Yes financial instruments are designed to stabilise the balance sheet however there are a couple of reasons why CER is overhedged with respect of its FX equity hedge and FX income hedge.
the FX equity hedge is overhedged for predominately two reasons:
- US assets have been written down considerably in the past 18 months and - CER has been forced to impair its SuperLLC investment as under the JV agreement, CER is liable for any negative equity held in SuperLLC by the other JV partners to the extent of the equity CER invested in Super.
FX income is overhedged as:
- Distributions from SuperLLC will be quarantined until at least Dec 2011. When CER hedged income from Super a few years back, little it did know that Super income would be quarantined from Dec2007 until Dec2010.
Luckily the weighted average hedging rate is 0.69 so therefore when the hedging contracts mature, CER will realise an "FX receivable".
- Also CSF income had been quarantined from Dec2007 until last week. However, this will no longer be an issue for CER as per last week's announcement.
We therefore have a vested interest in the AUD appeciating in value.
I was told by CER a few months back that the FX equity hedges will be written back between 0.80 and 0.90. These dont begin to mature until Dec2011. The AUD needs to become entrenched in this range between now and then for the FX equity hedges to be written back at no cost.
Yes you make a good point about the value of asset declining however this has no impact on P&L. It only affects the reserve account. Also the value of liabilities in AUD decline also. The market we are currently in is more interested in the liabilities figure than assets. If they see a lower liabilities figure, then this will improve sentiment.
Hope that has answered your queries. have a read of the CER 31 Dec 08 presentation for more info also.
Cheers
CER Price at posting:
9.5¢ Sentiment: Buy Disclosure: Held
