Assume that your team has recently been appointed as the “Financial Risk Management” team of your organisation. For this purpose, select a company of your choice (companies will be allocated to each group in the first class) and assess how well the company manages its risk by addressing the following issues. Your team has been requested to prepare a report to present to the board.
(a) Identify the primary financial risks that your company is exposed to. For this purpose asset and liability structures need to be considered. In this section you MUST discuss the outlook for the each variable and the related risk exposure.
(b) Make firm recommendations on whether to hedge all, part or none of the financial risk exposures that you identified in part (a) above. You MUST provide some explanation for each of your recommendations. You need to explain whether your hedging strategy is in accordance with the current strategy of the company and the reasons for suggesting this strategy. (You are not required to specify the type of derivative to be used to hedge in response to this question).
(c) To make recommendations on which derivative instruments (for example, options, futures etc.) to use to implement any hedges that you have recommended in part (b) above. Once again, you MUST explain your recommendations. This means that you will need to provide very well researched and fully explained reasons for your responses to part (b). However, it is advised that you make at least some hedge recommendations to make responses to parts (c) and (d) more meaningful]. You are NOT required to propose details of how to implement your hedge recommendations in this part – this is to be done in part (d).
(d) To propose, in accordance with each of your recommendations in (c) above, specific hedging strategies which require you to describe the following:
i. the exposures to be hedged,
ii. what percentage proportion of the exposure is to be hedged,
iii. which derivative(s) are to be used to hedge each exposure, iv. the number of derivative contracts for each hedge,
v. the delivery months (or duration of swaps) for each derivative, and
vi. the prices at the time of making the recommendation - futures prices, option strike prices (including an explanation of the choice of strike price(s)] and the interest rate for currency swaps (you will need to research this- use actual data).
For part (d) you may assume that the hedge horizon is mid-December and that you can use futures and options with a December expiration date for hedging.
Also, in part (d) if you recommend option strategies you may also wish to consider strategies that require the ‘purchase and sale’ of two different options (e.g. an option spread) to reduce the cost of the option strategy.
In this section you MUST show all calculations and include your responses in a table format.
(e) Is the company adequately hedged? Why or why not? What are your recommendations?
(4 + 4 + 3 + 2 + 2 = 15 marks) - Written Report / 5 marks – Presentation (10 mins)
1. You are expected to use actual data for your recommended hedging strategies for requirement (d). Futures and option prices for US contracts can be found at: http://www.cmegroup.com for Australian futures and options at www.sfe.com.au (is now taken over by ASX, so when you type the link it will take you to the ASX website).
2. The price data you use in your assignment will depend on the prices on the date that you access the data. That is, assignments submitted by different students will most likely have different prices.
3. It is your task to research the necessary futures and options contracts and the contract specifications in order to implement your proposed hedge strategies. Assistance will only be provided if it is clear that you have made a substantive research effort.
4. You need to weigh your report content based on the mark allocation.
5. Refer marking guide on blackboard.
6. Answers to each part should be clearly separated. Answers to different parts should NOT be combined under any circumstance.
7. There are no definitive answers for this assignment. Your submission will be evaluated based on the clarity of your report and the quality of your arguments as responses to the requirements.
8. The oral presentation should be a summary of the report and should be presented by only one member of the group.
1. You MUST submit the assignment via turnitin. Check the draft in the “draft submission” link before doing the final submission.
2. Please retain a copy of your work.
3. An assignment cover sheet must be attached to your submission (see blackboard for assignment cover sheet).
4. Note that the allocated marks are a guide for you to decide the weight placed on each part. However, the case study will be marked out of 100 and converted to a mark from 15.
5. Refer marking rubric on blackboard before submission.
6. Your submission is to take the form of a research report. It should be concise, spellchecked for obvious errors, edited, professional and be clearly expressed. The assignment should include the following sections:
Executive Summary, Introduction (brief), body (where you will answer parts to the assignment), conclusion (brief), References, Appendices (optional)
7. The assignment should be a total of 2500 words, excluding the executive summary, references and appendices.
8. You must do this assignment in groups of 4 (groups of 5 will not be permitted under ANY circumstances).
9. E-mailed assignments will not be accepted, the assignment must be submitted via turnitin.
10. Make sure that you allow yourself adequate time to complete this report because these guidelines will be strictly enforced and without exception.
11. Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources that are considered academically reputable.
Plagiarism - Please read the notes on plagiarism in the Unit Outline