Requirements
This assignment is a group case study report. All group members are required to participate in the group discussions, meetings as well as the assignment-related writings and works. The assignment / case study report should follow the required format and referencing system. Any issue arising during the assignment preparation should be promptly reported to the subject coordinator.

In the interests on maintaining a meritocratic process regarding marking practices, each group member is required to peer review and rate your other group members’ performance in terms of group activities participation as well as overall group process and output. This is compulsory (please see rubrics below for details). If you are not present in group activities, your personal group participation will be rated at zero. The peer rating document must be individually completed and a hard copy needs to be submitted to the lecturer by every student on the same day that you submit the report. If you failed to do this it will result in your personal group participation to be marked as zero.

The case study report is required to be submitted through “Safe Assign” on LearnJCU. Please check LearnJCU for the guidance on how to make a Safe Assign submission. To take advantage of this template’s design, use the Styles gallery on the Home tab. You can format your headings by using heading styles, or highlight important text using other styles, like Emphasis and Intense Quote. These styles come in formatted to look great and work together to help communicate your ideas.

By the third year of your studies, you should have acquired the habit of meeting deadlines for your work, by organising your study time appropriately. Remember, it is a good idea to try to complete a task in advance of the actual due date. In BX3031 the policy for assignments is as follows.

1. The assignment due date provided in the subject guide An electronic version should be submitted through Learnjcu SafeAssign gateway. Please ensure that you have signed, scanned and attached the School of Business Assignment Coversheet. A copy of the cover sheet is available online at:

http://www.jcu.edu.au/business/public/groups/everyone/documents/learning_object/jcudev_014008.pdf

 

2. The lecturer may decide to nominate a personal extension date to students, especially in cases of illness or personal issues (medical certificate/counsellor’s statement required); or inescapable, unexpected, documented work commitments. Importantly, you should contact your lecturer before the due date if you are likely to require an extension.
3. This assessment must be submitted through Safe Assign on LearnJCU. Students may not email or fax an assignment without prior approval from the Subject Coordinator/Lecturer.
4. In the absence of any extension being granted, late submission of work will result in a penalty of 5% of the possible mark for each day late.

Task 1 (15 marks)

Assume the date is 09/09/2016. You currently work for Queensland Sugar Limited (QSL), which is responsible for marketing Australian raw sugar exports on behalf of Australian sugar millers and growers. You have been tasked with producing a risk management proposal in which you are required to develop an effective hedging strategy to assist QSL to manage its transaction exposures to price risk up until the due delivery date of a sugar tranche on 08/11/2015. Raw sugar is traded internationally on the basis of US dollar prices. The size of the tranche is 3,300,000 long tons of sugar (1 long ton = 2240 pounds).

The proposal you present includes a strategy of taking short positions in ICE#16 futures contracts (International Continental Exchange (ICE) contract number 16) involving the whole consigned tranche in order to manage the firm’s exposure to spot price volatility for raw sugar. In your proposal, you also make mention that you expect the Australian dollar to appreciate against the US dollar over the next few months, which would therefore decrease the value of the consigned sugar in Australian dollar terms. Accordingly, you decide to simultaneously manage foreign currency risk over the hedging period by using foreign currency futures.

Your analysis should provide comparisons between the following results in hindsight: (i) implications for using the spot market and not hedging; (ii) the implications for using futures contracts to hedge over the time period; and (iii) the optimal hedging strategy.  Ideally, your analysis will show balances relating to an outstanding margin account in relation to changes in the prices over time. (Margin requirements are provided within the contract specifications including the initial margin and the maintenance margin). Furthermore, your analysis should identify any instances whereby margin calls would be executed on QSL.

A useful resource regarding ICE futures contracts is available at the following online address.

https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf

Data and supplementary materials for Task 1

A Microsoft Excel spreadsheet containing the appropriate contract specifications, in addition to date and price data to complete Task 1 will be made available on learn@jcu within the assessment/assignment folder. This includes data for both the ICE #16 futures price as well as AUD/USD futures contract prices for the corresponding periods.

Assume the nearest futures price to be the current spot price (i.e. 09/09/2016). This is the price at which you may acquire a position in both futures contracts. Since the spot price and the futures price converge at the expiry date, this implies the hedge will remain in place until 08/11/2016.

 

