国际金融代写 Risk Management代写 ACF 305代写
国际金融代写

国际金融代写 Risk Management代写 ACF 305代写

ACF 305:

International Financial and Risk Management

Michaelmas Term 2021

国际金融代写 Please include the word count on the front page of the assignment. A penalty will be imposed on answers that exceed this maximum.


 

Coursework Assignment  国际金融代写

Students are required to complete the following coursework assessment (CWA) as part fulfil-  ment of the ACF 305: International Financial and Risk Management module. This CWA will contribute 25% toward the overall mark for the module. Answers (produced on a group basis) must be submitted in the .pdf format before 12 o’clock (noon) of Friday, 17 December 2021.

Students must submit an electronic version of their report to Moodle. Electronic submissions will be checked for plagiarism, which includes evidence of (a) similarities between students’ answers, (b) unattributed statements, ideas and results from the literature, and (c) verbatim representations of other authors’ work, whether attributed or not. Evidence of plagiarism will be penalised. Students have to submit a declaration sheet where they confirm (by signing it) that they agree with the University’s regulations regarding plagiarism. Students must also be able to submit upon request the relevant data and spreadsheets/programs used to generate their answers.   国际金融代写

The report should not exceed 2,500 words in length. In addition to these 2,500 words of text, you may include tables and/or graphical material.

Please include the word count on the front page of the assignment. A penalty will be imposed on answers that exceed this maximum. The text should be double spaced, 12 point font. Marks will be awarded for writing style as well as content. Using clear, concise prose that is free from typographical errors and grammatical mistakes is a necessary condition to achieve a final mark of 70% or higher.

The purpose of this assignment is to evaluate students’ comprehension of risk management techniques using derivative instruments (forward and futures contracts) as well  as  the  concepts related to the equity cost of capital in an international context.  The  assignment  is  based  on  financial data made available in the accompanying spreadsheet (ACF305 CWA 2021.xlsx). Thedata encompasses exchange rates of a range of (home) currencies versus EUR (worksheet ’Exchange  rates’),  interest  rates  corresponding  to  those  currencies  (’Interest  rates’),  world  indexreturns(’World index ’), and individual companies’ equity returns (’Stock returns’).

The task: Background

Your team has just been appointed to advise and oversee the Finance Department of a large international company. Upon arrival, you have noticed that your predecessor was not really up to date with recent financial innovations. For example, members of the department have reported to you that your predecessor had a general distrust towards any derivative instruments, and therefore never hedged any existing exposures. In addition, he argued that the firm’s cost of capital could simply be determined through considering how the firm’s returns co-move with the S&P 500 index returns.

Among all other issues that need to be dealt with, your priorities are to (1) show the members of the Finance Department how an existing exposure to Euro (EUR) can be hedged with a forward contract, (2) explain to them why hedging makes economic sense, and (3) determine the cost of capital in an international setting. For the purpose of the CWA, assume that today’s date is 15 October 2021.

NOTE: Please do make sure that you have read the entire document and strictly follow the relevant instructions.

Required   国际金融代写

Hedging a EUR Exposure

Your first task is to hedge  the  foreign  currency  exposure  of  EUR  500,000  that  your  company has to pay to its suppliers on 15 April 2022. The file named ACF305 CWA 2021.xlsx (worksheet ’Exchange  rates’) contains the relevant exchange rates of your assigned home currency against Euro (i.e. HC/EUR).

NOTE: Each group is assigned a different home currency, therefore the exchange rates that you will need to use for your assignment will be different across groups. The labels in the first two rows of the Excel file denote the exchange rate of the currency that a group is assigned to.

For the present hedging exercise, you should first provide a clear and concise explanation of the minimum variance hedging with futures contracts technique. Also, you need to address four cases and, for each of them, discuss what the resulting hedging strategy should be.

