MAF308 Derivatives And Fixed Income Securities

Free Samples

MAF308 Derivatives And Fixed Income Securities

.cms-body-content table{width:100%!important;} #subhidecontent{ position: relative;
overflow-x: auto;
width: 100%;}

MAF308 Derivatives And Fixed Income Securities

0 Download6 Pages / 1,414 Words

Course Code: MAF308
University: Deakin Business School

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Question:

On Successful Completion of this assessment, students can: Graduate Learning
Develop and demonstrate knowledge of interest rate measurement, fixed income securities, forwards, futures, and options
Justify the mechanics of no arbitrage and apply to real worldsituations
Develop and demonstrate effective communication skills, including the ability to clearly explain graphs, data, statistics and algebra, in a manner appropriate for finance peers and academics.
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 for assessment 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.
Compute the duration of the bond on GSBG23 on 10 July 2018 14:00. Using graphs to demonstrate the effect of coupon and interest rate on duration respectively. Briefly discuss your graph results.
Note:
(1) You can solve all questions without any need of Excel build-in Functions, except “goal seek…” which is necessary to find yield-to-maturity. If you choose to do it manually, i.e., use bruteforce searching, it would be very time-consuming.
(2) In order to finish Part A, you need skills to use Excel. The information contained in appendix A may provide some extra help.
(3) You are encouraged to use Excel build-in functions as long as you can use them correctly. Warning: Some functions in Excel may cause confusion. For example, the description of “PRICE” function is “Returns the price per $100 face value of a security that pays periodic interest.”
Plagiarism occurs when a student passes off as the student’s own work, or copies without acknowledgement as to its authorship, the work of any other person or resubmits their own work from a previous assessment task.

Collusion occurs when a student obtains the agreement of another person for a fraudulent purpose, with the intent of obtaining an advantage in submitting an assignment or other work.

Answer:

Part B: Hedge use Futures and Derivatives Disaster
Question B2.1: Providing justification whether MG was hedging or speculating
Figure 1: Indicating the cash flow structure of hedges for MGRM
(Source: Mello and Parsons 1995)
Journal of Applied Corporate finance highlights significant information regarding the speculative measures, which was taken into consideration by the management of MG Refining and Marketing (MGRM). The measure taken by the management of MGRM was not accurate, as they were not hedging for the underlying assets that were being committed by every month. Moreover, the company mainly focused on short term valuation of the oil prices and opted to buy contract with short term duration, while the actual sales were conducted for long term. This mainly increased the mismatch of maturity structure of the company, as derivatives used for hedging purpuras did not match the delivery of the contracts. This increased overall variance of the organisation, while dealing with the hedging instruments and exposed the organisation to the excessive amount of basic risk. The accumulated risk structure of the organisation was shared when the prices were going down and increased the cash flow deficit from the mismatched hedges (Neuberger 2015).
Figure 2: Present Value relationship
(Source: Mello and Parsons 1995)
The second major loophole in the decision of MGRM was the hedging measures used for long term contracts. The organisation did not account on the present value of derivatives, which was negatively affecting their hedge position. This can be considered that biggest mistake, as the hedging period and delivery period of the context did not match and exposed the organisation to high volatility. The organisation also used one to one hedge ratio, which is not advisable for shorty term contract, which was being used by MGRM. This mainly increased the negative hedge value for the rolling contracts of MGRM and exposed the organisation to exponential losses (Abdel-Khalik 2014).
Question B2.2: Indicating how underlining assets mismatch and maturity mismatch impact hedge results
The claims regarding the purpose of hedging futures are correct, as the organisation needs to comply with the choice of asset underling the future contract and the delivery month. The underlying asset mismatch directly affects the level of pricing, which can be conducted for the particular asset. Therefore, in context of hedging it can be detected that underlying asset mismatch arises only when the underlying asset does match the hedging instrument. This mainly creates an imperfect hedge, which increases the level of risk attributes for the organisation conducting the hedge. Dickinson et al. (2017) indicates that investors and organisation mainly use hedging process for reducing the risk attributes of their portfolio exposure. On the other hand, Corbett and Smodis (2018) criticises that without adequate research the hedging measure mainly increases the risk level and raises the chances of loss from fluctuating prices.
Therefore, organisations dealing with jet oil cannot hedge their exposure in the commodity by hedging an underlying asset of heating oil futures, as the price valuation and output of the commodities are different. This measure will not allow the organisation to adequately hedge their products and reduce the actual exposure. As an alternative, the hedging measure will increase the level of risk for the organisation and exponentially increase the chance of losses. In addition, this kind of measure mainly leads to speculation and not hedge the underlying assets that needs to be hedged by the organisation is not being targeted.
The maturity mismatch is also considered to one of the problematic conditions for organisation, as it increases the risk attribute of the hedging measure. In addition, the maturity mismatch arises, when the underlying asset maturity does not match the hedging instrument maturity. This difference in contract maturity level mainly raises the basic risk of the underlying asset, which is being used by the organisation for its hedging purpose. Furthermore, the organisation needs to follow the roll over method for continuing the hedge, as the maturity level of the product delivery is not being hedged by the organisation. Magnan, Menini and Parbonetti (2015) mentioned that companies use the maturity mismatch to improve the effectives of the hedge, which can only be possible with adequate research and detection of the fluctuating prices. Bessis (2015) further indicated that when the beta of the stock is 1 and no maturity mismatch is present then risk from the underlying asset is nullified.
Therefore, it can be detected that organisations using the mismatch underlying asset and mismatch maturity will eventually increase the level of basic risk from their hedging instrument. In addition, from the evaluation it can be detected that the measure increases the level of risk from investment and does accurately hedge the exposure of the organisation. However, utilisation of the both the mismatch underlying asset and mismatch maturity can be conducted by the organisation, when the actual commodity instrument cannot be found in the market for hedging. The use of excessive research and correlation data can be used for conducting the hedge and securing the exposure (Goodhart and Perotti 2015).
Question B2.3: Discussing how maturity mismatch is critical in the case of Metallgescellschaft AG
The case study of MGRM directly sheds light on the criticality of the maturity mismatch, which needs to be taken into consideration by the organisation. In addition, the case study of MGRM also depicts that the hedging instruments maturity needs to be at the same level with the underlying asset delivery maturity. The occurrence of mismatch maturity will eventually raise the level of basic risk for the organisation, which led to the high losses incurred by MGRM at the end of 1993. The implementation of the strategy raised two critical consequences for MGRM, which led to the massive liquidity crisis for the company. This increment in massive liquidity problem did not indicate the use of adequate hedging measure imposed by the organisation.
Figure 3: The income and losses from delivery contract and Hedged contract
(Source: Mello and Parsons 1995)
The above figure relates to the cash inflow and outflow of MGRM, where the mismatch hedges were used by the organisation, which led to the accumulation of high cash outflows. In addition, the use of mismatched hedges increased the level of variance for the forms cash flow and exposed MGRM to excessive amount of basic risk, as the short dated future contracts were not compensated by the long dated delivery obligations. Hence, the use of short term hedge position for long term delivery obligations led to cash flow troubles for the organisation, which can be seen in the above figure. The use of rolling method for mismatched maturity is directly affecting the level of cash flows of MGRM and escalated the losses from the hedging instrument, as the basic risk from investment rose exponentially (Culp and Miller 1995).
The scenario of the cash flow problems is depicted in figure 1, where the continuous decline in short term future prices was directly increasing the negative balance in accumulated net cash flow. The rollover method also played a vital role in accumulating the losses, where the actual deliver of the contract was not being hedged by the organisation, which was being conducted in short term (Converse 2017). The delivery on monthly basis was at 1.28 million bbl, while the monthly hedge position was 154.0 million bbl and declining. This mismatch in maturity date raised the basic level of risk and projected a non-functionally hedge position for MGRM.
Reference:
Abdel-Khalik, A.R., 2014. Prospect Theory predictions in the field: Risk seekers in settings of weak accounting controls. Journal of Accounting Literature, 33(1-2), pp.58-84.
Bessis, J., 2015. Risk management in banking. John Wiley & Sons.
Converse, N., 2017. Uncertainty, capital flows, and maturity mismatch. Journal of International Money and Finance.
Corbett, T.P. and Smodis, S., 2018. Buy-side liquidity risk management best practices. Journal of Risk Management in Financial Institutions, 11(3), pp.207-217.
Culp, Christopher L. and Miller, Merton H., 1995, Metallgesellschaft and the Economics of Synthetic Storage, Journal of Applied Corporate Finance, Vol. 7.4, P62-76
Dickinson, D.L., Chaudhuri, A. and Greenaway-McGrevy, R., 2017. Trading while sleepy? Circadian mismatch and excess volatility in a global experimental asset market.
Goodhart, C.A. and Perotti, E., 2015. Maturity mismatch stretching: banking has taken a wrong turn. CEPR Policy Insight, 81.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Mello, A.S. and Parsons, J.E., 1995. Maturity structure of a hedge matters: Lessons from the Metallgesellschaft debacle. Journal of Applied Corporate Finance, 8(1), pp.106-121.
Neuberger, A., 2015. Rollover Risk. Wiley Encyclopedia of Management, pp.1-2.

Free Membership to World’s Largest Sample Bank

To View this & another 50000+ free samples. Please put
your valid email id.

E-mail

Yes, alert me for offers and important updates

Submit 

Download Sample Now

Earn back the money you have spent on the downloaded sample by uploading a unique assignment/study material/research material you have. After we assess the authenticity of the uploaded content, you will get 100% money back in your wallet within 7 days.

UploadUnique Document

DocumentUnder Evaluation

Get Moneyinto Your Wallet

Total 6 pages

PAY 4 USD TO DOWNLOAD

*The content must not be available online or in our existing Database to qualify as
unique.

