Financial Instrument Analysis

This assignment focuses on analyzing two types of financial instruments: swaps and commercial papers. It requires you to examine various details associated with each transaction, including security codes (IRSDB12, IRSDB14, etc.), face values, coupon rates, yields, spot rates, currency, and more. The document provides specific examples for both swap and commercial paper transactions, outlining the relevant financial terms and figures.

FINANCIAL RISK MANAGEMENT

Executive Summary
Financial risk management is highly associated with the formulation of competent
framework that helps in reducing the level of undesirable events. It can be summarized from the
report that fall in exports and less cost control finally results in curtailment in workforce which
led to decline in demand in nation and elevation in unemployment rate in the countries. Pressure
is observed in the economy of major giants in terms of growth rate. As per latest data, economy
of varied nations contract as their PMI and IIP values are below 50. It can be revealed from the
report that , fixed rate swap will be used so that when interest rate increase benefit of spread
between cash rate and fixed rate of swap can be obtained. Besides this, it can be inferred that
currency swap will be used to hedge position against currency risk. Under this transaction will be
done in the currency swap.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
International economic condition................................................................................................3
Domestic economic condition.....................................................................................................3
QTC yield curve and forecast and desired positioning of portfolio............................................4
Execution of portfolio transactions..............................................................................................4
Forecast of foreign exchange movement.....................................................................................5
Forecast of commodity price.......................................................................................................5
Proposed portfolio transaction.........................................................................................................5
Strategy........................................................................................................................................5
Quarter 2 deal..................................................................................................................................6
Exposure after confirmed deals.......................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10

INTRODUCTION
Financial risk assessment is the process which is highly concerned with the identification
of uncertainties associated with the securities. In this, report will provide deeper insight about the
level of GDP during recessionary period and its impact on foreign exchange market.
International economic condition
Subprime crisis originated in the USA in the FY 2008 drastically affect global economy.
USA is the one of the major economy in the world and major importer as well as exporter of
commodity in the market. Giant banks like Layman brothers declared themselves defaulter
which directly affects large and other size corporates in the nation (Santibañez-Aguilar and et.al.,
2016). This news trigger turmoil in the USA economy and due to globalization impact of poor
economic condition of USA is observed on major global economies like UK, Germany, China,
Japan and Russia etc. Consistent erosion of profitability of the firms observed in America and
European continent, due to consistent decline demand from USA. Fall in exports and less cost
control finally results in curtailment in workforce which led to decline in demand in nation and
elevation in unemployment rate in the countries. Pressure is observed in the economy of major
giants in terms of growth rate. As per latest data, economy of varied nations contract as their
PMI and IIP values are below 50 (Liu and et.al., 2017). GDP in these nations declined sharply
and bail out packages and quantitative easing programs are launched to support economy and
people from preventing it from falling in recession. All economic indicators are signaling that
major world economies are struggling to maintain their growth rate in current economic
environment and situation is gradually going out of hands.
Domestic economic condition
GDP decline from 5% to 1.5% from 2008 to 2009 on YOY basis. This is directly
reflecting that economy of Australia is contracting. Within a year growth rate of economy shrink
by huge percentage. Decline in growth rate from 5% to 1.5% reflects that recession have heavy
impact on major industries of Australia. Sharp reduction is observed in growth rate of finance,
business consulting, mining energy and healthcare industry. Impact of this scenario is observed
on unemployment rate where percentage increased from 4% to 5.7%. It can be said that
condition of Australia is critical.

QTC yield curve and forecast and desired positioning of portfolio
 Short term: Australia cash rate in 2008 was 7% which reduced to 3.25% in the February
month of 2009. Decline was observed in the interest rate in order to enhance production
and unemployment in the nation. Reduction in interest rates will directly reduce same on
bonds and this will lead to decline in bond value.
 Middle curve: Such curve is highly based on the growth level of GDP which in turn
helps investors in assessing the level of return. Moreover, future growth of GDP can
easily be assessed through the means of past indicators. From assessment, it has been
identified that during the quarter of June yield curve is falling down due to having high
mortgage interest rate and less customer spending (Hibbard and et.al., 2016). During such
period, due to the falling in the approval regarding building economy has reached to the
lower level. Further, in 2009, consumer spending level also decreased which in turn
places direct impact on the demand for loans. In the 1st quarter, overall cost of funds
increased to the significant level due to the issuance of 3 to 5 years maturity bonds.
 Long end curve: From assessment, it has been identified that long term yield curve is
highly influenced from inflation. By considering such aspect, it can be stated that due to
having slow economic growth rise in inflation level was not expected. Further, by
keeping in mind the condition of 2009 it can be presented that in the 1st quarter of 2009
long term yield increased as compared to last 3 quarters.
Execution of portfolio transactions
 Yield curve: From evaluation, it has been assessed that cash rate will be inclined by
RBAS in the upcoming quarters. This in turn pulls long term yield in the upcoming
quarter to a great extent.
 Middle curve: Graphical presentation of 2009 clearly shows that decline in export level,
rise in unemployment level etc. are the main causes due to which GDP in the 3rd quarter
decreased. Besides this, it has been found that yield of bonds with 3 to 5 years maturity
will decline in the upcoming time period (Karakaya and Karakaya, 2017).
 Long end curve: Outcome of investigation presents that long end curve and inflation is
highly correlated. On the basis of such aspect, if inflation will increase then yield also
inclines in similar direction.

