MSc Finance : Assignment title: Cartmel Enterprises Task 1 Calculations Task 2 Report

MSc Finance : Assignment title: Cartmel Enterprises Task 1 Calculations Task 2 Report Project description This paper will submit through UK turnitin system. Please do not plagiarism. More details see files. Requirements Task 1 Calculations (30%) (this part i sent you a sample work) Using the information provided about the transaction and the exchange rate information in Appendix A: (a) Calculate the potential cross rate that could be used as a substitute official rate for the Sierra Nuevo peso/ and the potential unofficial exchange rate that may be available for the receipt of Sierra Nuevo pesos; (b) Calculate the expected futures price as at 1 November; (c) Calculate the outcomes from each of the forms of currency hedge that are available to Cartmel Enterprises: (i) Forward rate agreement (ii) Futures (iii) Options Note: You should assume that on 1 November the spot rate is $/ 1.6528. Task 2 Report (65%) Write a report for the Board of Cartmel Enterprises. Your report should: (a) Outline two risks, other than currency risk, that may arise from trading with ZZ Hotels and suggest ways to manage these (indicative word count = 400); (b) Briefly explain how the Black-Scholes (BS) model may be modified to calculate the price of a currency option (no calculations are required) (indicative word count = 250); (c) Briefly explain two theories that may be used to calculate future exchange rates (indicative word count = 450) (d) Using your calculations from Task 1, critically evaluate the alternative forms of currency hedge that are available to Cartmel Enterprises and identify the expected revenues, in sterling, from the sale to the company in Sierra Nuevo as a result of each of these hedges (indicative word count = 750); (e) Provide a reasoned recommendation as to which hedge should be selected (indicative word count = 300). The remaining 5% will be given for the layout, structure and referencing within your report. 1 FACULTY OF BUSINESS AND SOCIETY Final mark awarded:_____ Assessment Cover Sheet and Feedback Form 2014/15 Module Code: AF4S134 Module Title: Quantitative Methods for Financial Markets Module Lecturer: Rosemary Eaton Assessment Title and Tasks: Title: Cartmel Enterprises Task: Individual report Assessment No. e.g. 1 of 2 Resit CW 1 No. of pages submitted in total including this page: Completed by student Word Count of submission (if applicable): Completed by student Date Set: 29th June 2015 Submission Date: 5th August 2015 Return Date: 3rd September 2015 Part A: Record of Submission (to be completed by Student) Extenuating Circumstances If there are any exceptional circumstances that may have affected your ability to undertake or submit this assignment, make sure you contact the Advice Centre on your campus prior to your submission deadline. Fit to sit policy: The University operates a fit to sit policy whereby you, in submitting or presenting yourself for an assessment, are declaring that you are fit to sit the assessment. You cannot subsequently claim that your performance in this assessment was affected by extenuating factors. Plagiarism and Unfair Practice Declaration: By submitting this assessment, you declare that it is your own work and that the sources of information and material you have used (including the internet) have been fully identified and properly acknowledged as required1. Additionally, the work presented has not been submitted for any other assessment. You also understand that the Faculty reserves the right to investigate allegations of plagiarism or unfair practice which, if proven, could result in a fail in this assessment and may affect your progress. Details of Submission: As this is a resit assessment, late submissions will not be accepted. No marks will be awarded if the assessment is submitted after the submission date unless extenuating circumstances are applied for and accepted (Advice Shop to be consulted). You are required to acknowledge that you have read the above statements by writing your student number (s) in the box: Student Number(s): IT IS YOUR RESPONSIBILITY TO KEEP A RECORD OF ALL WORK SUBMITTED 1 University Academic Integrity Regulations 2 Part B: Marking and Assessment (to be completed by Module Lecturer) This assignment will be marked out of 100% This assignment contributes to 50% of the total module marks. This assignment is bonded / non- bonded. Details : Assessment Task: See assignment brief. Learning Outcomes to be assessed (as specified in the validated module descriptor http://icis.glam.ac.uk): To apply and critique derivatives for managing risk (Knowledge, Critical Thinking, Communication, Key Skills and Research Domains) Grading Criteria: See assignment brief. 