F305-excel代写
时间:2022-12-08
LANCASTER UNIVERSITY
Department of Accounting & Finance

AcF305: International Financial and Risk Management
Coursework Assignment: Michaelmas Term 2022/23


The General Task:

Your team has just been appointed to advice and oversee the Finance Department of a large international
company. Upon arrival, you notice that your predecessor had not really been up-to-date with respect to
recent financial innovations. For example, members of the department tell you that your predecessor had a
general distrust towards any derivative instruments, and therefore never hedged any existing exposures. In
addition, he argued that the firm’s cost of capital could be determined through considering how the firm’s
returns commove with the S&P 500’s returns.

Among all other issues that need to be dealt with, your priorities are to (1) show the members of the Finance
Department how an existing exposure in euros can be hedged with a forward contract, to (2) explain to them
why hedging makes economic sense, and to (3) determine the cost of capital in an international setting across
different companies.

Today is December 31st 2018.

Hedging a EUR Exposure:

Your first task is to hedge a foreign currency exposure of EUR 360,000 that your company has to pay to its
suppliers on June 30th 2019. The file named ‘Data_cwa .xls’ contains the currency quotes (the exchange rates)
of your home currency against euro (i.e. HC/EUR).

NOTE: Each group is assigned to different home currencies, therefore the exchange rates that you will need
to use for your assignment will be different across groups. The labels in the first row of the excel file contain
the exchange rate that each group is assigned to.

For this hedging exercise, you should first provide a clear and concise explanation about the minimum-
variance hedging technique with future contracts. Also, you will need to address four cases, and for each of
them you will need to discuss what is the hedging strategy that you want to establish in your company.

HINT: All the exchange rates are highly non-stationary, therefore you have to work with percentage changes
in your regressions. To compute your final hedge ratio, you need to use the exchange rate on December 31st
2018. Finally, note that all interest rates are given in percentages.


1. Direct Hedge (case I):
First, assume that there is a possibility for you to design a future contract that will match the
currency that you are exposed to (i.e. the EUR) and on the date that you will receive the EUR. Under
the assumption that markets are perfect and arbitrage opportunities are not possible, discuss how
you could construct a hedging strategy that mitigates currency risk.


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2. Currency mismatch but no maturity mismatch (case II):
Assume there are no HC/EUR future contracts. In this case, you could try to hedge the EUR 360,000
with another currency. Your group has been assigned to a specific foreign currency (FC 1) that you
can use as a hedge. Determine the optimal hedge ratio, and how you would implement your
strategy to hedge the exposure of EUR 360,000.

NOTE: In the same spreadsheet, you will have the alternative foreign currency that you will use as a
hedge for the EUR, given as HC/FC 1.

3. Maturity mismatch but no currency mismatch (case III):
Assume that there are only Euro future contracts with a maturity of 1 year, so the forward contract
will still have 6 months to go when the EUR 360,000 are received. Determine the optimal hedge ratio,
and how you would implement your strategy to hedge the exposure of EUR 360,000.

NOTE: the effective interest rates that are given in the excel file are for three-month deposits. To
compute the effective six-month interest rates you will need to multiply the three-month deposit
interest rates by two.

4. Currency mismatch but no maturity mismatch – hedging with two foreign currencies (case IV):
Assume there are no HC/EUR future contracts. In this case, you will try to hedge the EUR 360,000
with two currencies. Your first future contract is against the FC that you were using on part 2, and
the second FC future contract is also given in the excel file as FC 2. In the excel file you will also find
which one is your specific second FC contract. Determine the optimal hedge ratio, and how you
would implement your strategy to hedge the exposure of EUR 360,000.

In your discussion, you should compare the variance of the unhedged cashflows with that of the
hedged cashflows. In particular, you should assume that all the past exchange rates up to December
31st 2018 are the different scenarios that the exchange rates can face on June 30th 2019.


The value of hedging:

In this task, you will need to explain why hedging with future contracts (which have a zero market value at
inception) can add value to the company in multiple forms. Your comments should be appropriately
referenced.

NOTE: Remember that you should aim to provide supporting arguments for hedging to your boss, who is a
very busy person and therefore she wants to have a brief and clear exposition of why hedging can be good.
Also, in this question you can use any reference, including the textbook or online sources.


Computing the Cost of Capital in an Integrated Market:

As a last step, you would also like to determine the cost of capital for several companies. To do this, you will
need the stock returns for each of the companies that you will be analysing, the stock returns of the world
market portfolio, and the percentage changes of your assigned home currency against EUR. In the Excel file
you will find a spreadsheet for the stock returns of each company, and an additional spreadsheet for the
returns of the world market portfolio – as well as a spreadsheet for the currency prices that you have been
using up to this point. Discuss and interpret the results of the following tasks:

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1. Estimate the International CAPM for each company using the world market index and your
assigned currency exchange rate.
2. Once you have estimated the International CAPM for each company, you should compute the
estimated cost of capital (expected return) using your estimated model for the three following cases:

a. Using only the estimated coefficient of the currency factor (from the full model) and its
expected value; i.e. giE(s) -- the definition of this parameters are given below.
b. Using only the coefficient of the market portfolio (from the full model) and its expected
value; i.e. biE(rw-rf) -- the definition of this parameters are given below.
c. Using the full model, this is, the expected return from applying the model given by the
following equation:

ai + biE(rw-rf) + giE(s)

where ai, bi, gi are the estimated coefficients of your regression of the stock returns of
company i on the excess returns of the world market portfolio, i.e. rw-rf, and the percentage
changes of your assigned currency, i.e. s.

