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    FRM Group 1 Assignment 3

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    Ridhi Musaddi
    The document appears to be a response to questions about how Anglo American manages financial risks from their professor. It summarizes that Anglo American manages currency, commodity price, and interest rate risk. For commodity price risk, it uses forward contracts to hedge risks from fluctuating prices. For currency risk from global operations, it generally does not hedge but decides on a case by case basis. For interest rate risk from borrowing in different countries, it aims to convert debt to floating rates to manage rate movements. It also compares Anglo American's risk management approaches to competitors Rio Tinto and Glencore.

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    FRM Group 1 Assignment 3

    Uploaded by

    Ridhi Musaddi
    35 views4 pages
    The document appears to be a response to questions about how Anglo American manages financial risks from their professor. It summarizes that Anglo American manages currency, commodity price, and interest rate risk. For commodity price risk, it uses forward contracts to hedge risks from fluctuating prices. For currency risk from global operations, it generally does not hedge but decides on a case by case basis. For interest rate risk from borrowing in different countries, it aims to convert debt to floating rates to manage rate movements. It also compares Anglo American's risk management approaches to competitors Rio Tinto and Glencore.

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    The document appears to be a response to questions about how Anglo American manages financial risks from their professor. It summarizes that Anglo American manages currency, commodity price, and interest rate risk. For commodity price risk, it uses forward contracts to hedge risks from fluctuating prices. For currency risk from global operations, it generally does not hedge but decides on a case by case basis. For interest rate risk from borrowing in different countries, it aims to convert debt to floating rates to manage rate movements. It also compares Anglo American's risk management approaches to competitors Rio Tinto and Glencore.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    35 views4 pages

    FRM Group 1 Assignment 3

    Uploaded by

    Ridhi Musaddi
    The document appears to be a response to questions about how Anglo American manages financial risks from their professor. It summarizes that Anglo American manages currency, commodity price, and interest rate risk. For commodity price risk, it uses forward contracts to hedge risks from fluctuating prices. For currency risk from global operations, it generally does not hedge but decides on a case by case basis. For interest rate risk from borrowing in different countries, it aims to convert debt to floating rates to manage rate movements. It also compares Anglo American's risk management approaches to competitors Rio Tinto and Glencore.

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    Financial Risk Management

    Professor David Veredas

    Term-III

    Group Assignment 3

    Company Allotted: Anglo American

    Group 1

    Akhilesh Kejriwal
    Aryan Setu
    C S Guru Karthick
    Kshitij Vats
    Ridhi Musaddi
    Q. Why does the company manage currency, commodities, and interest rate risks?
    Ans. The group classifies financial risk exposures into the following types: 1. Liquidity risk 2.
    Credit risk 3. Commodity price risk 4. Foreign exchange risk 5. Interest rate risk. We did
    detailed research on the last 3 types as per the question’s requirement. However, we found
    that the company does not specifically answer the question, “why does it manage these
    risks”. So, we’ve tried to base our answer on some statements we found spread across the
    report, fully/partially referencing the relevant risks and based on our understanding of the
    company’s business model.
    Commodity risk is present for the organisation as a minor one in regard to the prices of the
    commodities it produces. As a result, the organisation doesn’t put too much focus on
    hedging this risk. The most frequently used instrument is the forward contract, as it serves
    the purpose of hedging for them, which is protecting themselves from the price fluctuations
    of the commodities sold as provisionally priced. Currency risk, on the other hand, impacts
    the group on a much larger scale as a result of global operations (non-USD costs &
    revenues). Strengthening of the US dollar against the non-US dollar currencies influencing
    costs the group is exposed to had a positive effect on the group’s earnings (proving risk can
    be positive as well). The group’s policy is generally not to hedge such exposures, given the
    correlation, over the longer term, with commodity prices and the diversified nature of the
    group. Also, the management decides to hedge against the currency risk on a case-to-case
    basis regarding projects & borrowings. Managing interest rate risks is also important for the
    group since they have borrowed significant money in various countries. This makes the
    company exposed to changes in interest rates in the countries it has borrowed. This can
    make it extremely hard for them to predict future cash flows, without which precise future
    planning gets impossible to do.
    The management feels that, as per their currency & interest rate risks exposures and with
    the hedging arrangements in place, their earnings and equity are not materially sensitive to
    reasonable rate movements in respect of the financial instruments held currently (page 254,
    last para).

