JOCELYN TAN HUI YING 18WBR09382

INDIVIDUAL

Sime Darby Berhad is Malaysia’s largest conglomerate and also known as one of the
biggest conglomerates in Southeast Asia. The company has more than 270 operating companies
in 23 countries, the company has the widest range of overseas operations in Hong Kong,
accounting for 25% of the company's revenue, while Singapore accounts for 14% and Australia
accounts for 11%. In addition, the company accounts for 38% of its domestic revenue.

The company has a wide range of activities includes a broad scope of industries, but its
core business is plantation, which includes oil palm, also known as the world's largest palm oil
producer, accounting for 6% of global palm oil (CPO) production and the company's original
business is rubber, tire manufacturing, heavy equipment and car distribution, real estate
development, power generation and engineering services. In addition, the company also operates
other businesses involving paint manufacturing, refrigeration product development, tourism and
tourism services, hospitals and golf courses.

In the year of 2015, Sime Darby had made profit revenue of more than RM43.7 billion.
This company was listed on the Main Board in the Bursa Malaysia with the code of MYX:4197
and on 30 June 2015, the company has a market value of RM52.9 billion, which their operations
were conducted in 26 countries and 4 regions. Furthermore, the government has established close
relationships with Sime Darby to support the economy. The most important and the largest
proportion of the company's business growth is plantation sectors compared to other sectors.

Sime Darby's vision is to lead the multinational companies to provide sustainable value in
the future, and provide a more sustainable development opportunity for businesses to grow. The
company's mission is to develop a stable portfolio to maintain its business, good corporate
control and ethics, superior financial performance and enhanced environmental potential.
Risk exposure to Sime Darby

Assuming that I am a member of the top management among one of the listed company
in Bursa Malaysia, I would like to expect that the company I had chosen which is Sime Darby
Berhad, may face various risk and yet all the risks exposed can be reduce by the derivative
contract in the market.

The first risk that exposed is interest rate risk. If there is any change on the interest risk,
the investment value will change simultaneously (Coryn and Mays, 1997). It has four main areas,
namely the cost of interest expense or income change, the impact of changes in the business
environment on business presentation, the impact on multinational corporation-initiated pension
plans, and the change in market value of pending debt. Sime Darby interest rate risk was comes
from its borrowings and financial institution deposits. The group manages its interest rate risks
on deposits by placement on varying maturities and the interest rate risk of its long-term
borrowings by using derivatives such as interest rate swaps for a mixture of fixed and floating
rate debt. For examples, the percentage of fixed-rate borrowings in the Group's continuing
operations before and after interest rate swaps as a percentage of total borrowings was 1.3% and
7.3% as at 30 June 2018 respectively. Compare to 2017, the percentage was 23.4% and 40.5%
respectively. Hence, the details of the fixed rate borrowing percentage over total borrowing are
shown in the (appendix 1.1).

The second risk exposure to the company is foreign exchange rate risk. The company
foreign exchange risk represents the unfavorable exchange rate changes of the trade receivables
and payables, foreign currency denominated deposits and borrowings in foreign currency
positions, and the functional currency is not the retained profits of Malaysian Ringgit overseas
subsidiaries. Sime Darby does not have any foreign currency dominate in the financial assets
held for sales and liabilities associated with the assets on 30 June 2018 (appendix 1.2). If the
monetary assets or the liabilities not dominated in the functional currency of the hedged
subsidiary are not hedged, there is a foreign exchange risk that affects the income statement. For
example, from the borrowing part of June 2018, of the RM 960 million borrowings dominated in
US dollar, which has been hedged against derivatives by RM 217 million and RM 427 million
has been designated as a hedging instrument for accounts receivable and expected sales
(appendix 1.2.1).
 Furthermore, the third risk exposure to the company is liquidity and cash flow risk.
Liquidity and cash flows risk is the risk that a company will face financial difficulties when it
matures. Sime Darby maintains a cautious loan policy as it designed to maintain sufficient cash
for all cash flow needs, manage their company debt and investment portfolios during the relevant
time period, obtain a diversified source of funding, and maintain sufficient credit lines to provide
sufficient liquidity buffer. As at June 30 2018, the company’s total cash and cash equivalents
were RM1,629 million while in 2017, the total cash and cash equivalents were RM1,994 million,
including cash on hand, bank deposits and cash is held under the housing development account,
deducting bank overdrafts. They believes its contractual obligations, including the obligations
disclosed in the commitments and contingent events in (appendix 1.3) , it can be satisfied from
existing cash and investments, operating cash flows, available credit lines and other financing
that the Group reasonably expects to be available when needed.

