PREPARED FOR: DR WAEIBRORHEEM WAEMUSTAFA

Submitted date: 21st September 2015

BWRR 3063 (FUNANCIAL

RISK MANAGEMENT)
INDIVIDUAL ASSIGNMENT

Contents
1.0 background of the company and the financial risk committee..................................................2
2.0 The sources of the financial risk in Air Asia........................................................................3
2.1 Credit risk.............................................................................................................. 3
2.2 Market Risk............................................................................................................ 4
2.3 Liquidity risk.......................................................................................................... 5
2.4 Operational risk....................................................................................................... 6
3.0 Air Asia in managing risk.............................................................................................. 7
4.0 Conclusion and recommendation..................................................................................... 8
5.0 References.......................................................................................................... 10

1.0 background of the company and the financial risk committee.

Air Asia Berhad has set up in 1993 with initiated operations in 1996. In 2001, Tune Air Sdn Bhd
Tony Fernandess organization acquired this carrier from DRB-Hicom. Air Asian never think
back after that. Air Asias first and principle base is the Low Cost Carrier Terminal (LCCT) at
Kuala Lumpur International Airport, while its auxiliary center points are at Kota Kinabalu
International Airport, Senai International Airport and Penang International Airport.Air Asia is
well known as Malaysian minimal effort aircraft and even Asias biggest low admission, no-frills
carrier. The carriers claims No Admin Fee, however has a few charges for administrations
which are free on different aircrafts. Air Asia trademark is Now Everyone Can Fly. Being the
home of Air Asia, the LCCT is the monetary allowance terminal in KLIA, opened on 23 March
2006. LCCT is said to be carried about 10 million travelers a year. The Air Asia auxiliaries are
any semblance of Thai Air Asia, Indonesia Air Asia, Viet Jet Air Asia and Air Asia Red Tix. In
the meantime, Air Asia partner organizations are Air Asia X, Tune Hotel and Tune Money.
The Group intends to accomplish the most elevated norms of expert behavior and morals, to
increase current standards on responsibility and to oversee itself in understanding to the pertinent
regulations and laws. To accomplish long haul shareholder esteem through capable and
manageable development, the Gathering has built up and keeps up an inner control framework
that consolidates different control components at diverse levels all through the Group. The Board
is in charge of checking on the adequacy of these control instruments. Because of the
impediments inalienable in any such framework, this is intended to oversee instead of dispense
with danger and to give sensible yet not supreme certification against material misquote of
administration and money related data and records or against monetary misfortunes or
misrepresentation. The Group has set up an on-going procedure for recognizing, assessing,
checking and overseeing critical dangers that may tangibly influence the accomplishment of
corporate destinations. This procedure has been set up during the time and is consistently audited
by the Board. Administration is in charge of helping the Board actualize approaches and systems
on danger and control by distinguishing and evaluating the dangers confronted, and in the usage
of suitable healing activities to improve operational controls and danger administration.
Undoubtedly, the first level of confirmation originates from business operations which perform
the everyday operational danger through exhaustive arrangement of inner controls. The Board is

educated of real issues on inner controls, administrative consistence and danger taking. The
Board has gotten confirmation from the Group Chief Executive Officer, Chief Executive Officer
and Group Chief Financial Officer that the Group's danger administration and inward control
framework is working sufficiently and successfully, in every material viewpoint, taking into
account the danger administration and inner control arrangement of the Group. The Board is of
the perspective that the danger administration and inner control framework set up for the year
under survey is sound and satisfactory to shield the shareholders' venture, the enthusiasm of
clients, controllers and representatives and the Group's advantages.
2.0 The sources of the financial risk in Air Asia
Financial risk are derives from various way which is credit risk, market risk, liquidation risk and
operational risk.
2.1 Credit risk
Ordinary credit risk emerges through the likelihood of default on an obligation, a venture, or
indeed, even a receipt. At the point when a budgetary commitment is not completely released, a
misfortune results. The measure of the misfortune may be everything that is owed, or a part
thereof. Another wellspring of credit danger emerges from budgetary contracts, including
subordinates. Subsidiaries are contractual assertions between two gatherings (counter
gatherings), and they incorporate swaps, advances, prospects, and alternatives. The estimation of
these agreement is gotten from the worth of a fundamental resource, for example, a swapping
scale, record, interest rate, or product cost. Subordinates and other money related exchanges
make a specific test for credit hazard administration. (Horcher, 2004)
Cash flow from operating ratio= cash flow from operations (CFO) / current liability (CL)
Year

