FIN30014: Financial Risk Management Case Study, SUT, Malaysia Identify ONE financial risk faced by Alphabet Inc given the above scenario Systematically review and critically evaluate research from a variety

University Swinburne University of Technology (SUT)
Subject FIN30014: Financial Risk Management

Question 1

The next payment is due 6 months from now. Given the current economic environment in the US and globally, Alphabet Inc. fears that it will be adversely affected and wishes to hedge to reduce its risk related to interest rate changes. Based on this scenario, please answer the following questions:

(a) Identify ONE financial risk faced by Alphabet Inc. given the above scenario. Systematically review and critically evaluate research from a variety of sources to explain why you have identified this as a risk, and whether you would consider hedging. Please discuss in your answer the outlook for the underlying variable and cite evidence of an adverse and/or favorable direction. NB: reference list will not be part of the word count.

(b) For the risk, you have mentioned in part (a) please recommend a hedging strategy that is consistent with the outlook discussed in part (a) and explain why you have chosen this strategy above all others

(c) Irrespective of your answer above, assume you are using an exchange-traded option ‘combination’ strategy to hedge your risk. Please use real data from the CME group and provide the total cost of the hedge (the net premium), the strike prices used, and the number of contracts required. Show all calculations and provide screenshots of the data obtained from the CME group. Please do not include screenshots in an appendix, screenshots must be within part (c).

Required:

(a) Assume that you are a hedge fund manager and have invested in $1,000,000 worth of Russian government bonds one year ago and have decided to hedge the credit risk of these bonds at the time. Formulate a creative solution to hedge the credit risk of this reference entity. Analyse
how you can be protected from credit risk based on such a strategy and possible drawbacks.

(b) What are the implications of speculation using credit default swaps in the context given in the above article, to the broader society and economy? Provide examples where necessary.

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