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FIN30014 Financial Risk Management Sem 2, 2017 1 FIN30014 Financial Risk Management Assignment – Semester 2, 2017 Assessment Mark: 20% DUE: on or before, 5pm Thursday 12th October, 2017 Background Global Fund Managers Ltd (GFML) is an investment management company. GFML is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under management as at 19th August 2017 include the following: Investment Type Amount Portfolio Beta Representative Index / Security Australian Shares (equities) A$100m 1.15 S&P ASX 200 US Shares (equities) US$55m 1.0 S&P 500 Short term interest securities (ave. maturity 90 days) A$20m 0 Bank Accepted Bills Long term fixed interest securities (ave. maturities 5 years in both countries) A$40m US$30m 0 Relevant bond indices Section I Required: Assume that you are a recently appointed hedge strategist with GFML and that you have been requested to prepare a report for presentation to GFML’s Investment Strategy Committee at its next meeting. You have been specifically requested to address the following issues: (a) To identify and list the specific financial risk exposures faced by GFML with respect to the asset categories listed in the above schedule (please limit the financial risks to what is taught in this unit). Bear in mind that GFML is an Australian based fund and that most of its investors are Australian residents. In this section you MUST discuss the outlook (forecast) for the each underlying variable and the related risk exposure. You need to provide adequate justification for your responses. (b) To make firm recommendations on whether or to hedge all, part or none of the exposures identified in part (a) above. You MUST provide some explanation for each of your recommendations. (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 the hedges that you have FIN30014 Financial Risk Management Sem 2, 2017 2 recommended in part (b) above. Once again, you MUST explain your recommendations. You are NOT required to propose details of how to implement your hedge recommendations in this part. Section II (d) Irrespective of your recommendations in parts b and c above, assume that you need to hedge 50% Australian and US equities exposures. Provide a schedule that shows the following: a. the risk b. the exposures to be hedged, c. which derivatives are to be used, d. the number of derivative contracts for each hedge, e. the contract months, and f. the prices at the time of making the recommendation. (Note: in responding to part (d) you only have to implement the hedge – you do not need to calculate any hypothetical future outcome). In this section you MUST show all calculations and include your responses in a table format as presented below. Please include calculations of the number of contracts in the appropriate cell Risk Exposure to be hedged Proportion of the exposure to be hedged Derivatives i.e. Futures/or Options etc. No. of Contracts Contract months Long/short/ Put/Call Strike Prices, premiums/Futures prices etc. FIN30014 Financial Risk Management Sem 2, 2017 3 (e) Independently of your responses to part (d), propose TWO option “spread or combination strategies” that involve more than one option contract for the Australian equities portfolio. GFML’s management has expressed a desire to retain some of the upside benefits that hedging with options can permit but without paying a lot of money in option premiums. That is, your recommended strategies should provide a “reasonably effective” hedge but keep the option premium payment limited to a “reasonable amount” (it does not have to be zero!). As the strategist, it is up to you what you consider “reasonable” for this purpose. You must also describe the benefits and possible shortcomings of your proposed option strategies. You must use actual option data to illustrate your option strategies and to hypothetically demonstrate their benefits and shortcomings. For illustrative purposes, assume that the Australian ASX200 at the date of expiry of the option contracts was (a) approximately 10% lower than the level at the time you implemented the strategy, and (b) approximately 5% higher. (5 + 4 + 4 + 3 + 4 = 20 marks) Notes 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.asx.com.au 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. See marking rubric on page 5. 5. Answers to each part should be strictly separated. Answers to different parts should NOT be combined under any circumstance. 6. 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. 7. The assignment is to be done in pairs. You cannot submit an individual assignment without the consent of your tutor. If you dso, you will be penalised. 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 Submission Requirements 1. You MUST submit the assignment via turnitin. Check the draft in the “draft submission” link before doing the final submission. 2. No hardcopy is required. FIN30014 Financial Risk Management Sem 2, 2017 4 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 a total of 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 circumstance). 7. E-mailed assignments will not be accepted, the assignment must be submitted via turnitin. 8. Make sure that you allow yourself adequate time to complete this report because these guidelines will be strictly enforced and without exception. 9. Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources that are considered academically reputable. 