This assignment requires students to provide a risk management consulting report to a client. A marking rubric (in a separated rubric file) will be used to mark this report. In the report, students need to address the issues faced by the client as mentioned in the case. The report should follow the general format of a consulting report.

Requirements:

1.      Students may form a group of 3-4 students

2.      Answer all the questions raised in the case. Follow the general format of a consulting report, which could be, but not limited to, the sample posted on Canvas;

3.      Source Material: You need to use some source materials to support your arguments.

4.      Reference Style: Follow AGPS Harvard Style or APA style.

5.      The report should use proper English expression and grammar.

6.      The assignment must be submitted electronically via Submission Point on Canvas by the due date.

7.      Late submission will attract a deduction of 4 marks per day for penalty.

8.      Word Limit: 3000 words excluding references & appendixes.

SUBMISSION:

1.        Students are required to sign up their groups online via Canvas.

2.        Go to the course site on Canvas. Submit your assignment under the submission point. Only one submission is required per group.

3.        The assignment must be Word-processed, using Times New Roman, 12 Font, double-spaced for the main text, and single spaced for tables, figures & appendixes. 

4.        Marks MAY be deducted if all requirements and submission instructions are not completed.

Academic integrity:

In order to ensure the academic integrity of your submission and to deter others from copying your work, your submission will be processed through a text-matching software.

Turnitin will provide a similarity report of your submission against a large database of academic and professional documents. If your submission’s similarity report is above 35%, you will receive a mark of zero and you will be referred to the academic disciplinary committee.

Further information can be found here

Scenario:

Suppose you are a risk management professional working for iManageRisk firm which is located in Singapore.iManageRisk provides consulting services to firms such as airline companies and mining companies on their risk management. Mr. Robert Lee, the treasurer of Gemoil Pte Ltd, approaches you today (assume it is now July 2020) to ask you for advice on the financial risk management of his company.

Gemoil (Singapore) Pte Ltd is a trading company which specializes in international trade of petrochemicals and petrochemical equipment. In recent years, Gemoil mainly deals in crude oil, gasoil, diesel oil and fuel oil, with plans to increase its size and valuation over the next few years. Gemoil is a growth company that aims to a growing cash flow from expanding oil trading operations. As a growth company, Gemoil’s revenue is positively related to oil price and it aims to a growing cash flow from expanding oil trading operations and seeking to define up to 20 million gallons of jet fuel in December.

The company’s profit and loss are subject to many risk factors, such as the price change of oil and foreign exchange rate fluctuations. As the market price of oil is quite volatile, the company is considering using some strategies to manage its risk exposure. One way to hedge these exposures is to use futures contracts. For instance, the futures contracts traded in the NYMEX.

In your consulting report, please answer the following questions.

1)      Outline the potential financial risks and operational risks faced by Gemoil and explain these risks in details.

2)      Explaining the impact of current macroeconomic conditions to Gemoil’s business. (Appendix 1 give you an example of news items related to the current macroeconomic conditions)

3)      Please devise a hedging strategy for Gemoil:

a.       What position should it take if Gemoil wants to use heating oil futures to hedge the exposure?

b.      What is the optimal hedge ratio?

c.       How many heating oil futures contracts should be traded in order to achieve optimal hedging? (Assuming with tailing adjustment)

4)      Robert is concerned with the use of derivatives. He has heard from his long-term friend, Mr Marco Farrell, who graduated with a Master of Finance degree from RMIT University, on the dangers of misusing of derivatives products such as futures to firms. Marco also mentioned that derivatives pose a danger to the whole financial system, and thus they should be banned. Recently a complex derivatives trade has caused over $5 billion losses at J.P. Morgan. Above all, an investment guru, Warren Buffett, once referred derivatives to as “time bombs” and financial “weapons of mass destruction” (details can be found in the Appendix). In your report, please address his concerns. And you also need to address whether the company like Gemoil should use derivatives. Please use some source materials (such as academic journal articles and newspaper articles) to support your arguments in your report. Follow a proper referencing and citation style.

Appendix 1: Current affairs

Coronavirus outbreak & Global economy:

https://hbr.org/2020/03/what-coronavirus-could-mean-for-the-global-economy?ab=hero-main-text

https://www.cnbc.com/2020/03/12/coronavirus-impact-on-global-economy-financial-markets-in-6-charts.html

Oil price war:

https://edition.cnn.com/2020/03/13/business/saudi-arabia-oil-markets/index.html

COVID-19 & Airline Industry

https://www.cnbc.com/2020/06/25/airlines-may-lose-84-billion-in-2020-but-iata-offers-roadmap-for-recovery.html

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