London 2012 Olympic Games affect British foreign exchange? And how to manage currency-related risks?

As the world of business becomes increasingly global, more and more companies are establishing themselves as multinational corporations. They attempts to introduce new products and services, and a combination of different strategies in order to maintain profitability and competitive advantage in foreign markets, that will face a variety of challenges.One such challenge faced by throughout their dealing in foreign markets is fluctuations in currency exchange rates.

The currency risk is one of the treasury risks that affect almost all companies in one form or another. According to Arnold (2008) addressed that are three type of risk for firms which operate in an international marketplace, these include transaction risk, translation risk and economic risk. Arnold (2008) also emphasized that, the foreign exchange market is mainly concentrated in the import and export, tourism, government and bank.

However, predict future trends in major currency exchange rate movements, each foreign trade enterprises of the most important one under the floating exchange rate system work. However, due to many factors that affects the exchange rate movements, not just by the impact of the economic power and political conditions of the monetary authorities, and sometimes even a temporary government measures sufficient to affect the exchange rate movements?

There are examples from BBC news (2011) shows the Olympic Games hopes to create a £1bn boost for businesses and bring in four million extra foreign tourists. And that will bring in the business and tourists from now and beyond 2012. It's the latest wave of GREAT - Britain's biggest ever tourism campaign - which is costing the UK government £125m and aims to attract 4.6 million more visitors, £2.3bn in additional visitor-spend, and £1bn of extra investment over the next four years (Hirst, 2012). Although the Olympic Games can bring many benefits to the state, just as there are a lot of people around the world will come to Britain, which not only to promote British tourism development, but also bring unlimited business opportunities. In the same time, Hirst (2012) also consider some questions, that London 2012: Will GB reap ‘great’ tourism rewards? A multi-million pound international campaign has been launched to entice visitors to the UK. But with the Olympic Games expected to draw the attention of four billion global viewers, is this marketing push money well spent?

As result, Blake (2005) pointed out the Olympics has not always brought financial reward. The 1972 Munich Olympics made loss of £178 million, 1976 Montreal Olympics also made loss of £692 million. The 1984 Los Angeles Olympics and the 1992 Barcelona Olympics made surpluses of £215 million and £2 million. According to this result, it can draw a conclusion of this failure must be to the foreign exchange management are closely linked. Then UK 2012 faced with this tremendous business opportunities brought to the country simultaneously, the government is how to formulate a strategy to properly manage foreign exchange risk?

In addition, the currency risk has been shown to be particularly significant and particularly damaging for very large, one-off investment projects, so-called megaprojects. This is because such projects are typically financed by very large debts nominated in currencies different from the currency of the home country of the owner of the debt. Megaprojects have been shown to be prone to end up in what has been called the "debt trap," for example, a situation as due to cost overruns, schedule delays, unforeseen foreign currency and interest rate increases. And the costs of servicing debt become larger than the revenues available to do so. Financial restructuring is typically the consequence and is common for megaprojects.

At present, the currency fluctuations are a global phenomenon, and can affect multinational companies directly through their cash flow, financial result and company valuation. The exposure to currency risks might however be covered against or ‘hedged’, as it is called, by different external and internal corporate strategies. To reduce their exchange rate risk exposures, international firms actively utilize hedging instruments such as futures, options, and swaps (Broll et al, 2009). Corporations can hedge foreign exchange risks with diversification and derivatives. In addition, beyond diversification, currency derivatives manage foreign exchange risks. Currency derivatives, such as futures, options and forwards, lock in predetermined exchange rates over set periods of time.

Supplementary video: What do you feel are the long term benefits of London hosting the 2012 Olympic Games? ‎Available at: http://youtu.be/xi8l1uli9nY (Assessed 25 Feb 2012)

Evaluation the capital structure: Equity and Debt

According to Myers (2001) addressed the capital structure is the mix of securities and financing sources used by corporations to finance real investment. And capital structure has focused the company's two main forms of financing - equity or debt, or a combination of both. Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a company that is normally repaid at some future date. And the equity capital is money invested in a business by owners, stockholders or others who share in profits

From all sources of funds of a firm cannot be achieved using a single means of financing, instead of using a combination of various means of financing. Arnold (2008) claimed there are many ways to raising money of the listed company, and determine the optimal capital structure to seek to maximize the value of the company to achieve the company the lowest weighted average cost of capital. In the same way, as Titman and Wessels (1988) also explained that firms select capital structures depending on attributes that determine the various costs and benefits associated with debt and equity financing.

