MAF308 Derivatives and Fixed Income Securities è¿ªè‚¯ ä»£å†™
Deakin UniversityDepartment of FinanceMAF308 Derivatives and Fixed Income SecuritiesTrimester 2, 2017Assessment Task 2: Written Assignment DUE DATE AND TIME 04 September, 2017 11:59PM (AEST)PERCENTAGE OF FINAL GRADE 30%HURLDE DETAILS NilLearning Outcome DetailsUnit Learning Outcome (ULO)On Successful Completion of this assessment, students can:Graduate LearningOutcomeULO1â€ Develop and demonstrate knowledge of interest ratemeasurement, fixed income securities, forwards, futures, and options 1ULO2â€ Justify the mechanics of no arbitrage and apply to real worldsituations4, 5ULO3 â€ Apply derivatives securities to risk management; 5ULO4 â€ Develop and demonstrate effective communication skills, includingthe ability to clearly explain graphs, data, statistics and algebra, in amanner appropriate for finance peers and academics.1, 4Requirements You can choose to do this assignment individually or as a member of a group. Each group can have amaximum of 3 members and all members from the same group will receive the same mark.Submission ï‚· Each group (including â€œgroupâ€ with only one member) needs signâ€up via CloudDeakin from 28July 2017 to 25 August 2017.ï‚· Make sure you and your group partner register correctly. If you make a mistake or wish tochange the group, please email the details (e.g., name, student ID number, wrongly registeredgroup number) to Dr Peipei Wang (firstname.lastname@example.org). ï‚· Do not join someoneâ€™s group unless you have prior permission to do so. You will be removedfrom a group at the request of the other student! ï‚· You may work with Word or other text edit software, but you MUST convert your final reportto a PDF file. ï‚· Each group needs to lodge one electronic copy (final report in .pdf) of the assignment on theunit site. You are required to submit an ELECTRONIC COPY ONLY. Each group is required tosubmit only one document, which is the final report. Please donâ€™t submit your workingPage 2 of 10spreadsheet separately. All information should be combined into one document, which isyour final report. ï‚· Marking is based on the submitted final report (.pdf) only! This means that if you calculatecorrectly in the spreadsheet but copy incorrectly into the final report, you will lose allassociated marks, so please check carefully. ï‚· There is no official assignment cover sheet. Before submitting your assignment report, readthe plagiarism and collusion declaration section in the assignment submission dropbox. ï‚· You must keep a backup copy of every assignment you submit, until the marked assignmenthas been returned to you. In the unlikely event that one of your assignments is misplaced, youwill need to submit your backup copy.ï‚· Any work you submit may be checked by electronic or other means for the purposes ofdetecting collusion and/or plagiarism.ï‚· When you are required to submit an assignment through your Cloud Unit Site, you will receivean email to your Deakin email address confirming that it has been submitted. You shouldcheck that you can see your assignment in the Submissions view of the Assignment dropboxfolder after upload, and check for, and keep, the email receipt for the submissionLate submissionA request for a time extension must be made in writing to the Unit Chair, Dr Peipei Wang(email@example.com) at least two days before the due date. This request must includedocumentary evidence, such as medical certificate. Please note: since students will have several weeks to complete this assignment and are expectedto make good use of this time, being unfit on the due date or just one or two days prior to the duedate, may not be an acceptable ground to get an extension.Extensions can be granted for documented serious illness (not just on the day the assignment is due!)or for compassionate reasons under extenuating circumstances. The unit chair can ask to see howmuch work has been completed before granting an extension. All extension applications have to besent to the unit chairs before the due date.Work or holiday reasons are NOT grounds for an extension â€“ you are expected to manage these issuesas part of your studies. You are strongly encouraged to start early and to continually backup yourassignment as you progress. Computer crashes or corrupted files will NOT be accepted as valid reasonsfor an extension of any length.For further information about Special Consideration, visithttp://www.deakin.edu.au/students/assessments/specialâ€consideration Penalties for late submissionIn accordance with Universityâ€™s policy, the following marking