    Q. How does the company manage these risks?


    Ans. The company uses forward contracts and other derivative instruments to hedge the
    price risk economically. In many of the company’s sales and purchases, the selling price is
    normally determined 30 to 180 days after the delivery is done to the customer. This selling
    price is based on quoted market price specified in the contract, which makes it susceptible
    to future price movements. Thus, hedging, in such cases, protects the company from
    negative exposures to price movements. Table 1 (references) shows the exposure of the
    company’s financial assets and liabilities to commodity price risk.
    Next is currency risk. The major non-US currencies affecting the costs of the company are
    the Australian dollar, Chilean peso, Brazilian real, and South African rand. The company's
    policy is normally not to hedge such exposures. However, certain exceptions are allowed by
    a committee with delegated authority from the Group Management Committee. Also, the
    company is exposed to currency risks to a certain extent in terms of non-US dollar capital
    expenditure and dollar borrowings in US dollar functional currency entities. In such cases, an
    analysis is done on whether to hedge or not depending upon certain factors like the liquidity
    of foreign exchange markets, the cost of executing a hedging strategy and estimated foreign
    exchange exposure. The most frequent instrument used to hedge currency risks is currency
    swaps.
    Interest rate risk occurs because of interest rate fluctuations which affect the company’s
    financing activities. Anglo American is majorly exposed to US and South African interest
    rates. By June 2023, an alternative risk-free rate is expected to replace USD LIBOR. So,
    regarding its hedging agreements and upcoming financial market operations, the company is
    currently managing the switch to alternative risk-free rates. The company’s policy involves
    borrowing funds at a fixed rate of interest. The company uses interest rate derivatives to
    convert most of its borrowings to floating rates of interest and manage the exposure to
    interest rate movements. The company’s policy with financial assets is to maintain liquidity.
    They are trying to achieve this by investing cash at floating interest rates and maintaining
    cash reserves in short-term investments of less than a year’s maturity. Table 2 shows the
    company’s exposure of net debt to currency and interest rate risk.

    Q. How does it compare with competing companies?


    Ans. Rio Tinto has a broad commodity base, so it is exposed to changes in commodity
    prices. Generally, their policy is to sell their products at prevailing market prices like Anglo
    American. As per Rio Tinto policies, they don’t normally consider that usage of derivatives to
    fix prices would provide long-term value to their shareholders. But for certain commodities,
    derivatives contracts are used. They use embedded derivatives for that (annual report page
    196). Regarding currency risk, under normal market conditions, the company doesn’t
    consider actively hedging currency as they believe it will not provide any long-term benefits
    to their shareholders. There is a committee which reviews the company’s exposure on a
    regular basis, and currency protection measures are undertaken only under specific
    commercial circumstances. Rio Tinto’s interest rate risk management policy involves
    borrowing and investing at floating interest rates. The company uses interest rate swaps to
    convert bonds with fixed rates to floating rates. The company is exposed to long-term fixed-
    rate funding because at times maturity of interest rate swaps is shorter than that of bonds.
    So, to maintain floating rate exposure, new medium-dated swaps are transacted as interest
    rate swaps mature. At times, the company chooses to maintain fixed rates, but that is
    circumstantial.
    Glencore categorises risks into three broad heads: market, credit, and liquidity. Our focus
    risks fall under the category of market risk. Unlike Anglo American, this company takes all
    risks seriously and hedges actively against them. For commodity price risks, they manage the
    exposure through futures and options transactions on worldwide commodity exchanges or
    in OTC markets to the extent available. Their hedging methods for interest rate risks include
    the matching of assets & liabilities, swaps, and similar derivative instruments. Coming to the
    currency risk, the US Dollar is the predominant functional currency of the group. Their
    preferred hedging tools are the forward exchange contract and swaps.
    REFERENCES

     Investors | Anglo American


     aa-annual-report-full-2022.pdf (angloamerican.com)
     https://www.angloamerican.com/investors/annual-reporting#
     Anglo American Plc Peers & Key Competitors - GlobalData
     Glencore Digital Annual Report 2021
     Risk Management & Financial Reporting (riotinto.com)
     https://www.riotinto.com/en/invest/reports/annual-report
     https://cdn-rio.dataweavers.io/-/media/content/documents/invest/reports/annual-
    reports/2022/rt-annual-report-2022.pdf?rev=7a10cc8ddcf14ecf9bc5133070c33e85

    Table 1.

    Table 2.

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