Individual Assignment (25%)
OFRM 2024-2
Please submit your assignment electronically via the Turnitin Assignment tool no later than Sunday, Oct 20, 2024, 11:59pm.
The link for the Turnitin Assignment tool has been created for you under the Assignment page on MyUni. You will need to upload a Microsoft Word version of your assignment to Turnitin. Only one submission will be permitted.
Email submission will NOT be considered. Late submission will NOT be marked.
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 and AI use.
For the data, please use ONLY the data file “OFRM Data 2024-2” provided on MyUni under the ‘Assignment’ module.
Preamble:
Over the last two years, the threat of inflation and expanding interest rates appear large in Australia and much of the world, presenting a different set of challenges, no less. Recent geo-political challenges have been front-of-mind aggravating macro-economic risks, with increased volatility seen in the markets. Considering the evolving macro-economic and geo-political challenges, the ability to hedge one’s investment has gained prominence.
In this assessment, you will develop hedging strategies using derivatives to hedge your stock, giving due regard to the established market outlook.
Assume you have AUD1,000,000 that you must invest in stocks.
A. Stock valuation (5 marks)
Drawing on the knowledge gained in previous courses, employ relative valuation methods to value any ONE of the given stocks using only the data provided in the Assignment Data file. Assume 5% as the risk-free rate and no dividend. Determine whether to go LONG or SHORT the chosen stock with a capital of $1.000,000.
Assessment criteria:
o correct employment of relative valuation methodology,
o cohesive arguments to long/short the stock giving due regard to both specific stock and broader market outlook.
B. Hedging with Futures (10 marks)
Based on the market value of your stock on September 3 and the market environment you determined in part A., implement a futures hedging strategy for the ensuing two weeks period. 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:
o Appropriateness of the strategy versus prevailing market environment.
o Determination of hedge ratio.
o Full details of transactions presented in a table with appropriate narrative of all relevant transactions that may occur in real world investment.
o Effectiveness of the hedge and reasons why the hedge strategy worked/failed to work as you expect.
o Discuss how the hedge can be improved considering the shortcomings you identified.
C. Alternative hedging strategy (10 marks)
It is often advertised that options on futures can be just as effective as the underlying futures for hedging. Given your futures hedge position in part B, determine what corresponding positions in option on futures may be taken. Detail the strategy and its execution and explain how that is appropriate to your analyses in Part B. Defend why hedging with futures contracts is preferred to hedging with options on futures.
Assessment criteria:
o Explain options on futures hedge transactions needed.
o Determine trade positions required.
o Clarify appropriateness to part B objectives.
o Merits/demerits of using futures vs options on futures for hedging in this particular instance.
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 maximum word count of 2,500 words (size 12 font, single spacing), including all discussion, graphs, tables, and references.
A bonus of 2.5 marks (or 10% of the possible maximum mark for the assignment) will be awarded for early submission (by 11:59PM on Sunday, 13 October 2024). Submissions made after this time will not qualify for the bonus.