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You are a US based company. Today is the 20th of October 2017 and you have just been informed that you will receive a payment of £ 9m on the 9th of March 2018. You have decided that you are going to hedge this transfer using currency futures contracts. Use the data given in the Excel spreadsheet ‘Coursework Data 2018.xlsx’ for your calculations. Write a short report to your management board on the 20th of October 2017 explaining what you should do and why you want to hedge this transaction. You can assume the Board gives you the go-ahead in undertaking the hedge. Write a follow up report on the 10th of March 2018 explaining to your Board how successful your hedge was present them with a printout of the margin accounts. Assume the initial margin is $2,000 and the maintenance margin is $1,600 for the Pound Sterling futures contract. Your report (without the margin account) should not excess 1,000 words. [35 marks]
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Q3. The following table contains information about your UK equity portfolio – the stocks you hold and how many (note you are long in all positions). Stock price data is given in the Excel spreadsheet ‘Coursework Data 2018.xlsx’ Table 1 : UK Equity Portfolio Company: Number of Shares Tesco: 1,200,000 Rolls Royce: 750,500 BP: 835,575 Centrica: 1,825,500 EasyJet: 915,385 HSBC: 250,785 Choose any date between the 15th of January 2018 and the 15th of May 2018. That day is today for you (I hope that every student will chose a different day which denotes TODAY). Clearly mention what TODAY is for you. Calculate the 95 percent 10-day VaR of your portfolio using the variance covariance approach.
Recalculate the 95 percent 10-day VaR using an exponential moving average as your volatility measure. Recalculate the 95 percent 10-day VaR using historic simulation. Compare your estimates with the actual 10-day VaR. Write an (up to) 1,500 word report to your advisory board outlining the risk your portfolio is exposed too, what VaR measures and present and explain the different VaR estimates. Also include in your report the issue of back-testing, its importance and how you could do the back-testing in practice. Explain how you could use derivatives in improving your VaR estimates covering the period of the next 6 months. [35 marks] Get Finance homework help today