Background
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.
Required:
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.
(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).
FIN30014 Financial Risk Management Sem 1, 2016
2
(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)
Notes
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:
http://www.cmegroup.com for Australian futures and options at www.sfe.com.au
(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.
FIN30014 Financial Risk Management Sem 1, 2016
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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
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Posted on May 14, 2016Author TutorCategories Question, Questions