HINT: You have to work with percentage changes in your regressions. To compute your final hedge ratio, you need to use the exchange rate of 15 October 2021. Finally, please note that all interest rates are expressed in percentages.     国际金融代写

  1. Direct Hedge (case I): First, assume that there is a possibility for you to design a futures contract that will match the currency that you are exposed to (i.e.,  EUR) and the dateon which you need to pay your suppliers. Under the assumption that markets are perfect and arbitrage opportunities are not possible, discuss how you could construct a hedging strategy that minimises the currency risk.
  2. Currency mismatch but no maturity mismatch (case II): Assume there are no HC/EUR futures contracts. In this case, you could try to hedge the EUR 500,000 with a another,correlated currency,  Determine the optimal hedge ratio, and describe how you would implement your strategy to hedge the exposure to EUR 500,000 with forward contracts on FC1 (again, FC1 is group specific).
NOTE: In the same worksheet, you can find the HC/FC1 exchange rates to the right of the first set of data.
  1. Maturity mismatch but no currency mismatch (case III): Assume that EUR futures con- tracts only with the maturity of 1 year are available. The contract will therefore stillhave 6 months until delivery date when EUR 500,000 becomes  Determine the optimal hedge ratio and explain how you would implement your strategy to hedge your exposure.

NOTE:  Effective  interest  rates  that  are  provided  in  the  Excel  file  (worksheet  ’Interest rates’)  are  for  three-month  deposits.   To  compute  the  effective  six-month  interest  rates, simply multiply the three-month deposit interest rates by two.

  1. Currencymismatch – hedging with two foreign currencies (case IV): Assume there are no HC/EUR futures contracts. In this case, you try to hedge EUR 500,000 with two other  Your first futures contract is against FC1 (which you used in case II), and the second foreign currency futures contract is on yet another currency, FC2 (again, group specific). Determine the optimal hedge ratio and describe how you would implement your strategy to hedge the exposure to EUR 500,000 with a combination of FC1 and FC2 futures contracts.

NOTE: The HC/FC2 exchange rates can be found in the rightmost section of the ’Exchange rates’ worksheet.

The value of hedging

In this task, you will need to explain why hedging with futures contracts (which have a zero market value at inception) can add value to the company through multiple channels. Your comments should be appropriately referenced.

NOTE: Remember that you should aim to provide supporting arguments for hedging to your boss, who is a very busy person and therefore wants to have a brief and clear exposition of why hedging can be value-enhancing.

The cost of capital in the international market

As a last step, you would also like to determine the cost of capital for a (group-specific) company. To do this, you need the stock returns for the company that you are analysing,  the stock returns  of the world market index, and the percentage changes of your assigned home currency against EUR. In the Excel file you can find a worksheet for the stock returns of each company (’Stock returns’), and another worksheet for the returns of the world market portfolio (’World index ’), next to the worksheet for the prices of the currency that you have been using up to this point (’Exchange rates’).  Now, perform the following tasks:

  1. Estimate the International CAPM for your company using the world market index and your assigned currency exchangerate.   国际金融代写
  2. Once you have estimated the International CAPM for your company, compute the esti-matedcost of capital (expected return) using your estimated model for the three following cases:
(a)Using only the estimated coefficient of the currency factor (from the full model) and  its expected value; i.e. γiE(s) – definitions of these and all other parameters are given below.

(b)Using only the coefficient of the market portfolio (from the full model) and its ex-pected value; i.e. βiE(rw rf ).

(c)Using the full model, this is, the expected return from applying the model given by   the followingexpression:

αi + βiE(rw rf ) + γiE(s)

Parameters αi, βi, and γi are the estimated coefficients of your regression of the stock returns of your company (company i) on the excess returns of the world market portfolio,i.e. rw rf , and the percentage changes of your assigned currency, i.e. s.

3.Comparethe estimated cost of capital for each of the above scenarios against the average stock returns (i.e. the sample average) of your company.

Please make sure that all the obtained results are properly discussed and interpreted.