10. If you have any issues with your assignment partner please inform your tutor 3 weeks before the assignment is due. Plagiarism – Please read the notes on plagiarism in the Unit Outline FIN30014 Financial Risk Management Sem 2, 2017 5 FIN30014 Marking Rubric: Assignment (Pairs) Group Members: 1. 2. CRITERIA Unacceptable Acceptable Exemplary Mark 1. Introduce the topic and provide background. 2 marks Introduction unclear and little background information. 0 Sound introduction and key background details provided. 1 Coherent introduction and thorough background information. 2 2. Relevant issues are identified, analysed and supported with consistent arguments and data/evidence. 12 marks Key issues not identified or identified inappropriately. Arguments are poorly organised / difficult to follow. No or incorrect supporting evidence. 0-5 Appropriately identifies and discusses key issues. Arguments are consistent, well organised and supported with data/evidence. Generally logical flow and easy to follow. 6-9 Extensively identifies and discusses all relevant issues. Arguments are presented in a superior manner, well integrated and thoroughly supported with up-to-date evidence. 10-12 3. Structure and presentation consistent through whole report. 2 marks Poorly organised. Few headings. No table of contents or executive summary. Weak flow. Little attention to grammar, spelling and expression. 0 Appropriate structure and well organised analysis. Table of contents and executive summary provided Appropriate use of expression and minimal spelling errors. Good editing. 1 Professional structure, logical analysis. Executive summary accurate and concise. Superior presentation of table of contents, tables, figures, and appendices. Professionally edited. 2 4. Evaluate alternatives, draw conclusions/ make recommendations. 2 marks Weak/inconsistent connections between analysis and conclusions. Introduces new arguments inappropriately. 0 Logical/consistent connections between analysis and conclusions. 1 Superior conclusions drawn using all relevant analysis. Conclusions are consistent, realistic and professional. 2 5. Effective literature search and referencing. 2 marks Weak literature research. Few articles cited. Sources lack authority or are not current. Inconsistent or incorrect use of Harvard referencing. 0 Evidence of depth and breadth of relevant, authoritative and current research (at least 8 sources, at least 2 types of literature). Consistent use of Harvard referencing. 1 Extensive use of academically sound research sources (at least 12 sources, at least 3 types of literature) that is current and reliable. Correct Harvard referencing for all in text citations and reference list. 2 Marking: 0 – 9: Unacceptable; Does not meet expectation 10 – 15: Acceptable; Meets expectation 16– 20: Exemplary; Exceeds expectations TOTAL MARK: __________/20______

FIN30014 Financial Risk Management Sem 2, 2017
1
FIN30014 Financial Risk Management
Assignment – Semester 2, 2017
Assessment Mark: 20%
DUE: on or before, 5pm Thursday 12th October, 2017
Background
Global Fund Managers Ltd (GFML) is an investment management company. GFML is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under management as at 19th August 2017 include the following:
Investment Type
Amount
Portfolio
Beta
Representative
Index / Security
Australian Shares (equities)
A$100m
1.15
S&P ASX 200
US Shares (equities)
US$55m
1.0
S&P 500
Short term interest securities (ave. maturity 90 days)
A$20m
0
Bank Accepted Bills
Long term fixed interest securities (ave. maturities 5 years in both countries)
A$40m
US$30m
0
Relevant bond indices
Section I
Required:
Assume that you are a recently appointed hedge strategist with GFML and that you have been requested to prepare a report for presentation to GFML’s Investment Strategy Committee at its next meeting. You have been specifically requested to address the following issues:
(a) To identify and list the specific financial risk exposures faced by GFML with respect to the asset categories listed in the above schedule (please limit the financial risks to what is taught in this unit). Bear in mind that GFML is an Australian based fund and that most of its investors are Australian residents. In this section you MUST discuss the outlook (forecast) for the each underlying variable and the related risk exposure. You need to provide adequate justification for your responses.
(b) To make firm recommendations on whether or to hedge all, part or none of the exposures identified in part (a) above. You MUST provide some explanation for each of your recommendations. (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 the hedges that you have
FIN30014 Financial Risk Management Sem 2, 2017
2
recommended in part (b) above. Once again, you MUST explain your recommendations. You are NOT required to propose details of how to implement your hedge recommendations in this part.
Section II
(d) Irrespective of your recommendations in parts b and c above, assume that you need to hedge 50% Australian and US equities exposures. Provide a schedule that shows the following:
a. the risk
b. the exposures to be hedged,
c. which derivatives are to be used,
d. the number of derivative contracts for each hedge,
e. the contract months, and
f. the prices at the time of making the recommendation.
(Note: in responding to part (d) you only have to implement the hedge – you do not need to calculate any hypothetical future outcome). In this section you MUST show all calculations and include your responses in a table format as presented below.
