You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices.
EFB344 Assignment - Part A Due: Tuesday, 11th of May 2021 at 11:59pm Weight: 30% of the overall unit Hedging Risk Analysis Overview You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices. Description – Question 1 (6 Marks) On January 1st, 2017, your first client established a portfolio with $1,000,000. They purchased the top 10 Australian shares at the time, giving them proportions according to the market capitalisation. They have recently become concerned about a potential market downturn over the next three months due to a mutated COVID strain and has asked you to set up a hedge for her using SPI200 futures contracts. The contract will be established today (19th February 2021) and should be in place until at least May 19th, 2021. Step 1 – Determine the beta of the portfolio. Data from Yahoo!Finance for the 10 shares in the portfolio as well as the combined portfolio and the ASX200 is provided in the “Assignment_Part_A – Data and Results.xlsx” spreadsheet on Blackboard. Determine the beta of the portfolio. Step 2 – Choose an appropriate futures contract. A snapshot of SPI200 futures prices as of February 19th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Calculate the theoretical value for the contract, state all assumptions and provide the source of your assumptions. Discuss any differences between the theoretical value you have calculated and the listed value of the forward contract. Step 3 – Determine the number of futures contracts required. Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Be sure to state whether they should be ‘buy’ or ‘sell’ positions and hence whether you have used a ‘bid’ or ‘offer’ price. Step 4 – Provide the financial outcome for two (2) potential future scenarios. Determine the financial outcome for your client assuming two different potential future outcomes: 1) an ending SPI200 price of 6000 and 2) an ending SPI200 price of 7500. Description – Question 2 (6 Marks) You second client acts on behalf of a large Australian company who is looking to invest in a major project at the end of the year. This client knows that the company will need to borrow $20,000,000 in December for 3 months through debt instruments and is concerned about an increase in interest rates between now and then. They would like you to set up an interest rate hedge to protect them from any such increases in interest rates. The contract will be established today (19th February 2021) and should be in place until at least December 19th, 2021. Step 1 – Choose an appropriate futures contract. A snapshot of BAB futures prices as of February 19th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Determine the price and yield of the appropriate contract. Step 2 – Determine the number of futures contracts required. Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Determine whether they should be ‘buy’ or ‘sell’ positions. Step 3 – Calculate the total cost of raising the funds for the company under two (2) potential future scenarios. Determine the total cost of raising funds for your client assuming two different potential future outcomes: 1) an ending BAB price of 99.95 and 2) an ending BAB price of 99.85. Description – Question 3 (5 Marks) Your third client works for a large Queensland manufacturing company that is concerned about rises in electricity prices. They would like to lock in the price for the next 6 months to fulfill current orders with an estimated requirement of 150,000 megawatt hours at $35 per megawatt hour (ie. a $5,250,000 commitment). The contract will be established today (19th February 2021) and should be in place until at least September 19th, 2021. Assume that the storage costs for electricity are equal to the convenience yield (u=y) Step 1 – Choose an appropriate futures contract. From the snapshot of QLD Energy futures prices as of February 19th provided, determine which contract should be chosen stating the day of expiry for the contract. Calculate the theoretical value for the contract. Discuss any differences between the theoretical value you have calculated and the listed value. Step 2 – Determine the number of futures contracts required. Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position and whether they should be ‘buy’ or ‘sell’ positions. Step 3 – Provide the ending balances for two (2) potential future scenarios. Determine the financial outcome for your client assuming two different potential future outcomes: 1) an ending BQ price of $40 and 2) an ending BQ price of $30. Include the cost of the hedge. Presenting your results · You are to conduct your analysis in a copy of the Excel file “Assignment_Part_A – Data and Results.xlsx” provided on Blackboard. This file contains a tab with the data for the share portfolio and information relating to the futures contracts as well as a front page for you to summarize your results. All working is to be contained in the subsequent tabs. · The front tab asks you to provide the following: · Your name and Student number · A brief description of what you have done for each client and the potential future outcomes. Be sure to explain any reasons why your hedge may not have been perfect. This should be no more than 300 words. (8 Marks) · Your Excel file should be formatted in a reasonably clear way, so that someone who was given the same job after you would be able to understand your working and replicate what you have done. (5 Marks) Details of Submission · Submit the Excel file through the assignment portal that is available on the EFB344 Risk Management and Derivatives Blackboard site. Please include your name and student number in the file name of your document. Note that the portal will close after the due date and that any assignments that have been granted official extensions must be emailed to Katherine Uylangco (
[email protected]). · Also note QUT’s late assignment policy: Late Assignment + No Extension = 0% Additional Notes and Instructions · Your Excel spreadsheet must contain the formulas that you have used for all calculations (i.e. don’t paste the values for the calculations). · There is an Excel file available on blackboard (called “Excel guide.xlsx”) that includes instructions for how to do several useful things in excel. It also includes some informative examples which might be of interest. Please look at this file. If you have any questions, please ask!!! Criteria and Standards Sheet for Assignment Part A (30 marks) Marking Criteria High Distinction Distinction Credit Pass Fail Mark KS (1.1): Demonstrate and apply integrated discipline (including technical) knowledge Subject Knowledge Demonstrates comprehensive understanding of relevant finance and risk management concepts and techniques. Demonstrates a developed understanding of relevant finance and risk management concepts and techniques. Demonstrates a developed understanding of relevant finance and risk management concepts and techniques but with a few errors. Demonstrates an adequate understanding of relevant finance and risk management concepts and techniques. Insufficient or inaccurate understanding of relevant finance and risk management concepts and techniques. /17 KS (1.2): Apply technical and technological skills appropriate and effective for real world business contexts Excel Use and Formatting Document prepared and formatted according to standards required by the subject. Document generally prepared and formatted according to standards required by the subject, but with a small number of minor errors Document generally prepared and formatted according to standards required by the subject, but contains some errors Frequent errors but displays an ability to prepare and format the document according to standards required by the subject. Fails to format the document to an appropriate standard required by the subject / 5 HO (2.2): Exercise independent judgement and initiative in adapting and applying knowledge and skills for effective problem solving Critical Analysis Provides a clear and well-reasoned justification for the choice of superior risk management model that fully considers the empirical findings. Provides a strong justification for the choice of superior risk management model that is supported by the empirical findings. Provides a solid justification for the choice of superior risk management model which is generally consistent with the empirical findings. Provides only weak justification for the choice of superior risk management model which barely takes account of the empirical findings. Fails to provide a justification for the choice of superior risk management model and/or the arguments are at odds with the empirical findings. /8 Overall Grade: HD, D, C, P, F Overall Mark: ________ EFB344 Assignment - Part A Due: Tuesday, 11th of May 2021 at 11:59pm Weight: 30% of the overall unit Hedging Risk Analysis Overview You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices. Description – Question 1 (6 Marks) On January 1st, 2017, your first client established a portfolio with $1,000,000. They purchased the top 10 Australian shares at the time, giving them proportions according to the market capitalisation. They have recently become concerned about a potential market downturn over the next three months due to a mutated COVID strain and has asked you to set up a hedge for her using SPI200 futures contracts. The contract will be established today (19th February 2021) and should be in place until at least May 19th, 2021. Step 1 – Determine the beta of the portfolio. Data from Yahoo!Finance for the 10 shares in the portfolio as well as the combined portfolio and the ASX200 is provided in the “Assignment_Part_A – Data and Results.xlsx” spreadsheet on Blackboard. Determine the beta of the portfolio. Step 2 – Choose an appropriate futures contract. A snapshot of SPI200 futures prices as of February 19th is provided. Determine which contract should