penalties will apply if you submit anassessment task after the due date without an approved extension: 5% will be deducted from available marks for each day up to five days, and work that is submittedmore than five days after the due date will not be marked. You will receive 0% for the task. â€˜Dayâ€™ meansPage 3 of 10calendar day for electronic submissions. The Unit Chair may refuse to accept a late submission whereit is unreasonable or impracticable to assess the task after the due date.Turnitinï‚· Students are strongly recommended to check originality through Turnitin, prior to submittingthe final assessment. For more information about Turnitin and how to check for originality,refer to the Deakin website information at:http://www.deakin.edu.au/learning/cloudâ€learning/clouddeakin/guides/assessment/turnitinâ€plagiarismâ€andâ€grademarkï‚· Once you upload your paper as a submission, you can access the originality report. Use thefeedback to revise and improve your document. You can still make changes to the document,as the dropbox accepts further submissions until the due date (each attempt overridesprevious attempts). ï‚· All submissions will be checked for potential plagiarism using TurnitinÂ© software. If plagiarismis suspected, the assignment will automatically be referred to the Facultyâ€™s Academic ProgressCommittee. Referencing You must correctly use the Harvard style of referencing in this assessment. Academic Integrity, Plagiarism and Collusion Plagiarism and collusion constitute extremely serious breaches of academic integrity. They are formsof cheating, and severe penalties are associated with them, including cancellation of marks for aspecific assignment, for a specific unit or even exclusion from the course. If you are ever in doubtabout how to properly use and cite a source of information, consult your lecturer or the Study Supportwebsite http://www.deakin.edu.au/students/studyâ€support/referencing ï‚· Plagiarism occurs when a student passes off as the studentâ€™s own work, or copies withoutacknowledgement as to its authorship, the work of any other person or resubmits their ownwork from a previous assessment task.ï‚· Collusion occurs when a student obtains the agreement of another person for a fraudulentpurpose, with the intent of obtaining an advantage in submitting an assignment or other work.Can I recycle my own work?Deakin students are not permitted to recycle their assessment work, or parts of assessment work,without the approval of the unit chair of their current unit. This includes work submitted forassessment at another academic institution. If students wish to reuse or extend parts of previouslysubmitted work, then they should discuss this with the unit chair prior to the submission date.Depending on the nature of the task, the unit chair may permit or decline the request.Building evidence of your experiences, skills and knowledge (Portfolio)Page 4 of 10Building a portfolio that evidences your skills, knowledge and experience will provide you with avaluable tool to help you prepare for interviews and to showcase to potential employers. There are anumber of tools that you can use to build a portfolio. You are provided with cloud space throughOneDrive, or through the Portfolio tool in the Cloud Unit Site, but you can use any storage repositorysystem that you like.Remember that a Portfolio is YOUR tool. You should be able to store your assessment work,reflections, achievements and artefacts in YOUR Portfolio. Once you have completed this assessmentpiece, add it to your personal Portfolio to use and showcase your learning later, when applying forjobs, or further studies. Curate your work by adding meaningful tags to your artefacts that describewhat the artefact represents Page 5 of 10Assignment Task2 This Written Assignment contains 3 parts: Part A, Part B and Part C. The Assignment carries 100 marksand is converted to equal 30% of your total assessment in this unit. Marks have been allocated foreach part and it will help you to selfâ€evaluate after finishing the assignment. If you receive 80 marksout of 100 marks, it is equivalent to 24 marks out of 30 marks and contribute 24 marks to your totalassessment in this unit.The word limit is set for discussionâ€type questions. â€“ Be succinct: the fewer the better. Please donâ€™tmisinterpret this: if you write nothing, your work will be awarded zero. Your answer can exceed theword limit, but please consider what value the extra words add before you submit your assignment.Do you really need to write such a long answer? Part A: Bond Pricing and Duration (25 Marks)Develop a