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FIN30014 Financial Risk Management Sem 1, 2015
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FIN30014 Financial Risk Management
Assignment, Semester 1, 2015
Assessment: 15%
Due Date: on or before 5pm Wednesday, 6 May, 2015
Background
Platinum asset management (PTM) is an Australian Funds Management Company. PTM is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under management as at 10th March 2015 include the following:
Investment Type
Amount
Portfolio
Beta
Representative
Index / Security
Australian Shares (equities)
A$60m
1.15
S&P ASX 200
US Shares (equities)
US$100m
1.0
S&P 500
Short term interest securities (ave. maturity 90 days)
A$20m
US$10m
0
Bank Accepted Bills
Euro Dollars
Long term fixed interest securities (ave. maturities 5 years in both countries)
A$40m
US$30m
0
Relevant bond indices
Required:
Assume that you are a recently appointed hedge strategist with PTM and that you have been requested to prepare a report for presentation to PTM’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 PTM with respect to the asset categories listed in the above schedule. Bear in mind that PTM is an Australian based fund and that most of its investor are Australian residents. In this section you MUST discuss the outlook (i.e. forecast) for the each variable and the related risk exposure. You need to provide adequate justification for your responses. You must use academically reputable sources in order to justify your forecasts.
(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 recommended in part (b) above. Once again, you MUST explain your recommendations. [In the event that you have recommended in part (b) to not hedge any of PTM’s risk exposures then the marks available for parts (b) and (c) will be combined and your answer to part (b) assessed on that basis. This means that you will need to carefully and fully explain your reasons in part (b). However,
FIN30014 Financial Risk Management Sem 1, 2015
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it is advised that you make some hedge recommendations to make 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 (b), specific hedging strategies:
a. the exposures to be hedged,
b. what proportion of the exposure is 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.
(e) Independently of your responses to part (d), propose TWO option “combination strategies” that involve more than one option contract (such as a spread) for the US equities portfolio. PTM’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 US S&P 500 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.
(4 + 4 + 2 + 2 + 3 = 15 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. You need to weigh your report content based on the mark allocation.
FIN30014 Financial Risk Management Sem 1, 2015
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5. Refer marking guide on blackboard
6. Answers to each part should be strictly 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
Submission Requirements
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 assignment.
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. 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.

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