FIN30014 Financial Risk Management

FIN30014 Financial Risk Management
Assignment, Semester 1, 2016
Assessment: 15%
Due Date: on or before 5pm, Friday, 6 May, 2016
Sandfire Resources NL (SRN) is an Australian mining company primarily engaged in the extraction and processing of gold and copper in Western Australia. SRN has financed the construction cost of some of its recent mine developments with a syndicated bank loan of US$600 million. This loan facility is for ten years and is a floating rate loan priced at 2.5% above the 3 month US dollar LIBOR rate. The next loan rollover date is 31 Dec 2016. SRN also has Euro variable rate debt of EUR200million.
SRN's forecast monthly production (scaled down for ease of calculations in the requirements) for the September and Dec quarters, 2016 is presented in the following table.
Month Gold (Ounces) Copper (Pounds)
July 2016 2,000 500,000
August 2016 2,200 700,000
September 2016 2,400 600,000
October 2016 2,400 600,000
November 2016 2,600 700,000
December 2016 2,600 700,000
SRN's sales of both gold and copper are denominated in US dollars. SRN is unsure of the direction of the financial variables and have appointed you to identify the risks and recommend suitable hedges.
You have been commissioned by SRN's Board of Directors to prepare a business report that addresses the following requirements:
(a) To identify the financial risk exposures faced by SRN. In this section you MUST discuss the outlook for each variable and the related risk exposure. You need to provide adequate justification for your responses.
(b) To make recommendations to SRN's management on whether to hedge any, all or part of the financial risk exposures that you outlined in part (a) above. You MUST explain your recommendations. 1-19
(c) To make recommendations to SRN's management on whether to use options and/or futures (and forwards) to implement the hedges that you have recommended in part (b) above. You MUST explain your recommendations. (It is possible that you elect not to hedge any exposures. If so, the marks available for parts (b) and (c) will be combined and your answer to (b) assessed on that basis).
(d) Irrespective of your recommendations in parts (b) and (c) above, assume that SRN wishes to hedge fifty percent of its November and December production of copper 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 contract months used
d. whether you are going long or short futures and, in the case of options whether you are buying puts or calls
e. 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.
(e) Independently of your responses to part (d), above, use options "combination" strategies only to implement hedging strategies for SRN's December production of copper. SRN's management has expressed a desire to retain the upside benefits that options allow but without paying a lot of money for option premiums. You are requested to propose TWO option strategies with the requirement that they provide a "reasonably effective" hedge but keep the option premium payment to a "reasonable amount" (it does not have to be zero!). It is up to you what you deem to be "reasonable" but your option strategy recommendations should make commercial sense and not be trivial. You should also describe to SRN's management any possible adverse outcomes that your suggested strategies may pose for SRN.
(4 + 3 + 3 + 2 + 3 = 15 marks)
1. You are expected to use actual data for your recommended hedging strategies for requirement (d). Futures and option prices for US contracts can be found at: for Australian futures and options at (is now taken over by ASX, so when you type the link it will take you to the ASX website).
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 in order to implement your proposed hedge strategies. Assistance will only be provided if it is clear that you have made a substantive research effort.
4. You need to weigh your report content based on the mark allocation.
5. Refer marking guide on blackboard
6. Answers to each part should be clearly separated. Answers to different parts should NOT be combined under any circumstance.
7. There are no definitive answers for 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.
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
Submission Requirements
1. You MUST submit the assignment via Turnitin. Check the draft in the "draft submission" link before doing the final submission.
2. A hard copy should also be submitted in class or to the Convenor's assignment box – Box 13, 11th Floor, BA building (opposite the lifts).
3. An assignment cover sheet must be attached to your submission (see blackboard for assignment cover sheet).
4. 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:
Executive Summary, Introduction (brief), body (where you will answer parts to the assignment), conclusion (brief), References, Appendices (optional)
5. The assignment should be a total of 2500 words, excluding the executive summary, references and appendices.
6. You must do this assignment in a pair (groups of 3 will not be permitted under ANY circumstances).
7. E-mailed assignments will not be accepted, the assignment must be submitted via Turnitin.
8. Make sure that you allow yourself adequate time to complete this report because these guidelines will be strictly enforced and without exception.
9. Conduct research as widely as possible (up to 8 -12 sources). You MUST use sources that are considered academically reputable.
Plagiarism - Please read the notes on plagiarism in the Unit Outline                                                                                          . contact us at