According to Sheikh and Wang (2011) point out the decisions concerning capital structure are imperative for every business organization. In particular, there are not many modern enterprise is wholly owned. Each enterprise may also need to take a variety of ways to raise the necessary capital from different sources.

A recent example of BBC news (2012) shows that in the credit crunch and the recession made the retailer Peacocks to have collapsed in recent years. A number of reasons have been cited for the failure, including the role of the Royal Bank of Scotland (RBS) during talks to restructure its debts. As this result, Peacocks overall debt stands at £750m. The debts became too much for Peacocks which went into administration after talks on restructuring part of the debt collapsed. RBS was one of the lenders which refused to pump any more cash into the business. The reason is banks could not see a way where Peacocks could get close to paying off this debt.

However, the Peacocks is not carrying out the debt financing，that it can continue to operate? It is having failed to restructure its total £750m debt, that has taken a huge interest, but all stores would continue to operate as usual. The reason of this result is Yorkshire-based fashion chain Bonmarche, part of the Peacocks Group, was bought for an undisclosed sum by private equity group Sun European Partners. The advantage of equity capital is that, in contrast to debt, the money doesn't have to be repaid, and there's no interest to be paid (Anonymous, 2004). There are many factors affecting the capital structure, but different factors impact on the company, under its own characteristics to choose their own capital structure.

 The capital structure affects the value of the company? The capital structure is of special significance: firstly, improve the capital structure can increase corporate value and improve the efficiency and operational efficiency of financing; In addition, to help finance reform, including corporate bond market to establish and improve, and the financing system to facilitate investment and financing activities of the society as a whole, the rational allocation of financial resources, and promote long-term economic growth. At present, the capital structure aroused much concern because the capital structure as the value of the business.

It can be seen from the above in the capital structure is to be expected corporate earnings, the cost of capital, financing risks, and property rights distribution system, a comprehensive summary of the results. The capital structure design is corporate financing process to seek a reasonable balance between the various elements of financial leverage, financing costs and financing risks. The Capital structure is reasonable or not largely determines the debt service and fund-raising capacity and future profitability.

The value of stock market: and the distortion of share price.

In today's economic environment, why has many Stock exchanges around world? According to Arnold (2008) defined “stock exchanges are markets where government and industry can rise long-term capital and investors can buy and sell securities.” Stock exchange and stock market will be used interchangeably.

For example, BBC news (2011) reported the shares of Tokyo Electric Power Company (Tepco) fell on the Tokyo Stock Exchange on fears that the utility provider may be nationalised. It was the most actively traded stock on the bourse, falling 12% to 186 yen.  Thus, the company asked the government for an extra 690bn yen ($9bn; £5.6bn) to help pay compensation claims. Furthermore, as the Financial Times shows that the head Mizuho Financial Group, Tepco, said the Japanese government's commitment to financially support Tepco for providing further lending. It can be seen from the Tepco face of the crisis, the Stock markets can help companies provide funding. If there is can not to loans on insufficient funds. It should be face collapse.

In addition, According to Financial times report the Petrobras, Brazil’s state-controlled oil Company, has sold up to $7bn of bonds on international markets, which Petrobras underlines the strength of Brazil’s equity and debt markets (Leahy, 2012). The listed company through this stock market to improve the company's funds, and can improve the situation of the company's operations.

However, the stock market has played vital role in the modern economy, also Arnold (2008) stated has a number of characteristics. There are inclusive the firm can find funds and grow; allocation of capital; for shareholders; status and publicity; mergers; improve corporate behaviour.