spreadsheet in Excel that prices Australia Government Bond â€œ3.25% Treasury Bonds due21 April 2025â€, the term sheet is provided at Appendix 1.Working spreadsheet needs to include:ï‚· Inputso Day conventiono Annual Coupon Rateo Yield to Maturity (Annualized)o Number of Payment per yearo Face Value (PAR)ï‚· Outputs (determined by changing inputs)o Discount Rate per periodo Coupon Paymento Bond price Question A1: The yield to maturity of above particular bond is 1.858% per annum annuallycompounding on 11/7/2017. What is the market price of this bond on 11/7/2017? (Or equivalently toask, how much do you need to pay to get this particular bond on 11/7/2017?) (10 Marks)Spreadsheet template for A1: Page 6 of 10Note: (1) You can use the above template to organise your calculations but you are free to create yourown style. Please note, the numbers shown in the above template have nothing to do with the answerof your task Part A. You need to read your task carefully and fill in the correct one for eachcorresponding label. (2) If you are familiar with Excel functions, you may notice there are Excel builtâ€in functions, e.g.,â€œPRICEâ€ which allows you to calculate bond price directly. You are free to use any Excel builtâ€infunction to solve your problem as long as you use it correctly. (3) Excel builtâ€in function â€œYEARFRACâ€ is recommend to be used to find â€œnumber of yearsâ€ betweentwo dates. Please check following link for help of this function: https://support.office.com/enâ€us/article/YEARFRACâ€functionâ€3844141eâ€c76dâ€4143â€82b6â€208454ddc6a8.You need to cut and paste your table to show the calculation procedure. Specifically, youâ€™reencouraged to provide all formulas explicitly to show how you get the specific number, however youjust need show one or two formulas for the same type of calculation. For example, from the abovetemplate, cell 18C, 18D, 18E, 18F, â‹¯ use the same type of calculation, you just need to show one ortwo of them, for example, 18C ? ? ??.???????.???? ? 0.994918D ? ? ??.???????.???? ? 0.9857Showing your working process explicitly will help you to get partial marks when your numeric answerPage 7 of 10is wrong but you can demonstrate correct working logic. Similarly, if you use Excel builtâ€in function,you need to explicitly show input parameters of the function which allows you to get the specificnumber. Question A2: Construct a graph for the above bond showing the relationship between bond price (Yâ€axis or vertical axis) and yieldâ€toâ€maturity (Xâ€axis or horizontal axis) for a range of yieldâ€toâ€maturity(annualized) of 1.0% through 3.0% with step size of 0.1%. All yields are annualized and yearlycompounding. Discuss the relationship between bond price and yieldâ€toâ€maturity. (100 â€“ 150 words)(10 Marks)Question A3: Compute the duration of the above bond on 11/7/2017. Using duration relation, explainhow sensitive the above bond is to interest rate change. (200 words) (5 Marks)Spreadsheet Templet:Note: (1) You can use the above template to organise your calculations but you are free to create yourown style. Please note, the numbers shown in the above template have nothing to do with the answerof your task Part A, you need read your task carefully and fill in the correct one for each correspondinglabel.
MAF308 Derivatives and Fixed Income Securities è¿ªè‚¯ ä»£å†™(2) If you are familiar with Excel functions, you may notice there is an Excel builtâ€in function i.e.,â€œDURARTIONâ€ which allows you to calculate bond duration directly. You are free to use any Excelbuiltâ€in function to solve your problem as long as you use it correctly. Page 8 of 10Part B: Hedge use Futures and Derivatives Disaster (50 Marks)Question B1: For this question, you will need to access resources from the library and/or internet, toinvestigate how Futures can be used to hedge or speculate. (At least 2 citations are required tosupport your investigation. 500 words) (15 Marks)Question B2.1: Metallgescellschaft AG or MG is a German conglomerate. They have severalsubsidiaries in its â€œEnergy Groupâ€, with MG Refining and Marketing Inc. (MGRM) in charge of refiningand marketing petroleum products in the U.S. It was revealed publicly that it recorded a losses ofapproximately $1.3 billion at yearâ€end 1993 due mainly to cashâ€flow problems resulting from large oilforward contracts it had written (Mello and Parsons 1995). What happened was that MGRM committed to sell certain amounts of petroleum every month for upto 10 years at prices fixed in 1992 (i.e., MGRM has written oil forward contracts). To hedge theirposition, during the latter half of 