,373

19,523

28,581

30,288

 

Other

12,814

28,089

28,204

17,833

834

 

Total Foreign Revenues

73,446

88,327

113,066

134,091

102,190

 

 

 

Total Group Revenues

1,394,480

1,223,959

1,165,642

1,222,008

839,945

 

 

 

Total Foreign Revenues as a percentage of Total Group Revenues

5.27%

7.22%

9.70%

10.97%

12.17%

 

 

 

 

 

 

 

 

 

 

 

 

III –Spreadsheet analysis

The company’s foreign revenues in the spreadsheet given above show a downward trend. The revenue increased from 2008 to 2009 but has moved negatively after that. New Zealand gives the highest contribution to the total foreign revenues. Its contribution has decreased by 15% during the years discussed. United Kingdom has also shown a declining trend over the five year period and its contribution has come to zero in the current year, meaning a 100% decline in its contribution. Unlike New Zealand and United Kingdom, contributions from other countries have shown a positive trend from 2008 to 2011. In the current year, however, its contribution has decreased slightly. The total contribution from other countries, comparing 2008 with the latest year the contribution has increased by 1436%. The total group revenues, unlike the foreign revenues have shown a positive trend throughout the five years.

According to the percentages in the spreadsheet a downward trend is obvious till the current year. The reason for a negative trend in the percentage is because the total revenues have increased in all the years shown and the foreign revenues have decreased, hence resulting in a negative trend in percentage each year. It has fallen to 5% in the current year from 12% in 2008.

IV. Summary of Australia's direct foreign exchange (fx) value (Yearly average) - Spreadsheet

Foreign Currency

2012

2011

2010

2009

2008

New Zealand (NZD)

0.789

0.737

0.773

0.824

0.868

United Kingdom (GBP)

1.539

1.555

1.639

2.079

1.639

V. Spreadsheet analysis

Direct foreign exchange value or rate is defined as the rate at which one currency will be exchanged for another. It can also be referred to as the value of one currency in terms of another currency. Exchange rates are set in the foreign exchange rate market which has millions of buyers and sellers.

The value of the New Zealand Dollar (NZD) has declined against the value of the Australian Dollar (AUD) over the five year period shown in the spreadsheet. In 2008, the New Zealand dollar stood at 1.15 against 1 Australian dollar. The value has been on an increasing trend since 2008 till 2011 and has decreased slightly in 2012. The value in 2012 is still higher than the value in 2008. The depreciation percentage of the NZD against the AUD is approximately 10%.

The second currency shown in the spreadsheet is the Great Britain Pound (GBP). The value of the GBP against the AUD has also depreciated over the five year period under discussion. A different way to express this analysis is in terms of AUD. That is, the value of the AUD has appreciated again the value of the GBP. The depreciation percentage of the GBP against the AUD is approximately 6%.

VI. Existence, or non-existence of correlation

Correlation is the measure of the trend of how two currencies move in relation to each other. Existence of correlation can be in two ways; positive and negative. A positive correlation means that if one currency moves upwards or downwards, the other currency also moves in the same direction. A negative correlation means that if one currency moves upwards the other currency moves downwards. Nonexistence of correlation means that the movements of the currencies are not related to each other and are random (Naoui, 2010).

During the five year period – 2008 to 2012, the profits reported in the annual report, New Zealand has decreased by approximately 17%. During this period, the Australian currency has risen against the New Zealand Dollar by 10%. The movement of the profits is in the opposite direction as compared to the movement of the value of the Australian Dollar. As described above, this means an existence of a negative correlation.

For United Kingdom, during the period under discussion, the reported profits are nil in the current year and the Australian dollar has risen by 6% against the Great Britain Pound. This case is also similar to the movement of profits from New Zealand and the Australian Dollar, hence meaning a negative correlation.

VII. Reasons for volatility in foreign revenues

Volatility is the measure of change in the price of a financial instrument for a period of time. It measures the degree to which financial prices fluctuate. The Group – Programmed – is mainly exposed to New Zealand Dollar. It uses a 10% sensitivity rate to report foreign currency risk internally. Volatility is reflected by uncertainty. Volatility is supposed to be low in a market where there is no new information (Dhakal, 2010).

