Assessment 2: Derivatives and Hedging Strategies Assessment

Assessment Overview

This assessment requires students to apply derivatives to real-world financial problems. The case focuses on Pacifica Trading Pty Ltd, an Australian mid-sized import-export company. The company faces cash flow volatility due to fluctuations in the AUD/USD exchange rate and interest rates, prompting the CFO to consider hedging strategies using derivatives.

Learning Outcomes (SILOs):

• Compare and contrast characteristics of derivative securities (forwards, futures, options, swaps, etc.)

• Develop and evaluate arbitrage, hedging, and other strategies using derivatives

• Demonstrate practical applications of derivatives using digital tools

• Use derivatives to manage market, interest rate, currency, and credit risks

Case Context: Pacifica Trading Pty Ltd

Company Overview:

• Headquarters: Melbourne, Australia

• Branch: Vietnam

• Operations: Imports high-tech machinery from the US and exports locally produced goods to the US

• Focus for Assessment: US operations

Problem Statement:
Pacifica has faced significant cash flow volatility over the past year due to:

• Fluctuations in AUD/USD exchange rates

• Interest rate changes

Objective:
The CFO has tasked students with designing, implementing, and evaluating hedging strategies to manage currency exposure.

Assignment Instructions & Format

Required Report Structure:

1. Cover Page

2. Table of Contents

3. Executive Summary

   • Highlight critical results and main recommendation in one paragraph

4. Report Body

   • Answer all questions with estimates, calculations, and formulas/models used

   • Include relevant references

5. References List

   • APA 7 format

6. AI Usage Declaration

   • Declare AI use if applicable

7. Appendix (Optional)

   • Supporting calculations, diagrams, or additional explanations

Permitted Resources:

• Class material and pre-readings

• Research papers and journal articles via library resources

• Excel guides for regression analysis

• AI tools must be disclosed in the report

Assessment Tasks

Task 1: Futures Hedging Strategy

• Assess the Futures hedging strategy for Pacifica’s USD exposure

• Use CME-traded Australian Dollar Futures

• Perform Ordinary Least Squares (OLS) regression using price changes from 08/10/2023 to 29/06/2025

• Explain the model, tabulate estimated results, and provide a detailed interpretation

• Hedge an expected USD 15 million exposure until 27/07/2025
  Marks: 9

Task 2: Manage Cash Inflows

• Cash inflows expected: USD 10M (August 2025), USD 20M (September 2025)

• Adjust hedging position accordingly

• Analyse financial outcomes on:

  • 31/08/2025

  • 28/09/2025 (close position)
    Marks: 5

Task 3: Justification of Hedging Strategy

• Consider AUD/USD forecast from NAB

• Argue whether the hedging strategy remains justified until June 2027
  Marks: 3

Task 4: Critique and Recommendation

• Critically evaluate the applied hedging strategy

• Advise the CFO on whether futures contracts should be Pacifica’s primary hedging instrument
  Marks: 4

Task 5: Research and Inquiry

• Draw on literature and professional reports to assess whether futures hedging improves firm performance or value

• Use at least three recent references (post-2015)

• Provide inline citations with page numbers and a separate references page
  Marks: 5

Task 6: Alternative Derivative Comparison

• Design and explain a hedging strategy using futures for AUD/USD exposure

• Compare the strategy with an alternative derivative contract
  Marks: 4

Submission Guidelines

Files to Submit:

1. Word File:

   • Include report, answers, tables, and calculations

   • Save as: (e.g., 2222222_A2R)

2. Excel File:

   • Include calculations and regression analysis

   • Save as: 

Consultations:

• Questions will be answered during allocated class time or consultations

• Email queries are not permitted for question clarification

Formatting and Assessment Criteria

Evaluation Criteria:

• Use of information, research, and evidence to support proposed solutions

• Demonstrated problem-solving, analysis, and critical reasoning

• Accurate numerical solutions with supporting calculations

• Quality of research and appropriate referencing

• Clear communication and professional presentation

• Compliance with La Trobe University policies

Plagiarism:

• Any instance of plagiarism will result in failing the assessment

Reference Examples:

• Australian Bureau of Statistics. (2008). Childhood education and care (No. 4402.0). Retrieved from 

• APA7 guidance: La Trobe Library APA7 Guide

Key Points to Remember

• All questions are analytical and require critical thinking

• Ensure proper inline citations and a reference list

• Submit both Word and Excel files before the deadline

• Optional appendix for supporting material

Derivatives and Hedging Strategies 

Assessment Requirements Summary

The objective of this assessment was to apply derivative securities to real-world financial problems, specifically for Pacifica Trading Pty Ltd, an Australian import-export company facing cash flow volatility. Key requirements included:

• Analysis of derivative securities: Compare forwards, futures, options, swaps, and other derivatives.

