Background Global Fund Managers Ltd (GFML) is an investment management company. GFML is able to...

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Background Global Fund Managers Ltd (GFML) is an investment management company. GFML is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under management as at 19th August 2017 include the following: Investment Type Amount Portfolio Beta Representative Index / Security Australian Shares (equities) A$100m 1.15 S&P ASX 200 US Shares (equities) US$55m 1.0 S&P 500 Short term interest securities (ave. maturity 90 days) A$20m 0 Bank Accepted Bills Long term fixed interest securities (ave. maturities 5 years in both countries) A$40m US$30m 0 Relevant bond indices Section I Required: Assume that you are a recently appointed hedge strategist with GFML and that you have been requested to prepare a report for presentation to GFML’s Investment Strategy Committee at its next meeting. You have been specifically requested to address the following issues: (a) To identify and list the specific financial risk exposures faced by GFML with respect to the asset categories listed in the above schedule (please limit the financial risks to what is taught in this unit). Bear in mind that GFML is an Australian based fund and that most of its investors are Australian residents. In this section you MUST discuss the outlook (forecast) for the each underlying variable and the related risk exposure. You need to provide adequate justification for your responses. (b) To make firm recommendations on whether or to hedge all, part or none of the exposures identified in part (a) above. You MUST provide some explanation for each of your recommendations. (You are not required to specify the type of derivative to be used to hedge in response to this question). (c) To make recommendations on which derivative instruments (for example, options, futures, etc) to use to implement the hedges that you have FIN30014 Financial Risk Management Sem 2, XXXXXXXXXXrecommended in part (b) above. Once again, you MUST explain your recommendations. You are NOT required to propose details of how to implement your hedge recommendations in this part. Section II (d) Irrespective of your recommendations in parts b and c above, assume that you need to hedge 50% Australian and US equities exposures. Provide a schedule that shows the following: a. the risk b. the exposures to be hedged, c. which derivatives are to be used, d. the number of derivative contracts for each hedge, e. the contract months, and f. the prices at the time of making the recommendation. (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 as presented below.

Robert · Accepted Answer

Running head: FINANCIAL RISK MANAGEMENT
FIN30014 Financial Risk Management 
Assignment - Semester 2, 2017
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1 FINANCIAL RISK MANAGEMENT 
Executive Summary 
The current study focuses on evaluating the hedging strategies for Global Fund Managers Ltd 
(GFML). The study effectively identified special financial risk exposures, which are experienced 
by GMFL. In addition to that, the study recommended and justified the efficacy of hedging in the 
context of GMFL. It has significantly justified the proper derivative instruments for hedging as 
well. The study has also analyzed and depicted a detailed hedging account for GMFL in different 
market scenario.
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2 FINANCIAL RISK MANAGEMENT 
Table of Contents 
Introduction ..................................................................................................................................... 3 
Section I .......................................................................................................................................... 3 
(a) Identification and listing of the specific exposures of financial risks faced by GFML and an 
outlook for each underlying variable .............................................................................................. 3 
(b) Recommendations for GFML on hedging ................................................................................ 5 
(c) Recommendations for GFML on which derivative instruments to be used for implementing 
the hedges........................................................................................................................................ 6 
Section II ......................................................................................................................................... 7 
(d) Schedule: ................................................................................................................................... 7 
(e) Proposal of Hedging strategy and Option contract.................................................................... 9 
Conclusion ...................................................................................................................................... 9 
Reference list ................................................................................................................................ 10
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3 FINANCIAL RISK MANAGEMENT 
Introduction 
Risk management is one of the biggest factors that contribute towards the success of a 
company. The techniques that are adopted by a company for the management of its risks 
determines the success of the company irrespective of the risks present in the company. Global 
Fund Managers Ltd or GFML is a company dealing with investment management. The company 
is able to enter into the derivatives contracts for hedging investments or for adding value to the 
positions. The project report deals with risk management and the techniques of risk management 
that can be adopted by GFML with the four asset categories in which it is investing. At the end 
of the report, two options of combination and spread strategies, which involve more than one 
option contract for the Australian Securities Portfolio, has been given.
Section I  
(a) Identification and listing of the specific exposures of financial risks faced by GFML and 
an outlook for each underlying variable  
The risks of a company should be identified, assessed, and prioritized for managing them 
efficiently (Chance & Brooks, 2015). The company GFML has four different investments as at 
19 August 2017, which have different risks in the market. The four investments and the 
respective financial risks faced by them are as follows – 
1. Australian Shares (equities)  
The Company GFML invests an amount of Australian $100 million. This investment is 
the representative index under S&P Australian Stock Exchange (ASX) 200. The portfolio beta of 
the investment is 1.15. The beta portfolio of the investment made by GFML shows the risks of 
the investment. The volatility of the investment is quite high. Any beta portfolio, which is greater 
than 1.0, shows that the investment portfolio is quite volatile.  The first risk that the investment is 
facing is the „market risk‟ (Waemustafa & Sukri, 2016). The market risk, also known as 
systematic risk, is a risk that is faced by almost all the shares in the market. This risk affects 
every share in the market. Another risk that prevails in case of this investment portfolio is 
„liquidity risk‟ (Acharya et al., 2013). The liquidity risk can be referred to the possibilities, which
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4 FINANCIAL RISK MANAGEMENT 
an investor has regarding the buying or selling of an investment due to limited opportunities. The 
liquidity risk prevails in case of this investment portfolio since the amount invested in the 
Australian shares is huge. The 100 million Australian dollars invested in the portfolio is nearly 
impossible to recover. Due to the huge sum invested in the Australian shares, it will be very 
difficult to sell the shares and earn profit and hence, due to this reason, the beta, or volatility of 
the shares are so high. Another risk in this investment is „company risk‟. Company risks are the 
risks that are faced by an investor due to the financial uncertainty. However, this risk can be 
mitigated by using the correct recommendations.  
2.

Background Global Fund Managers Ltd (GFML) is an investment management company. GFML is able to enter into derivatives contracts to hedge investments or to add value to positions. Funds under...

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