Homework answers / question archive / BEA380 Derivative Securities Individual Assignment Submission date: 02 October 2023 at 5:00pm Word Length: 1800 words (excluding formulas & charts and tables) Font size and style: 12 Times New (Include UTAS signed group cover page) Presentation: The assignment should be typed and include a signed cover sheet

BEA380 Derivative Securities Individual Assignment Submission date: 02 October 2023 at 5:00pm Word Length: 1800 words (excluding formulas & charts and tables) Font size and style: 12 Times New (Include UTAS signed group cover page) Presentation: The assignment should be typed and include a signed cover sheet

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BEA380 Derivative Securities

Individual Assignment Submission date: 02 October 2023 at 5:00pm Word Length: 1800 words (excluding formulas & charts and tables) Font size and style: 12 Times New (Include UTAS signed group cover page)

Presentation: The assignment should be typed and include a signed cover sheet.

Format: You are required to write a professional research report. Your report should contain an executive summary, body, results where applicable, recommendations, conclusions and references. You should assume a business/finance audience. This assignment will be graded (in part) on your ability to communicate clearly and discussing your findings. Think very clearly about how you present your material. Make your report inviting and easy to read, with clear and concise language.

Grading Policy: The total of this assignment is 100 marks, which correspond to 20% of your final assessment.

Submission: Submit only 1 assignment PDF file on MyLo. Assignments will incur a penalty of 5% of the available marks for each day the assessment is late. Assessment submitted more than five (5) days late will not be accepted. Before submitting your assignment, carefully check that all material in this assignment is your own work, except where there is clear acknowledgement or reference to the work of others. For guidance on what is expected of you as a student, see the Academic Integrity for Students website.

Instructions: This individual assignment deals with derivative securities and how firms implement derivatives for speculating and hedging purposes. In completing this assignment, you need to use a financial media (such as Google Finance, Yahoo Finance, WSJ, and etc.). Attach a printout (as an appendix at the end of your submission) including every piece of information you obtain from the financial media in this assignment.