Despite the company by selling of $7bn in Brazil’s biggest international corporate bond offering, the following of company's shares soared in January this year. But following months in the doldrums, investors avoid the fear that less than Brazil’s stock market. As fourth quarter net profit down by half compared with a year earlier. Moreover, Leahy (2012) explained the company net profit in the three months to the end of December last year was R$5.05bn, down 52% compared with a year earlier and well below the R$9.2bn forecast by a Reuters analyst survey. In addition, Petrobras shares suffered their biggest fall in six months on the news and were down 7.16 per cent in afternoon trade at R$25.56 per share. In the same way, the Credit Suisse analyst of Leite (2012) also said “It could have been good but it wasn’t.”

Why the market price of the distortion? The share price fluctuations are base of the operation of stock, and by a variety of economic factors and non-economic factors. Arnold (2008) also disagreed that prices do not depart from true economic value, and claimed the most share deviate from true value, however, under the EMH that will expect the deviation to be random. Furthermore, How to solve the market price distortion may occur in the design of the stock option plan? The feasible way is to line the right price to determine the sale price and the stock to determine some sort of design. Be amended in order to avoid distortion of the market price of options granted, should be taken not only in determining the exercise price to market price when the options were granted as the only non-market valuation methods. On other hand, how a correct analysis of these factors? As result, the investors to make the right investment decisions, to examine the fundamental factors that affect the stock market price fluctuations. From different directions, directly or indirectly affect the profitability of the company's operating and stock and capital appreciation, income and psychological expectations from the different side effects, have a considerable impact on the stock market supply and demand.

Shareholder value creation

Shareholder value creation is the key to success in current market. There is increasing pressure on corporate executives to measure, manage and report the creation of shareholder value on a regular basis. And corporate executives are under increasing pressure to demonstrate on a regular basis that they are creating shareholder value. This pressure has led to an emergence of a variety of measures that claim to quantify value-creating performance. Moreover, creating value for shareholders is now a widely accepted corporate objective. Delivering shareholder value is not about this year’s profit or this year’s dividend, it is a much more important, long-term issue than that (Marsden, 2003).

The company's goal is to maximize shareholder value that is the core responsibility of senior management. The establishment of stock-based compensation mechanism to motivate senior managers to create shareholder value will be granted to managers to focus on the behavior of the long-term value. The aim stressed to senior managers and shareholders should bear the same risk. A considerable part of the top managerial compensation reflected the form of stocks, their salary in relation the performance of stock and the interests of investors, which is leading to senior management focus on long-term shareholder value. So as to achieve the effect of incentives, and other senior management salary system must be established on the basis of the evaluation system of the company a set of key performance indicators, and the assessment and salary system consistent with the strategic objectives of the company as a whole, so that it can guarantee to bring the pay incentive effects the maximization of shareholder value.

In addition, the high growth in profits does not mean that high growth in shareholder value. The markets tend to choose the profit high-growth industries and companies as long-term investment objectives, and given too much attention to the profit growth rate in practice.

Looking at the example, in 2000, a large energy company Enron suddenly collapse. Since the company's internal serious economic crisis, the managers in order to enable companies to quickly improve the company's stock price, there are financing a lot of money to solve the current difficulties of the company. Enron's use of a variety of subsidiaries and affiliates complex structure, the implementation of the multi-layer holding, so it can control a lot of companies with very little capital to achieve rapid expansion. At the same time, the hidden debt, tax evasion, artificially manipulate profits. But these acts are illegal.

It can therefore be seen the top of corporate managers evaluate their performance in terms are play vital role of generating shareholder value. The Enron Company’s senior management is not in the correct manner to deal with problems, but through deception, concealing and other illegal activities, thus leading to the company's bankruptcy and shareholder value worthless.

In addition, the failure of RBS – the biggest bail-out of the financial crisis – cost UK taxpayers £45bn in equity injections alone. The FT report is damning of RBS and its former management, led by Sir Fred Goodwin, the vilified former chief executive, and Johnny Cameron, former head of the investment banking division. There were “underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions”, the report said.

The analysts believe that the Royal Bank of Scotland this expansionist policy pursued by the annual huge loss partly due to the former chief executive Fred Goodwin. The strategic decision of the company executives to make the acquisition of decision-making and asset selection decisions should be based on the company is expected to maximize shareholder value criteria. If there are no good investment opportunities and the form of dividends and repurchase shares to return cash to shareholders. As result of this to emphasize the shareholder value is necessary contact to the performance of the company's senior management.