ACF 305:  International Financial and Risk Management

国际金融代写 Students are required to complete the following coursework assessment (CWA) as part fulfifilment of the ACF 305: International…

Coursework Assignment 国际金融代写

Students are required to complete the following coursework assessment (CWA) as part fulfifilment of the ACF 305: International Financial and Risk Management module. This CWA will contribute 25% toward the overall mark for the module.

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 confifirm (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.

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 fifinal 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 fifinancial data made available in the accompanying spreadsheet (ACF305 CWA 2021.xlsx). The data encompasses exchange rates of a range of (home) currencies versus EUR (worksheet ’Exchange rates’), interest rates corresponding to those currencies (’Interest rates’), world index returns (’World index ’), and individual companies’ equity returns (’Stock returns’). 国际金融代写

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 fifinancial 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 fifirm’s cost of capital could simply be determined through considering how the fifirm’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 15October 2021.

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

Required

Hedging a EUR Exposure 国际金融代写

Your fifirst 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 fifile 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 difffferent home currency, therefore the exchange rates that you will need to use for your assignment will be difffferent across groups. The labels in the fifirst two rows of the Excel fifile denote the exchange rate of the currency that a group is assigned to.

For the present hedging exercise, you should fifirst 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 fifinal hedge ratio, you need to use the exchange rate of 15 October 2021. Finally, please note that all interest rates are expressed in percentages.

  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 date on 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.

  1. 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, FC1. 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 specifific). 国际金融代写

NOTE: In the same worksheet, you can fifind the HC/FC1 exchange rates to the right of the fifirst set of data.

  1. Maturity mismatch but no currency mismatch (case III): Assume that EUR futures contracts only with the maturity of 1 year are available. The contract will therefore still have 6 months until delivery date when EUR 500,000 becomes payable. Determine the optimal hedge ratio and explain how you would implement your strategy to hedge your exposure.

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

  1. Currency mismatch – 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 currencies. Your fifirst 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 specifific). 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 国际金融代写

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-specifific) 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 fifile you can fifind 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 exchange rate.
  1. Once you have estimated the International CAPM for your company, compute the estimated cost of capital (expected return) using your estimated model for the three following cases: 国际金融代写

(a) Using only the estimated coeffiffifficient of the currency factor (from the full model) and its expected value; i.e. γiE(s) – defifinitions of these and all other parameters are given below.

(b) Using only the coeffiffifficient of the market portfolio (from the full model) and its expected value; i.e. βiE(rw rf ).

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

αi + βiE(rw rf ) + γiE(s)

Parameters αi, βi , and γi are the estimated coeffiffifficients 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.

  1. Compare the 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.

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 fifindings without making their own calculations. Based on the description provided, the reader must also be able to replicate your results.
  • Providing mathematical results only is not suffiffifficient. An important component of the grade awarded will be the critical interpretation of the obtained results. Moreover, you should always suffiffifficiently motivate any answer you provide. (“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 that is 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 (free riding), should be reported well in advance of the deadline such that an appropriate action can be taken in time.

How to approach this coursework: 国际金融代写

  1. Each member of the group should carefully read the coursework individually.
  2. 4 Once the fifirst reading has been done by all group members, the group should immediately meet to discuss the objectives of the coursework.
  1. During the meeting, group members should carefully plan how each task will be solved.
  2. All group members have to carefully read the relevant sections of lecture slides and the textbook. 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 clarifification.
  1. 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.
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Design of the coursework assignment & presentation

The coursework assignment should give the reader a clear understanding about how you decided to solve the various tasks. Be specifific, 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. 国际金融代写
  1. The coursework assignment must be stapled, or otherwise kept together. It should be divided into 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.
  1. Numbers should be rounded to three or four digits when possible, e.g. round 1.23456789 to 1.234 or 1.2346.
  1. Number both tables and fifigures, e.g. ‘Table 1: Total Exports’ or ‘Figure 3: Government Defificit’.
  1. The coursework assignment should be kept as short and concise as possible.
  2. The coursework assignment has to be written in Microsoft Word or a comparable word processor, such as Open Offiffiffice Word, Scientifific Word, MikTex, etc. 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 fifinal 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 国际金融代写

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 fifirst 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 way. This function gives you the slope (beta) of the regression model.

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