AF4S997 Quantitative Methods for Finance and Risk Management

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Reference no: EM132510655 , Length: word count:3000

AF4S997 Quantitative Methods for Finance and Risk Management - University of South Wales

Assessment Task:

A British companyjust signed a contract with an American company. The contract states that the American company will purchase 10,000 units of the British company's product at the price of $2000 per unit, with payment due in one month. The current weighted average cost of capital of the British company is 8%.

• Please compute value at risk of the account receivable using both Variance-Covariance and Historical Simulation method. Please interpret your results.Please refer to literature sourcesand critique each method.

• Please form three hedging strategies using the following financial instruments/ markets and demonstrate the relationship between the payoff and profit of each hedging strategy and the future spot exchange rate in one month's time on a chart.

o Currency forwards
o Money market
o Currency options

• Please discuss the costs and the benefits associated witheach hedging strategy, including speculation (i.e., no hedge).

• Which hedging strategy (including speculation) would you recommend? Please refer to literature sourcesand provide reasons for your recommendation.

Financial Market Information:

Spot rate
GBP/USD: 1.24
Forward rate
GBP/USD: 1.2496
Call Option 1
Strike: GBP/USD 1.225
Premium: $0.0187 per £
Call Option 2
Strike: GBP/USD 1.240
Premium: $0.0127 per £
Put Option 1
Strike: GBP/USD 1.225
Premium: $0.0054 per £
Put Option 2
Strike: GBP/USD 1.240
Premium: $ 0.0094 per £
Money Market
USD one-month borrowing rate: 5% per annum
USD one-month investment rate: 1.5% per annum
GBP one-month borrowing rate: 4% per annum
GBP one-month investment rate: 1% per annum

Word limit:3,000
Please indicate the exact word count at the end of your assignment

Attachment:- Quantitative Methods for Finance and Risk Management.zip

Reference no: EM132510655

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