Cite This Work
To export a reference to this article please select a referencing stye below:

APA
MLA
Harvard
OSCOLA
Vancouver

My Assignment Help. (2021). Derivatives And Fixed Income Securities. Retrieved from https://myassignmenthelp.com/free-samples/maf308-derivatives-and-fixed-income-securities/maturity-mismatch-stretching.html.

“Derivatives And Fixed Income Securities.” My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/maf308-derivatives-and-fixed-income-securities/maturity-mismatch-stretching.html.

My Assignment Help (2021) Derivatives And Fixed Income Securities [Online]. Available from: https://myassignmenthelp.com/free-samples/maf308-derivatives-and-fixed-income-securities/maturity-mismatch-stretching.html[Accessed 18 December 2021].

My Assignment Help. ‘Derivatives And Fixed Income Securities’ (My Assignment Help, 2021) accessed 18 December 2021.

My Assignment Help. Derivatives And Fixed Income Securities [Internet]. My Assignment Help. 2021 [cited 18 December 2021]. Available from: https://myassignmenthelp.com/free-samples/maf308-derivatives-and-fixed-income-securities/maturity-mismatch-stretching.html.

×
.close{position: absolute;right: 5px;z-index: 999;opacity: 1;color: #ff8b00;}

×

Thank you for your interest
The respective sample has been mail to your register email id

×

CONGRATS!
$20 Credited
successfully in your wallet.
* $5 to be used on order value more than $50. Valid for
only 1
month.

Account created successfully!
We have sent login details on your registered email.

User:

Password:

If you are looking for highly-trustworthy dissertation writing service, MyAssignmenthelp.com is your place to be. If you are not quite sure of how to write a perfect dissertation, just place an order with us. Our professionals will carry out extensive research to come up with the best dissertation topics.  From drafting the perfect dissertation structure to referencing perfectly, we will work on every aspect with utmost precision. If your aim is to score high this semester, do not hesitate to give us a call. Visit https://myassignmenthelp.com/ to know more about our services.

Latest Management Samples

div#loaddata .card img {max-width: 100%;
}

MPM755 Building Success In Commerce
Download :
0 | Pages :
9

Course Code: MPM755
University: Deakin University

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Answers:
Introduction
The process of developing a successful business entity requires a multidimensional analysis of several factors that relate to the internal and external environment in commerce. The areas covered in this current unit are essential in transforming the business perspective regarding the key commerce factors such as ethics, technology, culture, entrepreneurship, leadership, culture, and globalization (Nzelibe, 1996; Barza, 2…
Read
More

SNM660 Evidence Based Practice
Download :
0 | Pages :
8

Course Code: SNM660
University: The University Of Sheffield

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: United Kingdom

Answers:
Critical reflection on the objective, design, methodology and outcome of the research undertaken Assessment-I
Smoking and tobacco addiction is one of the few among the most basic general restorative issues, particularly to developed nations such as the UK. It has been represented that among all risk segments smoking is the fourth driving purpose behind infections and other several ailments like asthma, breathing and problems in the l…
Read
More
Tags:
Australia Maidstone Management Business management with marketing University of New South Wales Masters in Business Administration 

BSBHRM513 Manage Workforce Planning
Download :
0 | Pages :
20

Course Code: BSBHRM513
University: Tafe NSW

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Answer:
Task 1
1.0 Data on staff turnover and demographics
That includes the staffing information of JKL industries for the fiscal year of 2014-15, it can be said that the company is having problems related to employee turnover. For the role of Senior Manager in Sydney, the organization needs 4 managers; however, one manager is exiting. It will make one empty position which might hurt the decision making process. On the other hand, In Brisba…
Read
More

MKT2031 Issues In Small Business And Entrepreneurship
Download :
0 | Pages :
5

Course Code: MKT2031
University: University Of Northampton

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: United Kingdom

Answer:
Entrepreneurial ventures
Entrepreneurship is the capacity and willingness to develop, manage, and put in order operations of any business venture with an intention to make profits despite the risks that may be involved in such venture. Small and large businesses have a vital role to play in the overall performance of the economy. It is, therefore, necessary to consider the difference between entrepreneurial ventures, individual, and c…
Read
More
Tags:
Turkey Istanbul Management University of Employee Masters in Business Administration 

MN506 System Management
Download :
0 | Pages :
7

Course Code: MN506
University: Melbourne Institute Of Technology

MyAssignmentHelp.com is not sponsored or endorsed by this college or university

Country: Australia

Answer:
Introduction
An operating system (OS) is defined as a system software that is installed in the systems for the management of the hardware along with the other software resources. Every computer system and mobile device requires an operating system for functioning and execution of operations. There is a great use of mobile devices such as tablets and Smartphones that has increased. One of the widely used and implemented operating syste…
Read
More
Tags:
Australia Cheltenham Computer Science Litigation and Dispute Management University of New South Wales Information Technology 

Next