• Design and evaluation of hedging strategies: Use derivatives to manage currency, market, interest rate, and credit risks.

• Practical application using digital tools: Implement strategies and calculations via Excel and regression analysis.

• Report structure: Include Cover Page, Table of Contents, Executive Summary, Report Body (calculations, formulas, analysis), References (APA 7), AI declaration, and optional appendix.

• Key tasks:

  1. Develop a Futures hedging strategy and perform OLS regression to estimate the hedge ratio.

  2. Manage cash inflows (USD 10M and USD 20M) with appropriate hedging adjustments.

  3. Justify the hedging strategy using AUD/USD forecasts.

  4. Critically evaluate the strategy and provide recommendations.

  5. Research the impact of hedging on firm performance using recent academic literature.

  6. Compare the futures strategy with an alternative derivative solution.

• Submission: Word file (report) and Excel file (calculations).

Step-by-Step Academic Mentor Guidance

The Academic mentor guided the student systematically to ensure all requirements were met and learning objectives achieved:

Step 1: Understanding the Case Context

• The mentor explained Pacifica Trading’s operations, the nature of AUD/USD volatility, and the purpose of hedging strategies.

• Emphasis was placed on analyzing currency exposure and associated risks.

Step 2: Structuring the Report

• The mentor helped the student outline the report following La Trobe guidelines:

  • Executive Summary

  • Report body with clear sections for each task

  • References and appendix

• Guidance was given on presenting calculations clearly in tables and including formulas.

Step 3: Futures Hedging Strategy (Task 1)

• Mentor introduced OLS regression for estimating hedge ratios using historical data (08/10/2023 – 29/06/2025).

• Explained step-by-step how to calculate expected hedge, tabulate results, and interpret outcomes.

• Showed how to apply the hedge to an expected USD 15M exposure until 27/07/2025.

Step 4: Managing Cash Inflows (Task 2)

• Guided the student in adjusting the hedge for USD 10M (August) and USD 20M (September) inflows.

• Explained how to record financial outcomes on 31/08/2025 and 28/09/2025, closing positions accordingly.

Step 5: Justification & Forecast Analysis (Task 3)

• Mentor reviewed AUD/USD forecasts and taught the student how to assess whether the hedging strategy remains justified until June 2027.

Step 6: Critique and Recommendation (Task 4)

• Guided the student in evaluating the effectiveness of futures contracts versus other derivatives for hedging.

• Suggested structuring a recommendation for the CFO supported by calculations and evidence.

Step 7: Research and Inquiry (Task 5)

• Mentored the student to identify and review recent academic journals and professional reports (post-2015).

• Assisted in citing sources inline and preparing a reference list in APA 7 format.

Step 8: Alternative Derivative Comparison (Task 6)

• Demonstrated how to design an alternative derivative strategy, calculate outcomes, and compare it with the futures approach.

Outcome Achieved

The final assessment submission included:

• Comprehensive report with all six tasks answered clearly and calculations presented in tables.

• Regression analysis for hedge ratio with detailed interpretation.

• Hedging adjustments for cash inflows and comparison of outcomes.

• Critique and recommendation supported by literature and quantitative analysis.

• Alternative derivative analysis for effective comparison.

• Proper referencing using APA 7 and disclosure of AI tool usage.

Learning Objectives Covered

• LO1: Applied knowledge of derivatives to real-world corporate finance issues.

• LO2: Compared and evaluated hedging and alternative derivative strategies.

• LO3: Used digital tools (Excel) for regression and financial calculations.

• LO4: Developed analytical and critical reasoning skills in assessing strategy effectiveness.

• LO5: Conducted research and inquiry to support financial decision-making.

• LO6: Communicated professional, clear, and structured financial analysis through a written report.

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