3 Feedback/feed-forward (linked to assessment criteria): ? Areas where you have done well: ? Feedback from this assessment to help you to improve future assessments: ? Other comments Mark: Marker’s Signature: Date: Work on this module has been marked, double marked/moderated in line with USW procedures. Provisional mark only: subject to change and/or confirmation by the Assessment Board 4 Part C: Reflections on Assessment (to be completed by student – optional) Use of previous feedback: In this assessment, I have taken/took note of the following points in feedback on previous work: Please indicate which of the following you feel/felt applies/applied to your submitted work ? A reasonable attempt. I could have developed some of the sections further. ? A good attempt, displaying my understanding and learning, with analysis in some parts. ? A very good attempt. The work demonstrates my clear understanding of the learning supported by relevant literature and scholarly work with good analysis and evaluation. ? An excellent attempt, with clear application of literature and scholarly work, demonstrating significant analysis and evaluation. What I found most difficult about this assessment: The areas where I would value/would have valued feedback: 5 UNIVERSITY OF SOUTH WALES FACULTY OF BUSINESS AND SOCIETY Course Title: MSc Finance/MSc Finance & Investment Module Title: Quantitative Methods for Financial Markets Module number: AF4S134 Module tutor: Rosemary Eaton Submission details: ? Issued to students: Monday, 29 June 2015 ? To be submitted electronically via Blackboard by 11.59pm at the latest on Thursday, 5 August 2015 ? PLEASE NOTE THAT IF YOU ARE EVEN ONE MINUTE LATE UPLOADING YOUR FILE THIS WILL COUNT AS A LATE SUBMISSION AND THE APPROPRIATE PENALTY WILL APPLY ? The report should be a Word document (2003 or later) and should use the following naming convention: Student no AF4S134 May15 CW1 Resit Assignment Report ? Remember that your work should be identified by student number and not by name _________________________________________________________________________ Assignment title: Cartmel Enterprises Student notes: This part of the assignment comprises 50% of the overall assessment in this module. This is an individual assignment. This in-course assignment will test elements of the Learning Outcomes relevant to this assignment. Any answer you prepare is meant to demonstrate your competence in each of the separate domains. Learning outcomes covered: To apply and critique derivatives for managing risk (Knowledge, Critical Thinking, Communication, Key Skills and Research Domains) Retrieval task: To be advised if required 6 QUANTITATIVE METHODS FOR FINANCIAL MARKETS RESIT ASSIGNMENT AUGUST 2015 INDIVIDUAL ASSIGNMENT Background You work in the Treasury department of Cartmel Enterprises. Cartmel Enterprises is a multinational company, based in the UK, which specialises in the manufacture of garden irrigation systems. The company has been successful within Europe in recent years and now wishes to expand into new markets. The company has recently received an export order from ZZ Hotels, a new company in Sierra Nuevo, South America, who are setting up a new chain of hotels set in exotic gardens. The order is valued at 50 million Sierra Nuevo pesos and Cartmel Enterprises is due to receive payment in four months’ time. The country of Sierra Nuevo has recently been accepted into the World Trade Organisation, but does not yet have a freely convertible currency. Therefore, there is no official foreign exchange market for the Sierra Nuevo peso, however official exchange rates are published, but there is no formal market for the exchange of currencies denominated in Sierra Nuevo pesos. ZZ Hotels has discussed their situation with your Treasury department and informed them that they can gain access to sufficient US$ to pay for 90% of the goods, at the official US$/ Sierra Nuevo peso exchange rate. The balance would be payable in the local currency, the Sierra Nuevo peso. Cartmel Enterprises has been informed that an unofficial market in Sierra Nuevo pesos exists in which the peso can be converted into pounds sterling (£). The exchange rate in this market is 10% worse for Cartmel Enterprises than the ‘official’ rate of exchange between the peso and the pound. The Board of Cartmel Enterprises are concerned about the risks involved in dealing with ZZ Hotels and you have been asked to calculate the potential revenue and evaluate the risks. 7 Requirements Task 1 – Calculations (30%) Using the information provided about the transaction and the exchange rate information in Appendix A: (a) Calculate the potential cross rate that could be used as a substitute ‘official rate’ for the Sierra Nuevo peso/£ and the potential unofficial exchange rate that may be available for the receipt of Sierra Nuevo pesos; (b) Calculate the expected futures price as at 1 November; (c) Calculate the outcomes from each of the forms of currency hedge that are available to Cartmel Enterprises: (i) Forward rate agreement (ii) Futures (iii) Options Note: You should assume that on 1 November the spot rate is $/£ 1.6528. Task 2 – Report (65%) Write a report for the Board of Cartmel Enterprises. Your report should: (a) Outline two risks, other than currency risk, that may arise from trading with ZZ Hotels and suggest ways to manage these (indicative word count = 400); (b) Briefly explain how the Black-Scholes (BS) model may be modified to calculate the price of a currency option (no calculations are required) (indicative word count = 250); (c) Briefly explain two theories that may be used to calculate future exchange rates (indicative word count = 450) (d) Using your calculations from Task 1, critically evaluate the alternative forms of currency hedge that are available to Cartmel Enterprises and identify the expected revenues, in £ sterling, from the sale to the company in Sierra Nuevo as a result of each of these hedges (indicative word count = 750); (e) Provide a reasoned recommendation as to which hedge should be selected (indicative word count = 300). The remaining 5% will be given for the layout, structure and referencing within your report. 