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QUESTIONS

As you wake up on the morning of Tuesday 21^st April and prepare for your second day of work in your new position as the Deputy Risk Manager for Virgin Oz, you watch breakfast TV.  You hear the headlines that for the first time in history oil has plunged below zero as demand collapses and that May oil futures have turned negative at minus $US37.63 (AUD $59.37). It was at roughly $US60 earlier in the year when your boss took out a number of derivative contracts.  Working for an airline which uses a lot of derivative products you think that your boss is in for a bad day.

When you arrive at work you discover that your boss has quit amid rumours of sizeable losses on hedges that he has undertaken which, on top of numerous travel bans, could bankrupt the company and that the Board of Directors want to see you immediately.  Suddenly you realize that it is you that is going to have the bad day.

The Board of Directors turn to you as the deputy risk manager and want you to carry out a full review of all the derivative contracts that your boss has entered into so that they can determine the company’s exposure.

When you start your investigations, you discover that your former boss has attempted to hedge the company’s position using futures, forward and swaps.

You are required to:

1. Use Refinitiv or similar to ascertain the likely number of derivative contracts that your former boss has entered into, by researching airlines to come up with a credible mix.

(10 marks)

1. Check that the principles of forward and futures pricing has been correctly applied to the value of contracts that your former boss entered into to ensure the integrity of these transactions. He did quit suddenly after all.

(10 marks)

1. Determine the strategy that your boss has attempted to achieve in his hedging actions. Have appropriate contracts been entered into?

(10 marks)

1. Ascertain the likely profit/losses to date on the contracts.

(10 marks)

1. Determine a new options strategy to maximize Virgin Oz’s position.

(10 marks)

1. Write a report for the board of directors, setting out the results of your investigations, conclusions and recommendations. Please bear in mind that many members of the board of directors are non-financial managers so you will need to explain what derivatives are, as well as to define and state what type of derivatives the airline is a counterparty to. Then add your writeup from parts a) to e) above

(30 marks)

1. When this is completed produce an executive summary.

(10 marks)

1. Bibliography

(5 marks)

1. Appendix Research workings

(5 marks)