2009

2010

2011

2012

2013

CFO

784000

1594000

1404000

1324000

961000

CL

501000

589000

695000

783000

792000

CFO ratio (RM)

1.5649

2.7068

2.0201

1.6909

1.2134

Cash flow from operating ratio

3
2.5
2
1.5
1
0.5
0

cash flow from operating ratio (RM)

2009

2010

2011

2012

2013

2.2 Market Risk

Market risk is the risk that the value of an investment will decrease due to moves in market
factors. Volatility frequently refers to the standard deviation of the change in value of a financial
instrument with a specific time horizon. In Air Asia, this risk can be seen through using
Inventory Turnover Ratio. This ratio gives a sign of how effectively the organization's stock is
used by administration. A high stock proportion is a pointer that the organization offers its stock
quickly and that the stock does not mull, which may mean less hazard the stock reported has
diminished in worth. Too high a proportion could demonstrate a level of stock that is too low,
maybe bringing about regular deficiencies of stock and the capability of losing clients. It could
likewise demonstrate deficient creation levels for taking care of client demand.
Inventory turnover = cost of goods sold / average inventory
year

2009

2010

2011

2012

2013

COGS

58000

69000

60000

76000

74000

AI

168000

177000

176000

184000

166000

Inventory turnover

0.345

0.340

0.341

0.413

0.446

Inventory turnover
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

turnover
2009

2010

2011

2012

2013

2.3 Liquidity risk

In money, liquidity risk is the risk that a given security or resource can't be exchanged rapidly
enough in the business sector to keep a misfortune (or make the obliged benefit). Liquidity ratio
are utilized to focus an organization's capacity to meet its fleeting obligation commitments.
Speculators regularly examine liquidity ratio when performing central investigation on a firm.
Since an organization that is reliably experiencing difficulty meeting its fleeting obligation is at a
higher danger of insolvency, liquidity ratio are a decent measure of whether an organization will
have the capacity to serenely proceed as a going concern.
Any kind of ratio examination ought to be taken a gander at inside of the right connection. Case
in point, speculators ought to dependably take a gander at an organization's ratio against those of
its rivals, its area and its industry and over a time of quite a while. In this present issue's
Fundamental Focus, we research liquidity ratio utilizing time-arrangement investigation,
aggressive examination and part and industry examination. There are three ratios can be used to
measure liquidity risk for Air Asia which is current ratio, quick ratio and cash ratio.
1. Current Ratio = Current Assets Current Liabilities
2. Quick Ratio = (Cash & Equivalents + Short-Term Investments + Accounts Receivable)
Current Liabilities
3. Cash Ratio = Cash & Equivalents Current Liabilities

year
Current asset (RM billion)
Current liability (RM billion)
Current ratio

2009
2.87
1.84
1.5598

2010
3.54
2.19
1.6164

2011
3.4
2.39
1.4226

2012
2.92
2.57
1.1362

2013
2.53
4.11
0.6156

Current ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

Category 1
2009

2010

2011

2012

2013

2.4 Operational risk

Operational risk is the risk that is not inalienable in money related, deliberate or extensive risk. It
is the risk staying subsequent to deciding financing and methodical hazard, and incorporates risk
coming about because of breakdowns in inward methodology, individuals and frameworks.
There are many ratio analysis can be used to identify this risk such as operating expense ratio,
account receivable turnover, inventory turnover, account payable turnover and total asset
turnover.
Operating expense ratio = operating expenses / total revenue
Account receivable turnover = net sales / average account receivable
Inventory turnover = cost of sales / average inventory
Account payable turnover = cost of sales / average account payable

year

2010

2011

2012

2013

2014

Cost of sales (m)

