Discuss if your hedging objectives have been met.

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Jun 1, 2021

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Please submit your
assignment electronically via the Turnitin Assignment tool no later than Monday,
June 7, 5:00pm.
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via MyUni, please visit http://www.adelaide.edu.au/myuni/tutorials and click on
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For
the data please use only the data file Assignment 2 future hedge data provided
on MyUni under the Assignment module.
Assume you have
AUD100,000 that you must invest in stocks.
1.
Construct
a portfolio of 5 stocks from the data provided. Design the portfolio in any
which way you deem fit. Justify your portfolio selection and design.
(5 marks)
Data: daily stock price, beta and some fundamental indicators (P/B,
ROE, etc) for 10 stocks for the last 4 months covering consumer staples,
banking, pharmaceutical and consumer services (discretionary) sectors.
Assessment criteria:

Basis
and reasons for selecting the 5 stocks should be based on fundamental analyses.
Qualitative analyses will be considered provided the arguments are rigorously
justified.

Clarity
of objective/strategy of the portfolio and how its allocation will meet the
stated objective.

Full
details of portfolio in a table format with appropriate narrative of all
relevant transactions that may occur in real world investment.
2.
Once
you have set up your portfolio; hedge your portfolio using index futures
contracts. In order to do this you will need to:

Determine
your hedging objectives

Calculate
the beta of your portfolio, and

Work
out the optimal number of positions to hedge your long stocks position.

Justify
the decisions and/or assumptions you make.
(9 marks)
Data: daily indices cash and futures prices for the relevant markets
and 4 sectors over the same 4 months period
Assessment criteria:

Clearly
stated hedging objective(s), determined in light of earlier portfolio objective
and prevailing market conditions.

Explanation
for how a long/short position in index futures contribute to meeting that
objective.

Justification
for the selected index futures contract.

Calculation
of portfolio beta, hedge ratio and other relevant transactions that may occur
in real world investment with evidence.
3.
Hold
your hedged portfolio (of stocks and index futures) for a period of two weeks.
At the conclusion of this period, evaluate the effectiveness of your hedge, the
reasons for its success or failure and how the outcome could be improved.
Discuss if your hedging objectives have been met.
(8 marks)
Assessment criteria:

Comparison
of the result from the hedged and unhedged portfolio

Effectiveness
of the hedge and reasons why the hedge strategy worked/failed to work as
expected

Discuss
how the hedge can be improved taking into account the shortcomings you
identified above
REPORT WRITING. Your report must document complete discussion of the
process outlined above, as well as include full details of transactions
executed. Transaction costs must bear evidence that it is a realistic figure.
Good structure, presentation and concise writing skills are nonetheless
important. Your report length can be a MAXIMUM of 5 pages (size 12 font,
single spacing), including all discussion, graphs, tables and references.
(3
marks)

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