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国际金融代写

Very Important Remarks     国际金融代写

  • Describe clearly each time which calculations and/or Excel operations you perform to obtain your solution. One should be able to follow all your results and findings without making their own Based on the description provided, the reader must also be able to replicate yourresults.
  • Providing mathematical results only is not sufficient.An important component of the grade awarded will be the critical interpretation of the obtained results. Moreover, you should always sufficiently motivate any answer you  (“Yes, it will.” or “By 15%.” are not complete answers.)
  • Conclusions based on analytical results will be more highly evaluated than those based solely on numerical results.
  • An appendix can be used for any illustrative material that supports your report but thatis not essential for the understanding of the report itself (the appendix as such will not be marked).
  • Any problems within groups, such as certain members not contributing their fair share (freeriding), should be reported well in advance of the deadline such that an appropriate action can be taken in time.

How to approach this coursework:

  1. Each member of the group should carefully read the coursework individually.
  2. Oncethe first reading has been done by all group members, the group should immediately meet to discuss the objectives of the coursework.
  3. Duringthe meeting, group members should carefully plan how each task will be solved.
  4. All group members have to carefully read the relevant sections of lecture slides and the Other sources can be used to have a better understanding if necessary. If after competing all the reading there are still any important questions left regarding the module material relevant to the assignment, please contact the relevant module director (Greg) for clarification.
  5. Please make sure that you remain in a regular contact with your groupmates to be able schedule meetings and discuss any arising issues related to the task.

Design of the coursework assignment & presentation    国际金融代写

The coursework assignment should give the reader a clear understanding about how you decided to solve the various tasks. Be specific, but not repetitive. The report should be clearly structured and have a professional look and feel. Hence, please mind the following guidelines:

1.Each coursework assignment should have a front page, clearly stating students’ names, the title of the assignment, the date the coursework assignment was completed, and other relevant information.

2.The coursework assignment must be stapled, or otherwise kept together.It should be dividedinto separate sections, such as ‘1. Introduction’, ‘2. Hedging’,. . . , ‘K. Concluding remarks’. Use sensible headlines which hint at the content of the separate sections; these should be larger in font size and bold compared to the main text.  The main text must be consistently formatted, i.e., avoid modifying the font, size, colour. Use page numbers. You could have a short table of contents or an abstract at the beginning.     国际金融代写

3.Numbers should be rounded to three or four digits when possible, e.g.  round 1.23456789  to 1.234 or2346.

4.Number both tables and figures, e.g. ‘Table 1: Total Exports’ or ‘Figure 3: Government Deficit’.

5.The coursework assignment should be kept as short and concise as possible.

6.Thecoursework assignment has to be written in Microsoft Word or a comparable word pro- cessor, such as Open Office Word, Scientific Word, MikTex,  Hand-written assignments cannot be accepted.

Assessment

There are three parts: hedging, the value of hedging,  and international CAPM. Each of these  parts are worth 40, 15 and 30 marks, respectively. The remaining 15 marks (out of the maximum of 100) will be based on the clarity, consistency and accuracy of the exposition of your work.

The final grade of the coursework assignment depends therefore on (1) the standard of your writing, (2) style and design, (3) the correctness of your arguments and descriptions, and (4) your quality of reasoning.

Appendix: Regression

You have to estimate (standard) regressions, also called ordinary least squares (OLS) regressions. If you work with Excel, there are two ways of estimating a regression in Excel:

  • Using“Analysis ToolPak”: ‘Data’ – ‘Data Analysis’ [if ‘Data Analysis’ is not shown, you have to install the Add-In] – ‘Regression’ – ‘OK’ – specify ‘Input Y Range’, ‘Input X Range’ and ‘Output Range’ (you may tick ‘Labels’ but then you need to make sure that the first  row of your data range contains the labels) – ‘OK’. If you are estimating a regression with one (more than one) independent variable,  the ‘Input X Range’  includes cells from one  (more than one adjacent) columns.
  • Using a function: =SLOPE(known y’s,known x’s) you cannot estimate a regression with more than one independent variable in this  This function gives you the slope (beta) of the regressionmodel.

NOTE: There are no specific requirements regarding software that you should use for this assignment. (So you can use any.)

 

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