2798.3

3216.0

3641.1

3814.5

3992.4

average account payable

912.9

1137.2

666.1

745

773.1

Account payable turnover

3.0653

2.8280

5.4663

5.1201

5.1641

account payable turnover

6
5
4
3
2
1
0

account payable turnover

2010

2011

2012

2013

2014

3.0 Air Asia in managing risk

There is two way Air Asia in managing their risk. First is hedging. In the finance literature,
operational hedging is the course of action that hedges the firms risk exposure by means of non-

financial instruments, particularly through operational activities (Boyabatli & Toktay, 2004).
Secondly is derivative.
FRS139 is a bookkeeping standard presented in Malaysia with impact from 1 January 2010
which is related with representing subsidiary money related instruments. On account of AirAsia,
this standard applies to intrigue rate swaps, forward cash trades and fuel supporting exchanges.
The presentation of FRS139 carried Malaysia into line with International Accounting Standards,
which have been embraced by most of the world's created countries including all European
nations, Singapore and Australia (AirAsia, 2011).
FRS139 obliges that all subsidiary money related instruments are indicated on the organization
accounting report at their fair value' at every reporting date, with reasonable worth comparing to
'market value'. Changes in reasonable quality between every reporting date are reflected in the
organization salary proclamation either as an addition, where there is an increment in reasonable
worth, or an expense, where there is a lessening in reasonable quality. These progressions are
thought about the detail 'Different losses/ (additions) net' furthermore as a major aspect of
'finance Income' or 'Finance Costs' relying on the subsidiary's way. These adjustments in
reasonable worth are bookkeeping sections just and are particular from the bookkeeping passages
made on settlement of the money related instrument which happen dynamically amid the
contractual existence of the instrument. A significant number of the monetary instruments to
which AirAsia is a gathering have a long contractual life as they identify with the airplane's
financing. (AirAsia, 2011)
4.0 Conclusion and recommendation
There is five steps in managing risk which is identified the risk, measuring the risk, selecting the
risk managing technique, implementing the selected risk technique and monitoring and reporting
the implementation.
The initial steps in viable credit risk administration is to pick up a complete comprehension of an
organization general credit risk by survey risk at the individual, client and portfolio levels. While
organization make progress toward a coordinated comprehension of their danger profiles, much
data is frequently scattered among specialty units. Without an exhaustive danger evaluation,
organization have no chance to get of knowing whether capital holds precisely reflect dangers or

if advance misfortune saves enough cover potential transient credit losses. Powerless
organization are focuses for close investigation by controllers and financial specialists, and in
addition weakening losses.
For the way to decreasing advance losses and guaranteeing that capital holds properly mirror the
danger profile is to execute an incorporated, quantitative credit hazard arrangement. This
arrangement ought to get organization up and running rapidly with straightforward portfolio
measures. It ought to additionally oblige a way to more modern acknowledge risk administration
measures as requirements advance. The arrangement ought to include:
-

Better model administration that compasses the whole displaying life cycle.
Real-time scoring and breaking points observing.
Robust anxiety testing abilities.
Data representation capacities and business insight devices that get vital data under the
control of the individuals who need it, when they require it

5.0 References
AirAsia. (2011). press release - Sustained profitability at operational level.
Boyabatli, O., & Toktay, L. B. (2004). Operational Hedging: A Review with Discussion.
Singapore: Research Collection Lee Kong Chian School of Business.
Horcher, K. A. (2004, June 1). Credit Risk Management: New Techniques, Part 1. Professional
Development Network, pp. 1-4.