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Background of the company Telstra Corporation Limited is a telecommunications and media company, which is a leading provider of mobile phones, mobile devices, home phones, broadband internet and operating telecommunications networks in Australia. Telstra’s goal is to be one of the most admire, respected and trusted telecommunication companies in the world with their four strategic priorities of improving customer satisfaction, retaining and growing our customer numbers, simplifying the business, and developing new growth businesses (Telstra Corporation Limited, 2012).

With its successful in Australia, Telstra has also operates entities in other foreign countries. Beside some offshore controlled entities that provide managed network services, international data and satellite across Asia Pacific, China, India, Europe and Africa, Telstra also has two largest telecommunications provider and mobile operator in New Zealand and Hong Kong, which are TelstraClear and CSL New World (Telstra Corporation Limited, 2010).

According to the latest Telstra’s annual report (2012), the company’s strategy will be continue to provide customers and shareholders an opportunity to gain more benefits, with an increased focus on customer service leading to strong customer retention and acquisition in the next few years. 2. 0 Telstra’s financial analysis 3. 1 Summary of key revenue and profit data Telstra Corporation Limited| 2008 ($m)1| 2009 ($m)2| 2010 ($m)3| 2011 ($m)4| 2012 ($m)5| Sales revenues| 24,657| 25,371| 24,813| 24,983| 25,232| Other revenues| 171| 136| 104| 110| 136|

Total revenues| 24,828| 25,507| 24,917| 25,093| 25,368| Profits before tax| 5,140| 5,658| 5,538| 4,557| 4,934| Table 1. Key revenue and profit data of Telstra Corporation Limited As can be clearly seen in Table 1, the revenues of Telstra Corporation Limited have risen to $25. 5 billion in 2009 and fall down to $24. 9 billion in the next year. According to the annual report of Telstra Corporation Limited (2010), the decline in revenues of the year 2010 has been driven by lower usage across all calling categories and the continued dall in SIOs from acceleration of retail customer loss.

However, in 2011, the revenues started to rise again and have increased by 1. 1% to $25. 4 billion in 2012 (Telstra Corporation Limited, 2012). On the other hand, the report also shown that the company’s profit has fallen to $4. 5 billion in 2011 and started to increase by 8. 3% to $4. 9 billion in 2012. However, this result is still lower than the profits that the company got in the three years 2008 – 2010, which are over $5 billion. 3. 2 Summary of Foreign Revenues Foreign revenues| 2008 ($m)1| 2009 ($m)2| 2010 ($m)3| 2011 ($m)4| 2012 ($m)5| Hong Kong (CSL New World)| 917| 989| 770| 814| 860|

New Zealand (Telstra Clear)| 562| 547| 529| 516| 501| Other offshore controlled entities| 346| 390| 293| 299| 453| Total foreign revenues| 1,825| 1,926| 1,592| 1,629| 1,814| Table 2. Foreign revenues of Telstra Corporation Limited | 2008| 2009| 2010| 2011| 2012| Total foreign revenues as %| 7. 3%| 7. 5%| 6. 3%| 6. 4%| 7. 1%| Table 3. Total foreign revenues as percentage Referring to Table 2 above, we can clearly see that the revenues of CSL New World, TelstraClear and other offshore controlled entities had decline significantly in 2010. In percentage term, the revenue of foreign entities decreased by 6. % in 2010 and started to rise slowly in the next two years. According to the annual report of Telstra Corporation Limited (2010), the revenue performance of CSL New World was negatively impacted by lower local voice yields and reduced international roaming driven by lower outbound travel among CSL New World’s customer base since the beginning of the Global Financial Crisis (GFC). However in 2011, the revenues have shown signs of improvement due to the recovery of Hong Kong’s economy while TelstraClear revenue continued to decrease slightly.

On the other hand, revenue from other offshore controlled entities has declined by $97 million in 2010 due to the foreign currency movements and increased by $6 million in the year after (Telstra Corporation Limited, 2011). 3. 3 Rate of exchange and trend of statistic Rates of exchange1| 2008| 2009| 2010| 2011| 2012| New Zealand (NZD)| 1. 264| 1. 244| 1. 230| 1. 295| 1. 276| Hong Kong (HKD)| 7. 503| 6. 237| 6. 668| 8. 248| 7. 882| Table 4. Rates of exchange Table 4 above has clearly shown that between the years 2008-2012, the New Zealand dollar has depreciated from NZD1. 264 to NZD1. 76 to buy an Australian Dollar, espacially in 2011. According to the Reserve Bank of New Zealand (2012), New Zealand Dollar depreciate is because of its already difficult economic environment being further impact by the Christchurch earthquakes. Therefore, although the revenue of TelstraClear in New Zealand has increased by 1. 4% from NZ$664 million to NZ$673 million in 2011, but the revenue in Australian Dollar still decrease by (2. 5)% from A$529 million to A$516 million (Telstra Corporation Limited, 2011). On the other hand, the Hong Kong dollar also depreciated from HKD7. 503 to HKD7. 82 to buy an Australian Dollar between the years 2008-2012. In 2011, the Australian Dollar significantly appreciated against the Hong Kong Dollar with AUD1. 00 = HKD8. 248. Referring to the annual report of Telstra Corporation Limited (2011), the revenue in Hong Kong Dollar, which is their local currency, has grew by 19% from HK$5,264 million to HK$6,262 million in 2011 compared to the prior year. Despite the year on year change in the HKD/AUD exchange rate, the revenue of CSL New World in Australian Dollar still rise significantly due to the growth of customer numbers (Telstra Corporation Limited, 2011).