Date (day/month/year)	ICE 16 futures prices (US cents/lb)	AUD/US futures prices AUD/US
9/09/2016	28.0000	0.7439
10/09/2016	28.7000	0.7401
11/09/2016	29.8300	0.7332
12/09/2016	29.4500	0.7487
13/09/2016	31.5500	0.7432
14/09/2016	31.9000	0.7421
15/09/2016	32.8000	0.7338
16/09/2016	32.7000	0.7421
17/09/2016	32.2300	0.7321
18/09/2016	31.7800	0.7313
19/09/2016	30.0300	0.7212
20/09/2016	31.3200	0.7321
21/09/2016	31.7800	0.7398
22/09/2016	32.0300	0.7361
23/09/2016	32.0300	0.7391
24/09/2016	32.5400	0.7401
25/09/2016	32.9800	0.7356
26/09/2016	32.8900	0.7329
27/09/2016	32.0300	0.7214
28/09/2016	31.0100	0.7014
29/09/2016	30.9900	0.7001
30/09/2016	29.9800	0.6978
1/10/2016	28.3000	0.7034
2/10/2016	27.2500	0.7098
3/10/2016	26.2000	0.7150
4/10/2016	26.8900	0.7158
5/10/2016	26.9900	0.7204
6/10/2016	25.0400	0.7256
7/10/2016	25.9000	0.7354
8/10/2016	25.7500	0.7398
9/10/2016	24.6500	0.7372
10/10/2016	24.9800	0.7435
11/10/2016	24.7800	0.7521
12/10/2016	23.8900	0.7498
13/10/2016	24.5000	0.7431
14/10/2016	25.9900	0.7290
15/10/2016	26.8700	0.7010
16/10/2016	27.7100	0.6932
17/10/2016	27.3400	0.6901
18/10/2016	28.0100	0.7023
19/10/2016	28.1000	0.7067
20/10/2016	23.7600	0.7123
21/10/2016	29.9800	0.7233
22/10/2016	30.6700	0.7245
23/10/2016	31.1500	0.7265
24/10/2016	30.8700	0.7277
25/10/2016	30.8700	0.7298
26/10/2016	32.0400	0.7315
27/10/2016	32.0300	0.7345
28/10/2016	33.7600	0.7598
29/10/2016	32.0900	0.7534
30/10/2016	30.9100	0.7478
31/10/2016	29.0400	0.7398
1/11/2016	29.1400	0.7376
2/11/2016	29.1500	0.7356
3/11/2016	30.0300	0.7312
4/11/2016	31.2000	0.7245
5/11/2016	31.5400	0.7132
6/11/2016	31.8900	0.7015
7/11/2016	30.5500	0.7040
8/11/2016	30.9100	0.7123

 

Task 2 (10 marks)

After a successful run at QSL, you leave to take a position in risk management working for a local regional airline which is motivated to begin running international routes. At present, the airline does not have a hedging strategy in place to mitigate price risk for fuel inputs into their production. In line with its international expansion strategy, the airline is considering whether to use futures contracts in heating oil (as a proxy/substitute for jet fuel) to hedge their input price risk exposure.

Based upon the findings and insights that you have developed from the previous task working at QSL, you are required to provide a brief advising the CEO about the risks inherent to using these futures contracts in order to hedge risk. In particular, you should advise the airline about potential advantages and disadvantages of using futures contract to hedge risk in general as well as any potential impacts on liquidity and/or profitability affecting ongoing business operations.

Maximum word limit is 500 words.

 

 

Assessment Rubric

Criteria	Unsatisfactory 0-49%	Pass 50 – 64%	Credit 65 – 74%	Distinction 75 – 84%	High distinction 85 – 100%	Grade 25%
Evaluating an international commodity and currency hedge: Examining and evaluating transactions involving commodity and FOREX currency futures. Correctly specify equations and substitute data into appropriate equations. Appropriate specifications of financial contracts and accurate technical calculations. Weight: 15%	Demonstrates a lack of numerical and/or analytical skills and fails to address relevant concepts of international finance sufficiently.	Demonstrates basic use of relevant numerical and/or analytical skills to evaluate an international finance problem and identify implications applicable to empirical practices. Many errors in numerical applications and calculations.	Demonstrates sound use of relevant numerical and/or analytical skills to evaluate an international finance problem and identify implications applicable to empirical practices. Few errors in numerical applications and calculations.	Demonstrates an effective use of relevant numerical and/or analytical skills to evaluate an international finance problem and identify implications applicable to empirical practices. Numerical applications and calculations are mostly accurate and appropriate.	Demonstrates an advanced and effective use of relevant numerical and/or analytical skills to accurately evaluate an international finance problem and identify implications applicable to empirical practices. No errors in numerical applications and calculations.
Critical interpretation and discussion Interpret computational outputs and make concise and logical link between the data/analytical results and international finance empirical practices. Develop recommendations identifying effective risk management strategies. Weight: 10%	Discussions provide limited to nil applicability to issues in risk management and its relevance to internal finance practices. Produced work fails to demonstrate a sufficient understanding of knowledge pertaining to selected issues and integration in the international finance area. Poor writing skills.	Discussions provide partial applicability to issues in risk management using futures contracts. Poor identification and understanding of the implications for using futures contracts to hedge risk as well as potential impacts on business operations and profitability. Sound sentence and paragraph structure, some grammatical errors.	Discussions provide sound applicability to issues in risk management using futures contracts. Identifies and demonstrates a sound understanding of the implications for using futures contracts to hedge risk as well as potential impacts on business operations and profitability. Sound sentence and paragraph structure, few grammatical errors.	Discussions are concise and link logically to the analytical results. Appropriate risk management strategies are developed, demonstrating a firm understanding of the implications for using futures contracts to hedge risk as well as potential impacts on business operations and profitability. Effective writing skills, few errors.	Discussions are concise and persuasive, linking logically to the analytical results. Appropriate risk management strategies are developed, demonstrating a strong understanding of the implications for using futures contracts to hedge risk as well as potential impacts on business operations and profitability. Highly effective writing skills.

 

Each group member is required to peer review and rate other group members’ performance in terms of group activities participation as well as overall group process and output. This is compulsory. For example, if fellow group members are unanimous that you were not present in group activities, your personal group participation will be rated at zero. This implies that if the group mark is 20 then the zero weighting will result in a mark of zero (20*0.00 = 0). The peer rating document must be individually completed and a hard copy needs to be submitted to the lecturer by every student on the same day that you submit the report.

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