Risk exposure that able to hedge by using derivatives contracts

First of all, hedging means taking actions that are expected to generate a specific type of
risk, which is exactly the opposite of the actual risks that the company has exposed. The risk
exposure that I am able to hedge is foreign exchange risk by using derivatives of future contract.
Future contract is a contract with the seller at the time seller and the buyer signed a contract with
agreed price of goods or delivery of securities at a specific time in the future. Basically, future
and forward contracts are similar, both of them are the agreement of future exchange assets and
cash and the price is currently determined. In addition, future contracts are standard, can be
negotiate, and able to trade in future transactions to make them more liquid than forward
contracts so it is more suitable for Sime Darby.

Hedger and speculator use future contract to cover their loss and reduce risk. Hedge in
future will not decrease the risk but it will help to transfer the unexpected changing of price risk
or the interest rate from one party to another one. After the future and forward contract had
made, there will have price changing in the underlying assets, hence one party will benefited
from another party’s interest. If the asset price rises, the buyers will gains at the seller expense so
the seller can sell higher than the market price. If the asset price falls, seller wills gains at the
buyer expense. This means that the buyer needs to pay higher price as they can buy at lower
price according to the market price. In addition, investors will take advantage of future contracts
to conjecture their views on the market path as they trust they will have superior info than market
price by using this derivative. Foreign loans are usually denominated in the currency of the
lender. When the loan must be repaid in a foreign currency, it will introduce new risk factors.
This is because if the exchange rate changes, different dollar equivalent must be repaid in foreign
currency. For hedging "foreign exchange risk", certain companies trading in foreign exchange
futures contracts. These are cognate to financial futures, except for certain specified instead of a
specific foreign currency debt instruments in futures contracts.

Illustration and payoff

Below show the information that I had found to hedge the derivative securities.

Current inventory = RM 393, 759, 000 tones (appendix 1.4)

CPO contract size = 25 tons per contract

Spot price of CPO = RM1867

3-month CPO = RM2062 (appendix 1.4.1)

inventories
Number of Contract =
contract ¿ spot price

393 ,759 , 000

= 25 ×1867

= 8436 contracts

90
Storage cost = 8436 contracts × × 25 tons × 30
360

= RM 1, 581, 750
Scenario 1 : Assumes that the CPO price drops by 20% to RM1493.60

100% - 20% = 80%

RM1867 x 80% = RM1493.60

Action Position Day Position at Maturity Profit/Loss (RM)

Long inventory RM 1867 x 25 tons x 8436 RM 1493.60 x 25 tons x

contracts 8436 contracts (RM 78, 750, 060)
= (RM 393, 750, 300) = RM 315, 000, 240

Short 55 FCPO RM 2062 x 25 tons x 8436 RM 1493.60 x 25 tons x

contracts 8436 contracts RM 119, 875, 560
= RM 434, 875, 800 = (RM 315, 000, 240)
Less storage cost ( RM 1, 581, 750)

Net Profit RM 39, 543, 750

Scenario 2 : Assumes that the CPO price rise 20% to RM2204.40

100% + 20% = 120%

RM1867 x 120% = RM 2204.40

Action Position Day Position at Maturity Profit/Loss (RM)

Long inventory RM 1872 x 25 tons x RM 2204.40 x 25 tons x

8436 contracts 8436 contracts RM 71, 157, 660
= (RM 393, 750, 300) = RM 464, 907, 960

Short 55 FCPO RM 2062 x 25 tons x RM 2204.40 x 25 tons x

8436 contracts 8436 contracts (RM 30, 032, 160)
= RM 434, 875, 800 = (RM 464, 907, 960)
Less storage cost ( RM 1, 581, 750)

Net Profit RM 39, 543, 750

From the both scenario above shows that whether there is an increase or decrease in the price of
the Crude Palm Oil (CPO), the portfolio still will have a profit of RM 39, 543, 750 if we hedge
the portfolio.