Please include calculations of the number of contracts in the appropriate cell
Risk
Exposure to be hedged
Proportion of the exposure to be hedged
Derivatives i.e. Futures/or Options etc.
No. of Contracts
Contract months
Long/short/
Put/Call
Strike Prices, premiums/Futures prices etc.
FIN30014 Financial Risk Management Sem 2, 2017
3
(e) Independently of your responses to part (d), propose TWO option “spread or combination strategies” that involve more than one option contract for the Australian equities portfolio. GFML’s management has expressed a desire to retain some of the upside benefits that hedging with options can permit but without paying a lot of money in option premiums. That is, your recommended strategies should provide a “reasonably effective” hedge but keep the option premium payment limited to a “reasonable amount” (it does not have to be zero!). As the strategist, it is up to you what you consider “reasonable” for this purpose. You must also describe the benefits and possible shortcomings of your proposed option strategies. You must use actual option data to illustrate your option strategies and to hypothetically demonstrate their benefits and shortcomings. For illustrative purposes, assume that the Australian ASX200 at the date of expiry of the option contracts was (a) approximately 10% lower than the level at the time you implemented the strategy, and (b) approximately 5% higher.
(5 + 4 + 4 + 3 + 4 = 20 marks)
Notes
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.asx.com.au
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. See marking rubric on page 5.
5. Answers to each part should be strictly separated. Answers to different parts should NOT be combined under any circumstance.
6. 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.
7. The assignment is to be done in pairs. You cannot submit an individual assignment without the consent of your tutor. If you dso, you will be penalised.
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
Submission Requirements
1. You MUST submit the assignment via turnitin. Check the draft in the “draft submission” link before doing the final submission.
2. No hardcopy is required.
FIN30014 Financial Risk Management Sem 2, 2017
4
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 a total of 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 circumstance).
7. E-mailed assignments will not be accepted, the assignment must be submitted via turnitin.
8. Make sure that you allow yourself adequate time to complete this report because these guidelines will be strictly enforced and without exception.
9. Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources that are considered academically reputable.
10. If you have any issues with your assignment partner please inform your tutor 3 weeks before the assignment is due.
Plagiarism – Please read the notes on plagiarism in the Unit Outline
FIN30014 Financial Risk Management Sem 2, 2017
5
FIN30014 Marking Rubric: Assignment (Pairs)
Group Members: 1. 2.
CRITERIA
Unacceptable
Acceptable
Exemplary
Mark
1. Introduce the topic and provide background. 2 marks
Introduction unclear and little background information.
0
Sound introduction and key background details provided.
1
Coherent introduction and thorough background information.
2
2. Relevant issues are identified, analysed and supported with consistent arguments and data/evidence.
12 marks
Key issues not identified or identified inappropriately. Arguments are poorly organised / difficult to follow. No or incorrect supporting evidence.
0-5
Appropriately identifies and discusses key issues. Arguments are consistent, well organised and supported with data/evidence. Generally logical flow and easy to follow.
6-9
Extensively identifies and discusses all relevant issues. Arguments are presented in a superior manner, well integrated and thoroughly supported with up-to-date evidence.
10-12
3. Structure and presentation consistent through whole report.
2 marks
Poorly organised. Few headings. No table of contents or executive summary. Weak flow. Little attention to grammar, spelling and expression.
0
Appropriate structure and well organised analysis. Table of contents and executive summary provided Appropriate use of expression and minimal spelling errors. Good editing. 1
Professional structure, logical analysis. Executive summary accurate and concise. Superior presentation of table of contents, tables, figures, and appendices. Professionally edited. 2
4. Evaluate alternatives, draw conclusions/ make recommendations.
2 marks
Weak/inconsistent connections between analysis and conclusions. Introduces new arguments inappropriately.
0
Logical/consistent connections between analysis and conclusions.
1
Superior conclusions drawn using all relevant analysis. Conclusions are consistent, realistic and professional.
2
5. Effective literature search and referencing.
2 marks
Weak literature research. Few articles cited. Sources lack authority or are not current. Inconsistent or incorrect use of Harvard referencing.
0
Evidence of depth and breadth of relevant, authoritative and current research (at least 8 sources, at least 2 types of literature). Consistent use of Harvard referencing.
1
Extensive use of academically sound research sources (at least 12 sources, at least 3 types of literature) that is current and reliable. Correct Harvard referencing for all in text citations and reference list. 2
Marking: 0 – 9: Unacceptable; Does not meet expectation
10 – 15: Acceptable; Meets expectation
16– 20: Exemplary; Exceeds expectations TOTAL MARK: __________/20______

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