Question
Construct positions that fulfill the stated requirements in the following scenarios. You can use any type and number of financial assets and instruments you like. Do not do any calculations but feel free to assign symbols, numbers or use graphs if it helps you illustrate your answer. There may be more than one way to construct a position, so there is not a single answer.
(i) An EU company that produces livestock feed imports soya beans from abroad, processes them in their facilities (factory, silos and harbor) and sells the feed in the EU. The beans are ordered by the producer at an agreed USD price, transported by ship, paid upon cargo delivery, stored and used into production at a later date. The company orders quantities according to prearranged deals with clients (no purchases for future undefined use), does not want to use cash reserves for cargo payments and is paid upon product (livestock) delivery. The company is considered to have ownership of the soya beans upon purchase, i.e. at placing the order and agreeing the price (ignore the captain’s liabilities during travel). Identify the risks the company faces, hedge them and describe the transactions and assets involved. (10 points)
(ii) It is 22nd January and a short-seller has a short position on Game spot shares. His position is currently profitable but during the day there has been a surge of the stock price and he is getting anxious. He is not obliged to close the position at a certain date but does not have the funds to maintain it by the end of the day (or a later day) if the price increases significantly during the session. On the same day, an independent investor is thinking of investing in GameStop shares but lacks confidence on his ability to time the market correctly (he is worried that he might buy close to the peak or sell close to the bottom, thus being trapped in his position) and possibly lose a great deal. He is trying to cover that uncertainty risk by devising a strategy that will secure his level of wealth while allowing him to benefit from price changes. Hedge the risk the short-seller faces and find a strategy that serves the independent investor’s goal. (8 points)
(iii) A bonds investor has purchased a large number of discount bonds that mature over the next 5 years at varying dates which do not follow a pattern or a certain frequency.
The yield curve is currently flat, but the investor is worried that large Central banks will soon take action to prevent an increase in inflation in the post-Covid period. (8 points) School of Slavonic and East European Studies MAIN EXAMINATION 2018/19 Page 4 of 6 SESS0040 (iv) A Canada-based commodities trader is looking for investment opportunities in crude oil. He is considering three things: crude oil futures, a large crude oil Exchange Traded Fund (ETF) that consists of futures close to their expiration date (near-term futures) named USO and the USDCAD exchange rate (1 USD- ->X CAD). The correlations between the Canadian dollar (CAD) and spot/ futures oil prices is historically known to be at or above 0.8, but periodically declines over brief periods. Suggest two alternative positions that are potentially profitable (the trading strategies do not have to be much different but must include different assets). (8 points)
