FIN30014 Financial Risk Management Sem 2, 2020

FIN30014 Financial Risk Management

Group Assignment - Semester 2, 2020

Assessment Mark: 20%

(Assignment will be marked out of 100% and converted to a mark out of 20%)
DUE: on or before, 11:59 pm Friday 16th October 2020
Background
American Airlines, Inc. (listed in NASDAQ under the code AAL) is a major American
airline headquartered in, Texas, USA, that offer an average of nearly 6,700 flights daily to
350 destinations in 50 countries. Assume American Airlines has the following cost,
revenue, investment and liability structure.

Jet fuel consumption Quantity Portfolio Beta Representative

Index/underlying

July – Dec 2020 (Forecast) 6,031,746 - Crude oil

barrels

Revenue forecast from In millions -

Latin America for 2nd half of
2020

Mexican Peso Peso 270.24

Brazilian Real Real 67.73

Investments
Commercial Paper US$500 - Euro dollars
Equity investments (US)
US$25 1.15 S&P 500
Liabilities

2-year variable rate loan

US$28,698 -
(next re-set date 31st Dec
2020)

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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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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instrument/strategy

No. of Contracts
Contract months
Long/short/
Put/Call
Strike Prices, premiums/Futures
prices etc.
(10%)

Section III (25%)

(e) Propose ONE option combination strategy that involves more than one option
contract for the Brazilian Real revenue (67.73) for the risk faced by this
exposure. American Airline’s management has expressed a desire to retain some
of the upside benefits that hedging with options can permit but without paying a
lot of money in option premiums. That is, your recommended strategies should
provide a “reasonably effective” hedge but keep the option premium payment
limited to a “reasonable amount” (it does not have to be zero!). As the strategist,
it is up to you what you consider “reasonable” for this purpose. You must also
describe the benefits and possible shortcomings of your proposed option
strategies. You must use actual option data to illustrate your option strategies.
Calculate the number of contracts required for the strategy and provide the
strike prices and total premium costs.
(f) Assume there will be low volatility or relatively flat market in the S&P 500 over
December 2020 and assume American Airlines wishes to take advantage of this
low volatility but unsure in which direction it would be. Propose a speculative
option combination strategy that American Airlines can use to profit from this
market condition. You must also describe the benefits and possible shortcomings
of your proposed option strategies. You must use actual option data to illustrate
your option strategies
Calculate the number of contracts required for the strategy and provide the
strike prices and total premium costs.

Breakdown of assignment marks – Refer assignment rubric on pages 4 - 5

Context and purpose of writing - Introduction = 5%
Content (Relates to sections I- III including recommendations) =
(25 + 25 + 25 = 75%)
Sources and evidence = 10%
Structure, presentation and attention to detail = 5%
Grammar and expression = 5%

Total = 100%

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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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Marking Rubric – FIN30014 Group Assignment (100%)
Performance
Indicators
CRITERIA
Context of and purpose for
writing (5%) - Introduction
Content (75%) – Relates to
sections I- III including
recommendations.
Sources and evidence (10%)
Financial Risk Management
EXCEEDS STANDARD
High Distinction (HD)/80-
100
Excellent/exemplary/exceed
ing high standard
Outstanding, insightful work.
Goes beyond requirements
of the task to develop a
response, which is
thoughtful, reflective, and
considers alternative views
and makes connections
among ideas and information
from different sources or
from different aspects of the
course.
Demonstrates a thorough
understanding of context,
audience, and purpose of the
assignment. Submission is
responsive to the assigned
task(s) and comprehensively
and competently covers all
elements
Uses appropriate, relevant,
and compelling content to
illustrate mastery of the
assignment topic, conveying
the writer's understanding,
and shaping the whole
assignment
Demonstrates skilful use of
high-quality, credible,
relevant sources to develop
Distinction (D)/ 70-79
Very good/ exceeds
expectations
Very good work.
Purposefully and logically
developed. Thoroughly
addresses all aspects of the
task. Synthesis of details and
concepts from various
sources or topics shows
evidence of sound
understanding and
thoughtful examination.
Demonstrates an
understanding of context,
audience, and purpose of the
assignment. Submission is
responsive to the assigned
task(s) and covering all
expected elements
Uses appropriate, relevant,
and compelling discipline
related content to explore
ideas and shape the content
of the assignment
Demonstrates consistent use
of credible, relevant sources
to support ideas that are
Sem 2, 2020
MEETS STANDARD
Credit (C)/60-69
Good/Well done
Good work. Generally clear,
accurate and relevant.
Adequately addresses all
requirements of the task.
Demonstrates understanding
of course concepts, with
evidence of some thoughtful
examination and reflection.
Development is generally
logical, facts generally
correct. Tends to focus on
one interpretation.
Demonstrates awareness of
context, audience, and
purpose of the assignment.
Submission covers all
required elements.
Uses appropriate and
relevant content to develop
and explore ideas through
the assignment
Demonstrates effective use
of appropriate and relevant
sources to support ideas that
Pass (P)/ 50-59
Acceptable/Satisfactory/
Proficient
Satisfactory work. Shows
basic understanding of
concepts with minimal
evidence of reflection or
thoughtful analysis.
Complies with the basic
requirements, relies on
limited sources of
information, little integration
of concepts.
Demonstrates consideration
of context, audience, and
purpose. Submission covers
the majority of the required
elements
Uses appropriate and
relevant content to develop
simple ideas throughout the
assignment
Demonstrates an attempt to
use credible and/or relevant
sources to support ideas that
YET TO ACHIEVE
MINIMUM STANDARD
Fail (N) /0-49
Poor/unacceptable/Not
attempted/requires further
development/needs
improvement
Unsatisfactory work. Fails to
address the topic in a
meaningful way. May be
extremely brief, inaccurate,
illogical or undeveloped.
Demonstrates minimal or no
attention to context,
audience, purpose, and/or to
the assigned tasks(s) (e.g.,
expectation of instructor).
Some expected elements may
have been omitted
Uses inappropriate and/or
irrelevant content to develop
ideas in the assignment
Demonstrates little attempt
to use sources to support
ideas in the writing
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Structure, presentation and
attention to detail (5%) –
Should include the following
structure: Executive
Summary, Introduction
(brief), body (where you will
answer parts to the
assignment), conclusion
(brief), References,
Appendices (optional)
Grammar and expression
(5%)
Financial Risk Management
ideas that are appropriate for
the discipline and genre of
the writing
Demonstrates detailed
attention to and successful
execution of a wide range of
conventions particular to the
assigned task including
organization, content,
presentation, formatting, and
stylistic choices
Uses sophisticated,
expressive and appropriate
business language that
skillfully communicates
meaning to readers
eloquently and is
grammatically error free
situated within the discipline
and genre of the writing.
Demonstrates consistent use
of important conventions
particular to the assigned
task, including organization,
content, presentation, and
stylistic choices
Uses expressive and
appropriate business
language that competently
communicates meaning to
readers with clarity and
fluency and is grammatically
correct
Sem 2, 2020
are situated within the
discipline and genre of the
writing.
Follows expectations
appropriate to the assigned
task as such as organization,
content, and presentation
Uses language that generally
conveys meaning to readers
with clarity. Attention to
detail is evident.
are appropriate for the
discipline and genre of the
writing.
Attempts to use a consistent Minimal, inappropriate or no
system for basic organization attempt to use a consistent
and presentation system to organise and
present assignment
Uses straightforward Uses language that
language that generally sometimes impedes meaning
conveys meaning to readers. because of errors in usage.
The language is
understandable but there
may be room for
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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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.

Plagiarism - Please read the notes on plagiarism in the Unit Outline.