Corp Risk Mgmt

Homework 2 - Revised

Instructions

  1. This assignment is due by Monday, May 15, 2017, at noon. You must email your homework to me at . THE FILE MUST BE FORMATTED FOR PRINTING BEFORE YOU SEND IT TO ME.
  2. I will post the answers to the homework by Monday the 15th at 5:00 pm to help you study for the Quiz at the beginning of class the following Friday.
  3. This assignment is worth a total of 100 points.
  1. (25 points) Suppose on November 17, you buy fifteen (15) December Copper Futures contracts, which have a 100-ounce contract size. Your purchase price was $20 per ounce. Complete the following “Marking-to-Market” table if the Maintenance margin is 75% of the initial 5% margin. Assume that you withdraw any funds eligible for withdrawal due to accrued gains.
  1. What are the initial and maintenance margin amounts?
  2. At the end of November 21st, what is the total of funds withdrawn due to gains, if any?
  3. If you wanted to close out your position at the end of November 21st, what would you do?

Day / Futures Price / Daily Gain/Loss / Cumulative Gain/Loss / Margin Account Balance / Deposits or Withdrawals?
Initial / $20.00 / N/A / N/A / N/A
Nov 18 / $19.90
Nov 19 / $19.50
Nov 20 / $19.40
Nov 21 / $20.05
  1. (25 points) We discussed Corporate-Value-at-Risk (C-VaR) in class. Not only is it an attempt to quantify the value (of earnings… of cash flow… etc.) that could be lost on the downside, it is also (perhaps more importantly) a method for systematically identifying a corporation’s vulnerability to risk factors.

Please perform a C-VaR analysis on the firm that you work for. This is NOT a quantitative exercise (no need to start projecting cash flow amounts, expected earnings, etc.). On a qualitative level, I want you to consider the 4 steps to C-VaR and walk me through how you would perform them on your firm.

For Steps 1 & 2, I want you to discuss firm-specific information regarding your company’s risk factors and what areas of your firm these risk factors can potentially affect. Identify at least 3 risk factors and map them onto specific items at your firm that they can put at risk (revenues, expenses, taxes, etc.).

For Steps 3 & 4, I want you to walk me through the concepts of how you would use the information from Steps 1 & 2 to finally arrive at C-VaR for your firm.

NOTE: If your firm is a huge conglomerate, you can tailor this exercise to your division alone. Or, if you prefer, you can tackle the overall firm’s risk assessment. I want this exercise to provide some specific value to you, so frame the analysis to your specific needs/work environment.

  1. (50 points) Revisit the work that we did in class regarding AIFS. What if they choose to hedge different percentages of their base case scenario expenses (25,000 students) with a combination of futures and options. As shown in the template on our class website, they can cover 0%, 25%, 50%, 75%, or 100% of the risk. When they choose to cover, they can do so with combinations of futures and options as shown in the spreadsheet.

Using the template I have provided you with, calculate the positive or negative windfalls for stable dollar, weak dollar and strong dollar assuming:

  1. 25,000 student demand
  2. 30,000 student demand (but 25,000 were hedged for)
  3. 10,000 student demand (but 25,000 were hedged for)

Look carefully at all three spreadsheets after you have filled them out and make a recommendation for what hedging strategy AIFS should select (how much to hedge and which instruments to use in what proportions. Explain why you feel this is the best route for AIFS.

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