Between 2012 and 2011, New Zealand sales totaled $47,839 and $38,962. Upon translation the figures became $60,632 and 52,865 respectively. After translation, the increase in the profit is around 15% while actually, the increase is of around 23%.

VIII. Influence of growth rate, interest rate, inflation rate on NZD as compared to the Australian dollar

There are a number of factors that affect foreign exchange rates. Some of the factors are listed below:

Difference in inflation rates of the countries

Difference of income levels

Change in government policies and natural disasters

Difference in interest rates.

Interest Rate:

Higher interest rate generally leads to a higher demand by investors and speculators (Catalán, 2010). The interest rate in New Zealand has come down to 2.5% from 3% in 2011. While the interest rate in Australia has decreased to 3% from 3.25% in 2012.

The interest rates are lower in New Zealand as compared to Australia. Due to this, the investors in New Zealand will be attracted to invest in Australia. This would increase the supply of NZD and decrease its demand. This change in demand and supply will result in the depreciation of NZD against the AUD.

Inflation Rate:

Inflation is defined as an increase in the general level of prices of good, commodities and services over a period of time. Higher inflation rates generally leads to a decrease in demand and selling of local currency to buy cheaper goods from somewhere else (Kurihara, 2010). The inflation rate in New Zealand is 0.90 while it has increased in Australia from 2.00 to 2.20.

The inflation rate is slightly higher in Australia than in New Zealand. Australian consumers will be forced to buy NZD to buy goods from New Zealand. Supply of the NZD will decrease, therefore the demand will increase. This would result in an appreciation of the value of the NZD against the AUD.

Growth rate:

Growth – Gross Domestic Product (GDP) is the market value of all goods and services produced within a country in a given period of time (Chamberlin, 2011). The GDP of Australia is 1.9 and while that of New Zealand is 1. The supply of the NZD will remain stable but it’s demand will increase. This would result in an appreciation of NZD against the AUD.

IX. Foreign currency exposure

Currency

Liabilities

Assets

2012

2011

2010

2009

2008

2012

2011

2010

2009

2008

 

$'000

$'000

$'000

$'000

$'000

$'000

$'000

$'000

$'000

$'000

 

 

 

 

 

New Zealand Dollars

5,788

3,841

5,486

9,486

27,207

56,220

62,045

74,877

83,029

79,972

British Pounds

40

0

9,382

11,079

15,911

3,815

6,339

12,698

14,875

18,660

X. Financial Instruments

A financial instrument is any of the following:

Tradeable asset of any kind

Cash and cash equivalents

Ownership in an entity

Right to receive or deliver cash or another financial instrument

Derivative contracts, future, options and hedge funds.

The company has entered into a number of financial instruments to manage its exposure to foreign exchange rate risk and interest rate risk. It includes foreign exchange forward contracts, interest rate swaps and hedging.

Forward Contracts:

A forward contract is a contract between two parties to buy or sell currency (or any other asset) on an agreed upon date in the future at a rate decided today (Forward rate). The forward rate is calculated by adjusting the spot rate to the difference in interest rates of the countries and the contract’s time to maturity. The first step to guard from risk exposure in a situation when the company is going to import, an alternative to guard from risk exposure is to buy foreign currency now, second step is to enter into a forward contract to buy foreign currency and the last step is to buy foreign currency when the contract is due. While exporting, to cover risk, the company should enter into a forward contract to sell foreign currency and when the due date comes, it should dispose off the contract (Adilov, 2010).

Interest Rate Swaps

The interest rate swap is a liquid financial instrument in which parties to the contract agree to exchange interest rate cash flows (Dow, 2012).

Hedging

The main purpose of hedging is to reduce exchange rate risk due to exchange rate fluctuations. It is done by fixing the price of a specified amount of foreign currency, for delivery/payment on a fixed future date. From an importer’s point of view, a foreign exchange appreciation shall be protected. This concept is opposite for exporters (Cotter, 2009).