FIN30014/HBC343N Financial Risk Management/ Advanced Finance
Assignment, Semester 2, 2016
Due Date: On or before 5pm Friday, 4 November, 2016
Salvatore Resources NL (SRN) is an Australian mining company primarily engaged in the extraction and processing of gold and copper in Western Australia. SRN has financed the construction cost of some of its recent mine developments with a syndicated bank loan of US$600 million. This loan facility is for ten years and is a floating rate loan priced at 2.5% above the 3 month US dollar LIBOR rate. The next loan rollover date is 30 June
2017. SRN also has a Euro variable rate debt of EUR200million.
SRN’s forecast monthly production (scaled down for ease of calculations in the requirements) for the March and June quarters, 2017 is presented in the following table.
Month Gold (Ounces) Copper (Pounds)
January 2017 2,000 500,000
February 2017 2,200 700,000
March 2017 2,400 600,000
April 2017 2,400 600,000
May 2017 2,600 700,000
June 2017 2,600 700,000
SRN’s sales of both gold and copper are denominated in US dollars. SRN is unsure of the direction of the financial variables and have appointed you to identify the risks and recommend suitable hedges.
You have been commissioned by SRN’s Board of Directors to prepare a business report to address the following issues:
(a) To identify the financial risk exposures faced by SRN. In this section you MUST discuss the outlook for each variable and the related risk exposure with all relevant. You need to provide adequate justifications.
(b) To make recommendations to SRN’s management on whether to hedge any, all or part of the financial risk exposures that you outlined in part (a) above. You MUST fully explain your recommendations.
(c) To make recommendations to SRN’s management on whether to use options and/or futures (and forwards) to implement the hedges that you have recommended in part (b) above. You MUST fully explain your recommendations.
Note: (It is possible that you may elect not to hedge any exposures. If you have chosen this answer path, your answer response for the part (b) will be mark based on combined of part (b)’s and (c)’s marks.
(d) Independent from your parts (b)’s and (c)’s answers; and assumed that SRN wishes to hedge 50% of its November and December production of copper with exchange traded futures or options. Provide a schedule that shows
i. the risk you are hedging against
ii. the number of futures and/or option contracts that would be required
iii. the contract months used
iv. whether you are going long or short futures and, in the case of options whether you are buying puts or calls
v. the option strike prices that you recommend and the premium costs involved.
(Note: in responding to part (d) you only have to implement the hedge and you are not required to calculate any hypothetical future outcome). In this section you MUST show all calculations and include your responses in a table format.
(e) Independently of your responses to part (d), above, set up two options strategies to implement hedging for SRN’s June production of copper. SRN’s management has expressed their desire to retain the upside benefits of the option strategies with minimum option premiums. You are expected to suggest the option strategies that have some commercial value. You should also describe to SRN’s management any possible adverse outcomes that your suggested strategies may pose to SRN.
(4 + 3 + 3 + 2 + 3 = 15 marks)
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. To avoid the penalties associated with a late submission you should commence thinking about the issues and researching for this assignment as soon as possible.
1. You MUST submit the assignment via Turnitin. Check the draft in the “draft submission” link before doing the final submission.
2. A hard copy should also be submitted in class or to the assignment box –
Level 3 block B, Swinburne Sarawak Campus.
3. An assignment cover sheet must be attached to your submission (see blackboard for assignment cover sheet).
4. Your submission is to take the form of a business report. It should be concise, spell-checked for obvious errors, 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)
5. The assignment should be up to 2500 words, excluding the executive summary, references and appendices.
6. You must do this assignment in a pair (groups of 3 will not be permitted under ANY circumstances).
7. E-mailed assignments will not be accepted, the assignment must be submitted via Turnitin.
Make sure that you allow yourself adequate time to complete this report because all rules will be strictly enforced and without exception.
Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources that are considered academically reputable.
Extensions or late submissions - Unless an extension has been approved, you cannot submit an assessment after the due date. If this does occur, you will be penalised 10% of the assessments worth for each calendar day the task is late up to a maximum of 5 days. After 5 days a zero result will be recorded.
Extensions for Assignment will not be granted without adequate documentation (medical or otherwise) supporting the application for extension.
Plagiarism - Please read the notes on plagiarism in the Unit Outline. Heavy penalties carry for plagiarism.