FIN30014 Financial Risk Management

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 posidons. Funds under management as at 19. August 2017 include the following:
Investment Type Amount Portfolio Representative Index / Security
Australian Shares (equities) A$100m 1.15 S8cP ASX 200
US Shares (equities) US$55tn 1.0 S&P 500
Short term interest securities (ave. maturity 90 days) A$20m0 Bank Accepted Bills
Long term fixed interest US$30tn A$40m0 Relevant bond indices
securities (ave. maturities 5
years in both countries)
Section I
Assume that you are a recently appointed hedge strategist with GFML and that you have been requested to prepare a rm-t 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 (pleass limit the financial risks to what is taught in this unit). Bear in mind that GFML is an Australian ba.d 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 recommended in part (b) above. Once again, you MUST explain your recommendations. You are NOT required to propose details a 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 di is are to be used,
d. the number of derivative contracts for each hedge,
c. 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 a, hypothetical future outcome). 01 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
Exposure to be
Proportion of the
exposure to be
Derivatives i.e.
Futures/or Options etc.
No. of Contracts
Contract months
Strike Prices,
premiums/Futures prices etc.
(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 vrith 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 dns 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 105/s lower than the level at the rime you implemented the strategy, and (b) approximately YY0 higher.
(5 + 4 + 4 + 3 + 4= 20 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: htm:// for Australian futures and options at
2. The price data you use in your assigrunent 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 bc 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.
5. There are no definitive answers for this assignment. Your submission will bc
evaluated based on the clarity of y-our 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 penallies associated with a late submission you should commence thinking about die issues and researching fot 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.
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

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