Learning outcomes: This assignment relates to the following unit learning outcomes: • Describe the potential risks and benefits associated with derivatives and make well-informed decisions about their suitable usage. • Evaluate the role of derivative markets in promoting economic growth and stability. • Analyse and implement speculative and hedging strategies. • Calculate the price of forwards, futures, swaps and options contracts. Nature: The assignment will consist of questions covering topics from Week 1 to Week 9. 2 Research: This is a research assignment. You are expected to locate and access multiple sources of information and use appropriate referencing. If you need guidance on how to reference your work correctly. You can download a print friendly Harvard referencing guide from the University of Tasmania Library website: https://utas.libguides.com/referencing/Harvard. Value: 20% weighting towards your final assessment. The assignment will be graded according to the attached assessment rubric. *** IMPORTANT *** In completing this assignment, you must not in any way use the work of any other person and present it as your own. You must always clearly and accurately acknowledge the source of any material you use. In particular, you must NOT without clear and accurate acknowledgement: • Copy material (including audio-visual or computer-based material); • Use another person’s concepts, results, or conclusions; or • Summarise another person’s work. If you infringe these rules or encourage or assist another person to infringe them, severe penalties can apply (see the University’s policy on integrity: Statement on Academic Integrity or Assignment Question Background: Hydro Tasmania is the trading name of the Hydro-Electric Corporation, a Tasmanian Government business enterprise which is the predominant electricity generator in the state of Tasmania, Australia. The firm is currently Australia's leading clean energy business and largest generator of renewable energy. Its goal is to help make Tasmania the renewable energy battery of the nation and create an energy future that's clean, reliable and affordable. Requirement Using the 2022 financial annual report of Hydro, material derived from academic papers, government reports, market commentary (eg. from financial institutions, financial review, etc.) and/or books. Write a 1800 words report addressing the following questions listed 3 below. Do not base your report on blogs, opinion pieces, Wikipedia etc. Your report should contain an executive summary, body, results where applicable, recommendations, conclusions and references. Each question is classified under a criterion for grading purposes. Demonstrated understanding of financial derivatives: • Provide a detailed discussion of the derivatives employed by Hydro. Highlighting their differences and similarities. What would be the effects of volatility on each of these derivatives? Demonstrated understanding of financial risks and recommendation of hedging possibilities: • Provide a detailed analysis of the financial risks faced by Hydro in its daily business activities. Show which risks Hydro can be hedge and which risks it cannot hedge. Demonstrated understanding of hedging strategies: • Describe in detail how hydro uses derivatives to hedge its respective risk exposures. Does the firm make a profit or loss from its hedging strategies? Explain your answer with supporting figures. • Discuss in detail other hedging strategies that Hydro could have implemented. Highlight the impact of simple naked (uncovered) strategies on your proposed hedging strategy? • Given that Hydro isn’t publicly listed, briefly explain how its management could create a perfectly hedged position by using stocks and call options. Demonstrated understanding of margin accounts: • Discuss the relevance of futures margin account and what are the possible risks margin account minimize. Discuss Hydro’s net gain/loss from 2021 to 2022 by implementing margin account. Analysis of option profits graphs and discussing the graphs: • Suppose Hydro decides to trade in the energy options market. o Today’s spot price of energy is $3,261.80. o You have obtained data for the following option contracts for your analysis. All options expire in 1 year, the risk-free rate is 5%. Strike price Call premium Put premium 3,229.28 50.887 15.176 4 3,250.00 38.086 22.973 3,261.80 31.785 28.405 3,265.20 30.105 30.105 3,280.00 23.491 38.206 3,300.00 16.287 50.887 • Using the highest in-the-money call and put option payoffs, discuss how Hydro could benefit from a long-covered call, long covered put and a long straddle strategy. Draw and interpret the possible profit/loss graphs. Demonstrated an understanding of other Hydro deals: • In 2021, Hydro, Macquarie and Shell entered a trade of stored energy deal. From your derivatives knowledge, what conclusions and recommendations can you make about this type of financial contract. Useful links: Firm website - https://www.hydro.com.au/ Annual reports - https://www.hydro.com.au/about-us/our-governance/annual-report Financial review Hydro deal - https://www.afr.com/companies/energy/hydro-macquarie[1]shell-in-game-changer-storage-deal-20210119-p56vby Report samples - https://www.datapine.com/blog/daily-weekly-monthly-financial-report-examples/ - https://youtube-breakingintowallstreet-com.s3.amazonaws.com/JAZZ-Equity-Research[1]Report.pdf - https://www.occ.gov/publications-and-resources/publications/quarterly-report-on-bank[1]trading-and-derivatives-activities/files/pub-derivatives-quarterly-qtr1-2021.pdf 5 Assessment Rubric Criterion Fail Pass Credit Distinction High Distinction Demonstrated understanding of financial derivatives. (10%) Few key features are identified and explained. Discussion is insufficient or irrelevant. Most key features are identified and explained. Discussion may be insufficient or irrelevant in places. Most key features are identified and explained. Too much or too little analysis on one feature. Discussion is relevant. All key features are identified and explained. Discussion is relevant and demonstrates deep understanding. All key features are identified and explained. Discussion is relevant and demonstrates deep and critical understanding. Demonstrated understanding of financial risks and recommendation of hedging possibilities. (10%) Few relevant dimensions identified and explained. Some relevant dimensions identified and correctly explained. More than half the relevant dimensions identified and correctly explained. Many relevant dimensions identified and correctly explained. All relevant dimensions identified and comprehensively explained. 6 Demonstrated understanding of hedging strategies. (20%) Few hedging strategies are discussed. Competing arguments for and against alternative hedging strategies are not discussed. Recommendations are insufficient or irrelevant Most hedging strategies are discussed. Competing arguments for and against alternative hedging strategies are discussed. Recommendations may be insufficient or irrelevant in places. Most hedging strategies are discussed. Competing arguments for and against alternative hedging strategies are discussed. Too much or too little analysis on one alternative hedging strategy. Recommendations are relevant. All hedging strategies are discussed. Consistent evaluation of competing arguments for and against alternative hedging strategies. Recommendations are clear, follow logically from analysis and relevant. All hedging strategies are discussed. Consistent and critical evaluation of competing arguments for and against alternative hedging strategies. Recommendations are clear, follow logically from analysis, relevant and demonstrate deep and critical understanding. Criterion Fail Pass Credit Distinction High Distinction Demonstrated understanding of margin accounts. (10%) Few relevant dimensions identified and explained. Some relevant dimensions identified and correctly explained. More than half the relevant dimensions identified and correctly explained. Many relevant dimensions identified and correctly explained. All relevant dimensions identified and comprehensively explained. Analysis of option profits graphs and discussing the graphs. (20%) Few key features are analysed and discussed. Analysis and discussion are insufficient or irrelevant. Most key features are analysed and discussed. Analysis and discussion may be insufficient or irrelevant in places. Most key features are analysed and discussed. Too much or too little analysis and discussion on one feature. Analysis and discussion are relevant. All key features are analysed and discussed. Analysis and discussion are relevant and demonstrates deep understanding. All key features are analysed and discussed. Analysis and discussion are relevant and demonstrates deep and critical understanding. 7 Demonstrated an understanding of current Hydro deals. (10%) Few relevant dimensions identified and explained. Some relevant dimensions identified and correctly explained. More than half the relevant dimensions identified and correctly explained. Many relevant dimensions identified and correctly explained. All relevant dimensions identified and comprehensively explained. Presentation of report in written form – language of finance. (10%) Argument partially organised and sometimes coherent. Some discipline specific academic language. Acknowledged some sources. Some referencing conventions followed Argument generally organised and coherent and generally in discipline specific academic language Acknowledged most sources. Reasonably accurate referencing. Well organised argument, generally logical, concise and coherent, and mostly in discipline specific academic language. Acknowledged most sources. Mostly accurate referencing. Well organised argument, mostly logical, concise, and coherent, and in discipline specific academic language Acknowledged all sources. Mostly accurate referencing Logical structure and a coherent, concise well[1]developed argument in discipline specific academic language. Acknowledged all sources. Accurate and consistent referencing Overview, executive summary, and conclusion accurately and clearly present the reports main elements. (10%) Overview, executive summary, and conclusion are disorganised and/or incoherent. Overview, executive summary, and conclusion show some attempt to organise in a logical manner, but often disorganised. Overview, executive summary, and conclusion do not always flow in a logical manner, however an attempt at a logical argument is demonstrated. Overview, executive summary, and conclusion logically organised. Overview, executive summary, and conclusion logically organised and impressively written in a style that engages the reader. Assessment Submission Rules: Rule 1: Failure to acknowledge sources will lead to an overall fail grade. Rule 2: Incoherent English writing will lead to a fail grade and writing that is difficult to understand will result in reduced marks due to the impediment it creates in determining whether or not the student has met the above standards. Rule 3: Using ChatGPT/ChatBot will lead to an overall fail grade.