8 Appendix A Exchange rates: $/£ Spot 1.5324 – 1.6124 3 months forward 1.5798 – 1.6335 4 months forward 1.5978 – 1.6545 1 year forward 1.6413 – 1.7353 Sierra Nuevo peso/$ ‘Official’ spot rate 20.50 £/$ Currency futures (CME, £62,500) September 1.5965 December 1.6339 Philadelphia SE £/$ options £31,250 (cents per pound) STRIKE PRICE CALLS PUTS Sept Dec March Sept Dec March 1.5950 4.45 4.85 5.15 3.50 4.75 5.85 1.6250 3.30 3.75 4.15 4.80 6.10 7.25 1.6550 2.40 2.90 3.30 6.40 7.75 8.85 1.6850 1.75 2.25 2.60 8.25 9.55 10.65 Assume that options and futures contracts mature at the relevant month end. Notes: You should assume that on 1 November the spot rate is $/£ 1.6528. You will need to calculate an expected futures price as at 1 November in order to illustrate the results of a futures hedge. 9 The individual word processed report should be clearly laid out and concise. The word limit for the report is 2,250 words. Your calculations should be included as an Appendix to your report and all workings should be shown. Referencing should be in accordance with the Harvard System. You may wish to use an appropriate referencing tool. Credit will be given for reference to topical journal articles/web sources rather than text books. Note that ‘wikipedia’ and ‘investopedia’ are not acceptable academic references. They may be somewhat useful as a starting point for links to other sources, but not in their own right. The main text shall not be less that 12pt and one-and-a-half or double line spacing should be used. Feedback: The normal turnaround time for marking of assignments and provision of feedback is twenty working days from the date of submission. Academic integrity: It is dishonest not to acknowledge the work of other people and you open yourself up to the accusation of plagiarism. The text of this assignment must be in your own words (not even a sentence or phrase should be taken from another source unless this source is referenced and the phrase placed in quotes). For more information in respect of Harvard referencing please go to http://studentlibrary.southwales.ac.uk/referencing/ and the University Assessment Regulations on plagiarism and unfair practice generally at the following web address: http://asaqs.southwales.ac.uk/parta/ You must understand and use this system for all assessed work. You will find further useful resources on assignment planning and report writing at this link: http://studyskills.southwales.ac.uk/ 10 You are advised to familiarise yourself with the assessment criteria below. Marking Criteria – Written assignment N.B. The categories in the grid below are not necessarily equally weighted Grade Knowledge, Understanding and Relevance Argument, Analysis and Evaluation Communication Research / Information Literacy Practical Skills (Referencing) 80% + An excellent grasp of the subject matter is shown throughout the assignment and how it applies to its themes, questions and issues An excellent level of critical analysis and evaluation of the issues contained in the assignment is displayed. The assignment displays originality. The assignment displays a very sophisticated level of writing, displaying excellent clarity of argument, a coherent and organised structure and provides original, well-evidenced and coherent insights The assignment utilises a wide range of relevant sources, displaying outstanding information literacy skills in respect of research & accessing sources, distinguishing the most relevant and appropriate sources, and uses them in the assignment in an excellent manner The assignment has been properly referenced throughout, in accordance with the system of referencing prescribed in the course documentation. 70-79% A full and comprehensive grasp of the subject matter is shown throughout the assignment and how it applies to its themes, questions and issues A full and comprehensive level of critical analysis and evaluation of the issues contained in the assignment is displayed The assignment displays a sophisticated level of writing, displaying very good clarity of argument, a coherent and organised structure and provides well-evidenced and coherent insights The assignment utilises a wide range of relevant sources, displaying excellent information literacy skills in respect of research & accessing sources, distinguishing the most relevant and appropriate sources, and uses them in the assignment in a very effective manner The assignment has been properly referenced throughout, in accordance with the system of referencing prescribed in the course documentation 60-69% There is a substantial knowledge of relevant material, showing a clear grasp of themes, questions and issues therein. The assignment is consistently focused on being relevant to the requirements of the assessment A good, clear