1993, MGRM established long energy futures (and swaps) positionsequivalent to nearly 160 million barrels of oil, positions that would benefit handsomely if energy pricesrose (Edwards 1995). Instead, energy prices (crude oil, heating oil, and gasoline) fell sharply during thelatter part of 1993, causing MGRM to incur huge unrealized losses and margin calls on its derivativespositions. An important aspect of MGRMâ€™s hedging strategy is that its derivatives positions wereâ€œstackedâ€ in shortâ€dated futures (and swaps) that had to be rolled forward periodically to maintainthe hedge (Mello and Parsons 1995). MGâ€™s losses in the futures (and swaps) markets have raisedquestions about whether MG was really hedging or speculating. Please check the following tworeading references and internet resource for this famous case (i.e., google â€œMetallgescellschaft AGâ€)and answer the following questions. Give your own (informed) opinion on whether you felt that MG was hedging or speculating and justifyyour stance using appropriate literature to support your argument. (300 words) (10 Marks) (Note: the conclusion of hedge or speculation itself is meaningless for this question, your discussionshould contain your view/understanding on the boundary of hedge and speculation, and the riskinvolved in hedge or speculation, in the context of the case of Metallgescellschaft AG.)Question B2.2 Hull (2016) claims that for the purpose of hedge using futures, the â€œchoice (of contract)has two components: 1. the choice of the asset underlying the futures contract; 2. the choice of thedelivery monthâ€(p.73).In reference to the information from the textbook cited above discuss, in general terms, howunderlying assets mismatch (e.g. the asset you want to hedge is jet oil, but because there is no jet oilfutures, you can use heating oil futures) and maturity mismatch (e.g. the maturity of the futures isdifferent from, usually shorter than, the maturity you need) impact hedge results. (500 words) (10Marks)Question B2.3 After you have discussed this in general terms, you are to discuss how maturitymismatch is critical in the case of Metallgescellschaft AG. (400 words) (15 Marks)Reading Reference:Page 9 of 10(1) Culp, Christopher L. and Miller, Merton H., 1995, Metallgesellschaft and the Economics ofSynthetic Storage, Journal of Applied Corporate Finance, Vol. 7.4, P62â€76(2) Mello, Antonio S. and Parsons, John E.,1995, Maturity Structure of a Hedge Matters: Lessonsfrom the Metallgesellschaft Debacle, Journal of Applied Corporate Finance, Vol. 8.1, P106â€120Part C: Options (25 Marks)The full list of ASX listed companies can be found from the following link:http://www.asx.com.au/asx/research/listedCompanies.doChoose one company (per group) as the objective for the following questions. You can collectinformation on stock and options from:http://www.asx.com.au/asx/markets/equityPrices.doNote: You must be able to access both the stock and option prices. If you randomly pick a company,and cannot find its option price, discard it and pick another one.Question C1: For the company you choose, collect the stock (last) price, and liquid option prices, andinclude the date you collected these prices.ï‚· Call options have the same strike price but 2 different maturitiesï‚· Put options have the same strike price but 2 different maturitiesï‚· Call options have the same maturity but 3 different strike prices ï‚· Put options have the same maturity but 3 different strike pricesFor each option, collect expiry date, call or put identifier, exercise price or strike price, bid price, offerprice, last price, volume, and open interest. Present this information in table format. (10 Marks)Question C2: Explain how option prices vary with different strike price and different expiration dates.Provide your reasoning rather than simply saying, for example, strike price increases, and call optionprice decreases. (300 words) (15 Marks)Total: 25 + 50 + 25 = 100 MarksReference:(1) Edwards, Franklin R. 1995, Derivatives can be Hazardous to your Health: The Case ofMetallgesellschaft, Derivatives Quarterly, Spring, P8â€17(2) Mello, Antonio S. and Parsons, John E.,1995, Maturity Structure of a Hedge Matters: Lessonsfrom the Metallgesellschaft Debacle, Journal of Applied Corporate Finance, Vol. 8.1, P106â€120(3) Hull, John C. 2016, Fundamentals of Futures and Options Markets, Global Edition (8e), PearsonHigher Ed USA, P73Page 10 of 10Appendix 1: Term Sheet for 3.25% Treasury Bonds due 21 April 2025MAF308 Derivatives and Fixed Income Securities è¿ªè‚¯ ä»£å†™
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