MAF308: Derivatives and Fixed Income Securities - Finance Assignment

Internal Code: MAS 4598

Finance Assignment Help

This Written Assignment contains 3 parts: Part A, Part B and Part C. The Assignment carries 100 marks and is converted to equal 30% of your total assessment in this unit. Marks have been allocated for each part and it will help you to self?evaluate after finishing the assignment. If you receive 80 marks out of 100 marks, it is equivalent to 24 marks out of 30 marks and contribute 24 marks to your total assessment in this unit. The word limit is set for discussion?type questions. – Be succinct: the fewer the better. Please don’t misinterpret this: if you write nothing, your work will be awarded zero. Your answer can exceed the word 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 Develop a spreadsheet in Excel that prices Australia Government Bond “3.25% Treasury Bonds due 21 April 2025”, the term sheet is provided at Appendix 1. Question A1: The yield to maturity of above particular bond is 1.858% per annum annually compounding on 11/7/2017. What is the market price of this bond on 11/7/2017? (Or equivalently to ask, how much do you need to pay to get this particular bond on 11/7/2017?) Question A2: Construct a graph for the above bond showing the relationship between bond price (Y? axis or vertical axis) and yield?to?maturity (X?axis or horizontal axis) for a range of yield?to?maturity (annualized) of 1.0% through 3.0% with step size of 0.1%. All yields are annualized and yearly compounding. Discuss the relationship between bond price and yield?to?maturity. Question A3: Compute the duration of the above bond on 11/7/2017. Using duration relation, explain how sensitive the above bond is to interest rate change. Question B1: For this question, you will need to access resources from the library and/or internet, to investigate how Futures can be used to hedge or speculate. (At least 2 citations are required to support your investigation. Question B2. Metallgescellschaft AG or MG is a German conglomerate. They have several subsidiaries in its "Energy Group", with MG Refining and Marketing Inc. (MGRM) in charge of refining and marketing petroleum products in the U.S. It was revealed publicly that it recorded a losses of approximately $1.3 billion at year?end 1993 due mainly to cash?flow problems resulting from large oil forward contracts it had written (Mello and Parsons 1995). What happened was that MGRM committed to sell certain amounts of petroleum every month for up to 10 years at prices fixed in 1992 (i.e., MGRM has written oil forward contracts). To hedge their position, during the latter half of 1993, MGRM established long energy futures (and swaps) positions equivalent to nearly 160 million barrels of oil, positionsthat would benefit handsomely if energy prices rose (Edwards 1995). Instead, energy prices (crude oil, heating oil, and gasoline) fellsharply during the latter part of 1993, causing MGRM to incur huge unrealized losses and margin calls on its derivatives positions. An important aspect of MGRM’s hedging strategy is that its derivatives positions were “stacked” in short?dated futures (and swaps) that had to be rolled forward periodically to maintain the hedge (Mello and Parsons 1995). MG's losses in the futures (and swaps) markets have raised questions about whether MG was really hedging or speculating. Please check the following two reading references and internet resource for this famous case (i.e., google “Metallgescellschaft AG”) and answer the following questions. Give your own (informed) opinion on whether you felt that MG was hedging or speculating and justify your stance using appropriate literature to support your argument.