Reference no: EM131230091 , Length: word count:2750

Financial Risk Management Assignment-

Background

Platinum Asset Management (PAM) is an investment management company. PAM is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under management as at 19th August 2016 include the following:

Investment Type	Amount	Portfolio Beta	Representative Index / Security
Australian Shares (equities)	A$200m	1.15	S&P ASX 200
US Shares (equities)	US$65m	1.0	S&P 500
Short term interest securities  (ave. maturity 90 days)	A$30m	0	Bank Accepted Bills
Long term fixed interest securities (ave. maturities 5 years in Australia and New Zealand)	A$50m NZ$20m	0	Relevant bond indices

Section I -

Required:

Assume that you are a recently appointed hedge strategist with PAM and that you have been requested to prepare a report for presentation to PAM'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 PAM with respect to the asset categories listed in the above schedule. Bear in mind that PAM is an Australian based fund and that most of its investor are Australian residents. In this section you MUST discuss the outlook for each 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. [In the event that you have recommended in part (b) to not hedge any of PAM'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, 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).

Section II -

(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 two different option contracts 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.

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: https://www.cmegroup.com for Australian 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) and for New Zealand athttps://www.nzx.com/Derivatives

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 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.

Words-2750

Pages-11

Reference-APA 22