Beruflich Dokumente
Kultur Dokumente
Investments
Commercial Paper US$500 - Euro dollars
Equity investments (US)
US$25 1.15 S&P 500
Liabilities
Required:
Assume that you are a recently appointed hedge strategist for American Airlines Inc. and
that you have been requested to prepare a report on your recommendations of hedging
strategies given the current environment related to COVID-19, for presentation to the
board of directors at its next board meeting. You have been specifically requested to
address the following issues:
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FIN30014 Financial Risk Management Sem 2, 2020
Section I (25%)
(a) To identify the specific financial risk exposures faced by American Airlines
(please limit the financial risks to what is taught in this unit). In this section, you
MUST discuss the outlook (forecast) for each underlying variable and identify
whether it will present a risk to the firm. You need to provide adequate evidence
to support the justification for your responses. (15%).
(b) Make firm recommendations on whether to hedge all, part or none of the
financial risk exposures that you identified in part (a) above. You MUST provide
some explanation for each of your recommendations. (i.e. the reasons for
suggesting this strategy. (You are not required to specify the type of derivative to
be used to hedge in response to this question). (10%)
Section II (25%)
(c) To make recommendations on which derivative instruments (for example,
options, futures, etc.) to use to implement any hedges that you have
recommended in part (b) above. Once again, you MUST explain your
recommendations (i.e. justify the choice of the derivative instrument). This
means that you will need to provide very well researched and fully explained
reasons for your responses to parts (a & b). (15%)
(d) Irrespective of your recommendations in parts (b) and (c) above, assume that
American Airlines wishes to hedge 100 percent of its jet fuel consumption with
exchange-traded futures or options. Provide a schedule that shows
a. the risk you are hedging against
b. the number of futures and/or option contracts that would be required
c. the reason for choosing futures or options
d. the contract months used
e. whether you are going long or short futures and, in the case of options
whether you are buying puts or calls
f. the option strike prices that you recommend, and the premium costs
involved.
(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 as presented below.
Please include
calculations of the
number of contracts in
the appropriate cell
Type of Risk
Exposure to be hedged
The proportion of the exposure
to be hedged
Derivatives i.e. Futures/or
Options etc.
Explain the choice of derivative
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FIN30014 Financial Risk Management Sem 2, 2020
instrument/strategy
No. of Contracts
Contract months
Long/short/
Put/Call
Strike Prices, premiums/Futures
prices etc.
(10%)
Total = 100%
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FIN30014 Financial Risk Management Sem 2, 2020
Word Limit – 3500 words +/- 10%, including executive summary, table of
contents, references and appendices. Exceeding this word limit will carry
penalties.
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FIN30014 Financial Risk Management Sem 2, 2020
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FIN30014 Financial Risk Management Sem 2, 2020
ideas that are appropriate for situated within the discipline are situated within the are appropriate for the
the discipline and genre of and genre of the writing. discipline and genre of the discipline and genre of the
the writing writing. writing.
Demonstrates detailed Demonstrates consistent use Follows expectations Attempts to use a consistent Minimal, inappropriate or no
Structure, presentation and
attention to detail (5%) – attention to and successful of important conventions appropriate to the assigned system for basic organization attempt to use a consistent
Should include the following execution of a wide range of particular to the assigned task as such as organization, and presentation system to organise and
structure: Executive conventions particular to the task, including organization, content, and presentation present assignment
Summary, Introduction assigned task including content, presentation, and
(brief), body (where you will organization, content, stylistic choices
answer parts to the presentation, formatting, and
assignment), conclusion
stylistic choices
(brief), References,
Appendices (optional)
Grammar and expression Uses sophisticated, Uses expressive and Uses language that generally Uses straightforward Uses language that
(5%) expressive and appropriate appropriate business conveys meaning to readers language that generally sometimes impedes meaning
business language that language that competently with clarity. Attention to conveys meaning to readers. because of errors in usage.
skillfully communicates communicates meaning to detail is evident. The language is
meaning to readers readers with clarity and understandable but there
eloquently and is fluency and is grammatically may be room for
grammatically error free correct grammatical improvement.
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FIN30014 Financial Risk Management Sem 2, 2019
Notes
1. You are expected to use actual data for your recommended hedging strategies for
requirement (d). Futures and option prices can be found at
http://www.cmegroup.com and 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 to implement your proposed hedge strategies.
Assistance will only be provided if it is clear that you have made a substantive
research effort.
4. See marking rubric on pages 4-5.
5. Answers to each part should be strictly separated. Answers to different parts
should NOT be combined under any circumstance.
6. There are no definitive answers to 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.
7. The assignment is to be done in a group of 3. You cannot submit an
individual assignment, nor in pairs, without the consent of your tutor. If you
do so, you will be penalised.
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.
Refer to late submission penalties in the Unit Outline.
Submission Requirements
1. Please ensure that you are allocated to the correct group on Canvas before
submitting the assignment.
2. You MUST submit the assignment via the Canvas assessment submission system.
Check the draft in the “draft submission” link before doing the final submission.
3. No hardcopy is required.
4. An assignment cover sheet must be attached to your submission (see Canvas for
assignment cover sheet).
5. 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:
6. Executive Summary, Introduction (brief), body (where you will answer parts
to the assignment), conclusion (brief), References, Appendices (optional)
7. The assignment should be a total of 3500 words, including the executive summary,
table of contents, references and appendices.
8. E-mailed assignments will not be accepted, the assignment must be submitted via
Canvas.
9. Make sure that you allow yourself adequate time to complete this report
because these guidelines will be strictly enforced and without exception.
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FIN30014 Financial Risk Management Sem 2, 2019
10. Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources
that are considered academically reputable.
If you have any issues with your group members, please inform your tutor, 3
weeks before the assignment is due.