7810AFE - Derivatives & Risk Management Report Writing - IManageRisk Firm Case Study - Management Assignment Help

Assignment Task

Part A

In Part A, you need to provide a risk management consulting report to a client. In your report, please address the issues faced by the client as mentioned in the case. 

Suppose you are a risk management professional working for iManageRisk firm which is located in Nathan, Queensland. manage risk provides consulting services to firms such as energy companies and mining companies on their risk management. Mr. Richard Rogers, the treasurer of QEnergy, approaches you today (assume it is now January 2021) to ask you for the advice on financial risk management of his company.

QEnergy is an Australian oil and gas company producing crude oil from Australia's highest-grade major field in northeastern Australia, with plans to increase its size and valuation over the next few years. QEnergy is a growth company that aims to have growing cash flows from expanding oil operations and the huge capital growth upside of an exploration company seeking to define up to 150,000 barrels of oil. 

The company’s profit and loss is subject to the price change of crude oil. The company will benefit US$4,000 for each 1 cent increase in the price per barrel of crude oil (WTI) sometime in late July 2021. As the market price of crude oil is volatile, the company is considering using some strategies to manage its risk exposure. One way to hedge these exposures is to use futures contracts. There are futures contracts traded in the COMEX division of the Chicago Mercantile Exchange (CME) Group.
In your report, please devise a hedging strategy for QEnergy.        

Questions

• What kind of futures should QEnergy use and what position should it take if QEnergy wants to use futures to hedge the exposure? Why? ]
• What is the optimal hedge ratio?   
• Note that monthly data for spot and futures prices (both in US$, WTI Crude Oil) for the past five years has been obtained for you. See Appendix A. 
• What is the company's exposure measured in barrels of oil? 
• How many crude oil futures contracts should be traded? Note: Check the Chicago Mercantile Exchange website for the specification of crude oil futures.                                     
• What is the maintenance margin requirement?  Why does the exchange require maintenance margin?                                                                                                     
• What are other major risks faced by QEnergy apart from the risk arising from the price change in crude oil?                                                             
• Discuss whether QEnergy should use derivatives and if QEnergy use derivatives, what areas should QEnergy be aware when using the derivatives.
• Follow the general format of a consulting report, please use some source materials (such as academic journal articles and newspaper articles) to support your arguments in your report. Follow a proper referencing and citation style .

Part B 
(You are required to answer all of the following questions)

Problem B1: Forward Pricing and Valuation of Forward Contract 
A stock is expected to pay a dividend of $2 per share in both 2 months and 4 months. The stock price is $100, and the risk-free rate of interest is 10% per annum with continuous compounding for all maturities. An investor has just taken a short position in a 6-month forward contract on the stock. 
What are the forward price and the initial value of the forward contract?
Three months later, the price of the stock is $90 and the risk-free rate of interest drops to 8% per annum. What are the forward price and the value of the short position in the forward contract?

Problem B2: Put-Call Parity
The price of a European call that expires in six months and has a strike price of $49 is $4.5. The underlying stock price is $50, and a dividend of $1.00 is expected in three months. The term structure is flat, with all risk-free interest rates being 10%. 
What is the price of a European put option that expires in six months and has a strike price of $49? 
Explain in detail the arbitrage opportunities if the European put price is $1.60.

Problem B3: Binomial Trees 
A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 7% per annum with continuous compounding. 
Use a two-step binomial tree to calculate the value of a six-month European put option with a strike price of $42. 
Use a two-step binomial tree to calculate the value of a six-month American put option with a strike price of $42. 
Use a two-step binomial tree to calculate the value of a six-month European call option with a strike price of $42. 
 Without calculations, show the value of a six-month American call option with a strike price of 42. 
Show whether the put-call-parity holds for the European put and the European call. [

Problem B4: Value of Swaption 
Suppose that the LIBOR yield curve is flat at 10% with annual compounding. A swaption gives the holder the right to receive 9% (with annual compounding) in a five-year swap starting in three years. Payments are made annually. The volatility of the forward swap rate is 25% per annum and the principal is $1 million. Use Black’s model to price the swaption.  Give d1 and d2 with four decimal places and interpolate using the tables for N(x

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