Reference no: EM133123666

You are responsible for identifying a corporation which could benefit from a risk management strategy that uses futures. Your proposal should include the following items.

1. Executive Summary - a paragraph directed toward the company's CEO giving an overview of the risk management project and a summary of results. Company annual reports are a good source for this.

2. Key Assumptions - a list of assumptions associated with this RISK MANAGEMENT question.

3. The nature and quantity of the risk and justification for risk management. For example, if you identify a company with a significant amount of currency exposure from international sales, try to quantify the amount in particular currencies. Or if you identify an airline that purchases jet fuel, try to quantify how much on an annual basis.

4. Options for Hedging and Contract Specifications - discuss alternatives considered, the amount of exposure hedged, rationale for the selected instruments, and number of contracts needed to hedge exposure. Also please discuss how you would implement the hedge, i.e. buy/sell one month contracts and roll them over, buy/sell longer term contracts, or a combination. Please consider if the strategy is viable given daily trading volumes in the contracts.

5. Some evidence to support historically how the hedged position would or would not have been effective (use historical data for the underlying exposure and the hedged instrument to show how the hedge is effective in locking in costs with the futures).

6. Where an exact hedging instrument does not exist, please defend your selection on the basis of high correlation with the underlying exposure and liquidity (which you should justify with statistical analysis).

7. Information on a wide variety of futures contracts can be found at www.cmegroup.com.

You are responsible for identifying a futures-based hedging contract that may be used for the purposes of hedging against the underlying exposure. There are many possibilities, but some examples to consider might be:

1. A company with significant exports that needs to hedge currency risk.

2. A company that consumes large quantities of a commodity in its production of final goods.

3. A company that produces commodities.

4. A company with large floating rate debt outstanding.

5. Unless you want to do significantly more work, please do not choose a Financial Services firm. Their risks are quite complex and it is their business to manage them. The idea is to find a firm that may not be hedging particular risks and needs a solution to this problem.