and orderly analysis of the issues and a good level of evaluation of the issues contained in the assignment is displayed A well written assignment, with good grammar and spelling, in a readable style with a good structure The assignment utilises a good range of relevant sources, displaying very good information literacy skills in respect of research & accessing sources, distinguishing the most relevant and appropriate sources, and uses them in the assignment in a largely effective manner The vast majority of the information in the assignment has been properly referenced in accordance with the system of referencing prescribed in the course documentation 50-59% Adequate knowledge of a fair range of relevant material is shown, with intermittent evidence of an appreciation of its significance. The assignment seeks to address the requirements of the assessment but it also contains parts that are not directly relevant. Some analytical treatment is displayed, but the assignment tends to be more descriptive than analytical. There is some evidence of evaluation of the issues contained in the essay but it is of limited scope. A competently written assignment, with only minor lapses from standard grammar, and a satisfactory structure The assignment utilises a satisfactory range of relevant sources, displaying good information literacy skills in respect of research & accessing sources, distinguishing the most relevant and appropriate sources, and uses them in the assignment in a competent manner Most of the information in the assignment has been properly referenced in accordance with the system of referencing prescribed in the course documentation 11 Grade Knowledge, Understanding and Relevance Argument, Analysis and Evaluation Communication Research / Information Literacy Practical Skills (Referencing) 40-49% A basic understanding of the subject is shown, but only a limited range of material is used. There is a significant degree of irrelevance. There is little evidence of analysis or evaluation in the assignment – it is largely descriptive An assignment with a simple basic style but with significant deficiencies in expression and/or structure The assignment utilises a narrow range of relevant sources, displaying limited information literacy skills in respect of research & accessing sources. It fails to distinguish relevant and appropriate sources from those that are not and/or uses relevant and appropriate sources in an inadequate manner Some of the information in the assignment has been properly referenced in accordance with the system of referencing prescribed in the course documentation 35-39% A limited understanding is shown of a narrow range of material. The content of the assignment has little relevance to its requirements There is very little, or no, evidence of analysis or evaluation in the assignment. It is heavily dependent on description An assignment with numerous deficiencies in expression, presentation and structure The assignment is based on an inadequate use of literature, often with an over reliance on basic textbooks and class materials Much of the information in the assignment has not been properly referenced in accordance with the system of referencing prescribed in the course documentation. 0-34% The assignment has insufficient evidence of the knowledge, understanding and skills appropriate to the level of the qualification. The work is weak in most, if not all, of the above indicators. Year:    0    1    2    3    4    5        Inflation    Tax Revenue    0     12,978,000      15,807,410      19,996,904      15,419,471     0        0.03 Fixed Cost    0     -2,244,000      -2,288,880      -2,334,658      -2,381,351             0.02 Variable Cost    0     -7,176,000      -8,760,960      -11,473,613      -9,124,897     0        0.04 Cash Flow    0     3,558,000      4,757,570      6,188,634      3,913,223     0 Taxation    0    0     -711,600      -951,514      -1,237,727      -782,645             0.2 Less: Taxation on capital allowances    0    0     375,000      281,250      210,938      632,813 After tax cash flow    0     3,558,000      4,420,970      5,518,370      2,886,434      -149,832 Initial Investment     -7,500,000     0    0    0    0    0 Net Cash Flow     -7,500,000      3,558,000      4,420,970      5,518,370      2,886,434      -149,832 Discount Factor    1    0.9201    0.8466    0.7790    0.7168    0.6596    0.0868    (WACC) Present Value     -7,500,000      3,273,831      3,742,987      4,298,945      2,069,012      -98,823 Net Present Value                             5,785,953 Capital allowances 7,500,000                  NPV=      5,785,953 0.25     -1,875,000      375,000              IRR=     40.28% 5,625,000                  MIRR=     21.71% -1,406,250      281,250 4,218,750                  Paybcky period=     1.89 -1,054,688      210,938              7,500,000 3,164,063      632,813              -3,558,000 3,942,000 Discounted payback period=     2.11 7,500,000 -3,273,831 4,226,169 -3,742,987 483,182 ARR on average investment=    72.78% ARR on total investment=    36.39% Total before tax cash flow      18,417,427 less depreciation     -7,500,000 10,917,427 Average profit before tax=      2,729,357 Average investment=      3,750,000