Derivatives (M)

Individual Assignment (30%)

o Submit your assignment electronically via the Turnitin Assignment tool by 9am
Monday, June 5. The link for the Turnitin Assignment tool has been created for you
under the Assignment page on MyUni. You will need to upload your assignment to
Turnitin. Email submission will not be considered. This is your final exam and in
line with examination rules, late submission will not be marked.
o Statement of Acknowledgement of Original Work
By submitting your assignment you declare that all material in this assessment is your
own work. You have also read the University's Academic Honesty Policy. Please be
aware of policy and guidelines regarding plagiarism (see Course Outline for website
link).
o Whilst you are encouraged to make use of the Refinitiv access available to you for
your individual research, it is a requirement to use ONLY the data provided in the
“Assignment Data” file for this assignment.

Preamble
Just as market participants are anticipating post-COVID economic growth, the threat of
inflation and burgeoning interest rates now looms large in most economies, presenting
a different set of challenges, no less. In light of the prevailing macro-economic and geo-
political challenges, hedging one’s investment has also gained prominence.

In this assessment, you will devise hedging strategies using derivatives to hedge your
stock, giving due regard to the prevailing market outlook.

Part A. (6 marks)
In your 2022 Semester 2 EVA group assignment, you were required to value a stock
based on fundamental analyses and relative valuation. You were then required to
recommend a “buy” or “sell” on this stock on the basis of your analyses and the
prevailing market price of the stock.

Continuing with that stock from your EVA assignment, you are required in this
assignment to:
A1. Determine the return of this stock on 31 March, 2023. Present your calculations
and justify the return measure used. Discuss if the returns support fundamental analyses
(particularly the relative valuation methods in EVA assignment) as a basis for stock
selection. Assume you have AUD100,000 invested in this stock. (3 marks)

Assessment criteria:
 Calculation of return
 Justification of return measure employed
 Suitability of stock selection method in view of return achieved

A2. Based on the historical prices of the stock, comment on the risk during your
holding period (defined as the period from the inception of your portfolio in the EVA
assignment i.e. 1 July 2022 to 31 March 2023). You are required to show your
calculations and justify the risk measure(s) used. Discuss if passive investing is a
suitable strategy in the light of your risk assessment of the prevailing market conditions.
(3 marks)
Assessment criteria:
 Calculation of risk measure(s)
 Justification of risk measure(s) used
 Suitability of passive investing in light of risk assessment for the investment
period

Part B. (15 marks)

Based on the market value of your stock and the market environment you determined
in part A., implement a futures Beta hedging strategy for the period 31 March to 14
April 2023. You are required to, at a minimum:
• implement the futures hedging strategy. Explain the strategy and its execution,
and how that is appropriate to your analyses in Part A.
• tabulate and evaluate the performance of the strategy at the end of the hedge
period in terms of risk and return, and recommend potential improvement.

Assessment criteria:
 Appropriateness of the strategy vis-à-vis prevailing market environment
 Determination of hedge ratio
 Full details of transactions presented in a table with appropriate narrative of all
relevant transactions that may occur in real world investment
 Effectiveness of the hedge and reasons why the hedge strategy worked/failed to
work as you expect
 Discuss how the hedge can be improved taking into account the shortcomings you
identified

Part C. (5 marks)
Suppose you are not restricted to hedging with futures contracts. Devise an alternative
strategy using options to hedge your stock for the period 31 March to 14 April 2023.
You are required to, at a minimum:
 explain the strategy and its execution, and how that is appropriate to your
objective in Part B.
 tabulate and evaluate the performance of the strategy at the end of the hedge
period.

Assessment criteria:
 Appropriateness of the strategy vis-à-vis your objective in Part B
 Full details of transactions presented in a table with appropriate narrative of all
relevant transactions that may occur in real world investment

Part D. (4 marks)
Compare the results of your hedge in Parts B and C. Discuss and conclude if one
approach is necessarily superior than the other, applying the underlying theory to
prevailing market conditions.

Assessment criteria:
 Comparison of hedge performances
 Discussion and conclusion
REPORT WRITING.
Your report must document a complete discussion of the process outlined above,
including full details of transactions executed. Transaction costs must bear evidence
that it is a realistic figure. Good structure, presentation and concise writing skills are
likewise important. Your report length must have a word count of circa 3,000 words
(size 12 font, single spacing), including all discussion, graphs, tables and references.