Telstra manage the translation foreign exchange risk with forward foreign currency contracts, cross currency swaps and/or borrowings denominated in the currency of the entity concerned (Telstra Corporation Limited, 2012). They currently hedge their net investments in TelstraClear Limited and Hong Kong CSL Limited in New Zealand Dollar and Hong Kong Dollar spectively. Although there is some volatility in profit or loss from exchange rate, there is no significant impact on profit or loss from foreign currency movements. 3. 0 Australia versus Hong Kong

Australia| 2008| 2009| 2010| 2011| 2012| Economic growth rates1| 2. 2| 1. 5| 2. 4| 2. 3| 3. 3| Interest rates2| 7. 25| 3. 0| 4. 5| 4. 75| 3. 50| Inflation rates3| 3. 7| 2. 1| 2. 7| 3. 1| 2. 0| Hong Kong| | | | | | Economic growth rates4| 2. 3| -2. 6| 7. 1| 5. 0| 1. 8| Interest rates5| 3. 50| 0. 50| 0. 50| 0. 50| 0. 50| Inflation rates6| 4. 3| 0. 6| 2. 3| 5. 3| 3. 8| Table 5. Australia vs Hong Kong As can be clearly seen in Table 5, the averaged economic growth in Australia between 2008 and 2012 was 2. 3%, which is slightly lower than Hong Kong’s averaged economic growth of 2. %. According to Table 4 in section 2. 3, over the same period, the foreign exchange rates of Hong Kong Dollar increased from AUD1. 00 = HKD7. 503 to AUD1. 00 = HKD7. 882. As a result, Hong Kong dollar is depreciated against Australia Dollar. This movement in currency value is not consistent with the theory that Eun and Resnick (2012) has states, which is higher income growth will increased demand and result in currency appreciation. On the other hand, the average interest rate in Australia is 4. 6% and is higher than Hong Kong, which is only 1. %. According to Eun and Resnick (2012), higher in interest rate will generally lead to an increase in demand by investor. As a result, the Australia currency will be appreciated against Hong Kong currency. This result has reflected exactly what has been analysed above in both countries currency. In Australia, the average inflation rate between the years 2008-2012 is 2. 72%. While in Hong Kong, the average inflation rate over the same period is 3. 26%. It can be clearly seen that the inflation rate of Hong Kong is higher than Australia.

Eun and Resnick (2012) has stated that, higher inflation rate will lead to the depreciation of currency due to the decrease in demand and selling off local currency to buy cheaper goods elsewhere. In overall, the movement in currency value of Hong Kong and Australia is consistent with the theory that Eun and Resnick stated in International Financial Management (2012). 4. 0 Derivative Financial Instruments 5. 4 Fair value hedges Telstra use fair value hedges to mitigate the risk of changes in the fair value of our foreign currency borrowings from foreign currency and interest rate fluctuations over the hedging period.

Where a fair value hedge qualifies for hedge accounting, gains or losses from remeasuring the fair value of the hedging instrument are recognised within finance costs in the income statement, together with gains and losses in relation to the hedged item where those gains or losses relate to the risks intended to be hedged (Telstra Corporation Limited, 2012). 5. 5 Cash flow hedges Telstra use cash flow hedges to mitigate the risk of variability of future cash flows attributable to foreign currency fluctuations over the hedging period associated with their foreign currency borrowings and on going business activities.

They also use cash flow hedges to hedge variability in cash flows due to interest rate movements associated with some of their domestic borrowings (Telstra Corporation Limited, 2012). 5. 6 Hedges of a net investment in a foreign operation The foreign operations that Telstra invests are exposed to foreign currency risk, which arises when they translate the net assets of their foreign investments from their functional currency to Australian dollars.

Telstra hedge their investments to mitigate exposure to this risk by using forward foreign currency contracts, cross currency swaps and/or borrowings in the relevant currency of the investment (Telstra Corporation Limited, 2012). 5. 0 Reference list Department of Foreign Affairs and Trade (2013). Countries and Regions. Australia Facts Sheet. Retrieved from: http://www. dfat. gov. au/geo/ Department of Foreign Affairs and Trade (2013). Countries and Regions. Hong Kong Facts Sheet. Retrieved from: http://www. dfat. gov. au/geo/ Eun, S. and Resnick, B. 2012) International Financial Management, (6th edn. ) McGraw-Hill, New York. Hong Kong Monetary Authority (2013). Monetary Stability. Interest Rate Adjustment Mechanism. Retrieved from: http://www. hkma. gov. hk/eng/key-functions/monetary-stability. shtml Oanda (2013). Currency Exchange. Retrieved from: http://www. oanda. com/ Reserve Bank of Australia, (2013). Monetary Policy. Interest Rate Decision. Retrieved from: http://www. rba. gov. au/monetary-policy/int-rate-decisions/ Telstra Corporation Limited (2008). Annual Report. Retrieved from: http://www. elstra. com. au/abouttelstra/investor/financial-information/annual-reports/ Telstra Corporation Limited (2009). Annual Report. Retrieved from: http://www. telstra. com. au/abouttelstra/investor/financial-information/annual-reports/ Telstra Corporation Limited (2010). Annual Report. Retrieved from: http://www. telstra. com. au/abouttelstra/investor/financial-information/annual-reports/ Telstra Corporation Limited (2011). Annual Report. Retrieved from: http://www. telstra. com. au/abouttelstra/investor/financial-information/annual-reports/