3. Draw a scatterplot of the estimated cost of capital for each of the above scenarios against the average
stock returns (i.e. the sample averages) of each of the companies.


To obtain an idea on how to compute a firm’s cost of capital, please refer to chapter 19 in Piet Sercu’s book
‘International Finance – Putting Theory into Practice’ and our lecture slides.


How to face this coursework:

1. All members of the group should read the coursework individually. They should carefully
read each sentence of the coursework.
2. Once the first reading has been done by all group members, the group should immediately
meet to discuss the coursework.
3. During the meeting, group members should carefully analyze and plan how each task will
be solved.
4. All group members have to carefully read the slides that cover the relevant topics for this
coursework. On top of this, group members will read the relevant material from the text
book. Other sources can be used to have a better understanding if necessary. If after all this
reading there are still some important questions about the assignment, then contact Alberto
to ask.
5. Keep meeting with your groupmates regularly to discuss any issues related to your report.

Design of the coursework assignment & presentation:

The coursework assignment should give the reader a clear understanding about how you decided to solve
the various tasks. Be specific, but not repetitive. From your descriptions and the datasets, the reader must be
able to replicate your outcomes.

The length of the essay is limited to no more than 2,500 words, excluding plots, footnotes and bibliography
(if necessary). Use Times New Roman, font size 12, single-spaced. Excessive length will be penalized. The
essay should be clearly structured and should have a professional design. Hence, mind the following
guidelines:
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1. Each coursework assignment should have a front page, clearly stating students’ names, the title of
the assignment, the date the coursework assignment was completed, and other relevant information.
The coursework assignment must be stapled, or otherwise kept together. It should be divided into
separate sections, such as ‘1. Introduction’, ‘2. Hedging’,…, ‘K. Concluding remarks’. Use sensible
headlines which hint at the content of the separate sections; these should be larger in font size and
bold compared to the main text. The main text must be consistently formatted, i.e., avoid modifying
the font, size, colour. Use page numbers. You could have a short table of contents or an abstract at
the beginning.

2. Numbers should be rounded to three or four digits when possible, e.g. round 1.23456789 to 1.234 or
1.2346.

3. Number both tables and figures, e.g. ‘Table 1: Total Exports’ or ‘Figure 3: Government Deficit’.

4. The coursework assignment should be kept as short and concise as possible.




Assessment:

There are three parts: hedging, the value of hedging, and international CAPM. Each of these parts will be
worth 45, 20 and 35 marks, respectively. These 100 marks correspond with 85% of the coursework, and the
remaining 15% will be based on the clarity, correctness and accuracy of the exposition of your work.

The final grade of the coursework assignment depends on (1) the standard of your writing, (2) style and
design, (3) the correctness of your arguments and descriptions, and (4) your quality of reasoning.

After a reasonable time, the coursework assignment will be returned to you with comments.

Organization:

You have to work in groups. The deadline for the submission is Friday noon on week 10. Late submissions
will be penalized. In addition, you will have to submit your coursework in “pdf” format via Moodle.

Students have to submit a declaration sheet where they confirm (by signing it) that they agree with the
University’s regulations relating to plagiarism.

The coursework assignment has to be written in Microsoft Word or a comparable word processor, such as
Open Office Word, Scientific Word, MikTex, etc. Hand-written assignments cannot be accepted.

Appendix: Regression

You have to estimate (standard) regressions, also called ordinary least squares (OLS) regressions. If you
work with Excel, there are two ways of estimating a regression in Excel:

• Using “Analysis ToolPak”: ‘Data’ – ‘Data Analysis’ [if ‘Data Analysis’ is not shown, you have to install
the Add-In] – ‘Regression’ – ‘OK’ – specify ‘Input Y Range’, ‘Input X Range’ and ‘Output Range’ (you
may tick ‘Labels’ but then you need to make sure that the first row of your data range contains the labels)
– ‘OK’. If you are estimating a regression with one (more than one) independent variable, the ‘Input X
Range’ includes cells from one (more than one adjacent) columns.
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• Using a function: =SLOPE(known_y's,known_x's) you cannot estimate a regression with more than one
independent variable in this way. This function gives you the slope (beta) of the regression model.

For interpretation of regression results, see the optional reading of week 5 (or your material of
relevant previous courses).

NOTE: There are no requirements on that software that you should use for this assignment. You can use any.

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