Forecast of foreign exchange movement
By doing investigation, it has been identified that during the period of 2008 Australian
dollar has performed in an effectual way as compared to US $. From the last 3 quarters, trend of
market is highly volatile which in turn places direct impact on the price level of securities.
Further, it has been assessed that economic condition either good or worst has direct impact on
the value of AUD $. The main examples of foreign exchange movement is that value of AUD $
has fallen down in against to Euro due to the decreasing rate of GDP (Chu and et.al., 2017). This
aspect clearly shows that GDP level has greater influence of the movement of foreign exchange.
Thus, it is suggested to the investors to lay emphasis on hedging aspect. Hence, by making
purchase of foreign currencies in the exchange of Australian dollar investors can reduce the risk
level significantly.
Forecast of commodity price
Below mentioned graphical presentation clearly shows that due to having lower demand
from Asian countries price of copper fallen down from US $ 2500/ton during the quarter of June
to September. Moreover, if the level of production decreases due to slow economic growth then
it has direct impact on the price of copper. Besides this, in the upcoming time period price of
copper will decline. The rationale behind this, US and other developed countries are making their
best efforts in relation to improving the level of GDP. Thus, it is recommended to the investors
to make focus on hedging aspect of copper after the quarter of December.
Proposed portfolio transaction
Strategy 3month commercial paper: Commercial paper are sold in the market to the institutional
investors. Annual inflation rate increased from 2% to 5% in the years 2009 (Australia
inflation rate, 2017). Cash rate is increased to control inflation and it is expected that in
the upcoming time period situation become worse (Li, H and et.al., 2015). Hence, with
increase in inflation it is expected that cash rate will enhanced. Ultimately, yield on bonds
will increased. Thus, short term bond which is commercial paper is issued at 3% interest
rate.

 Interest rate swap: Interest rate swap will be used to hedge against interest rate. In the
upcoming time period interest rate will increase and due to this reason there is less
uncertainty. Hence, fixed rate swap will be used so that when interest rate increase
benefit of spread between cash rate and fixed rate of swap can be obtained. Cross currency swap: Currency swap will be used to hedge position against currency
risk. Under this transaction will be done in the currency swap. By doing so against
currency fluctuation will be handled in respect to portfolio.
Quarter 2 deal
Benchmark and Actual composition after portfolio transaction
Benchmark Actual
Modified Duration 3.85 -0.87
Cash at Bank 0.00% 117.60%
CP3M/Floating 20.00% 0.26%
DB10 10.50% -2.66%
DB12 * 17.00% -3.04%
DB14 * 25.00% -5.44%
DB19 * 27.50% -6.73%
Asset class

Facility Class Proportion
Bills 0.00%
Domestic Bonds -14.01%
Eurobonds -3.58%
Exposure after confirmed deals
CONCLUSION
On the basis of entire project work it is concluded that there is heavy importance of
derivative instruments like forwards, future and swap. By using these instruments hedging is
done against the open position.

REFERENCES
Books and journals
Santibañez-Aguilar, J. E. and et.al., 2016. Financial risk assessment and optimal planning of
biofuels supply chains under uncertainty. BioEnergy Research. 9(4). pp.1053-1069.
Liu, J. and et.al., 2017. Improving risk assessment in financial feasibility of international
engineering projects: A risk driver perspective. International Journal of Project
Management. 35(2). pp.204-211.
Hibbard, J. H. and et.al., 2016. Adding a measure of patient self-management capability to risk
assessment can improve prediction of high costs. Health Affairs. 35(3). pp.489-494.
Karakaya, E. and Karakaya, G., 2017. Developing a Risk Management Framework and Risk
Assessment for Non-profit Organizations: A Case Study. In Risk Management, Strategic
Thinking and Leadership in the Financial Services Industry (pp. 297-308). Springer
International Publishing.
Chu, P. L. and et.al., 2017. Financial analysis and risk assessment of hydroprocessed renewable
jet fuel production from camelina, carinata and used cooking oil. Applied Energy, 198,
pp.401-409.
Li, H. T. and et.al., 2015. A Construction and Empirical Test for Financial Risk
Assessment. International Journal of Economics and Finance. 7(8). p.68.
Online
Australia inflation rate, 2017. [Online]. Available through :<
https://tradingeconomics.com/australia/inflation-cpi>. [Accessed on 8th June 2017].

APPENDIX
Portfolio generated cash flow and client cash flow
Value of commercial paper at end of Q1
Face value of CP3M for Q1 202175416.1
Value of swap payment and receipts
Swap floating(IRSDB12) 50,000,000
378082.1918
Cross currency floating (CCSUS19) 100000000.00
756164.3836
1134246.575
Futures
Deposit margin 299600
Brokerage cost 2140
301740
Administration fee 1386301.37
Cash flows -204997704.1
Client cash flow
New advances
QEPA -50000000
Debt service payments
QEPA 22,164,858 (8659432/4)
APA 12332429 (49329716/4)
LG 4118086 (16472344/4)
APA 1st advance 6939551544
CFF 6,928,166,917
PGC -204997704.1
CFF 6,928,166,917
Net funding requirement 6,723,169,213
Bills
CENTRAL TREASURY SWAP
MANAGEMENT COURCE Transaction Advise
Transaction date
15-09-2009

dd/mm/yy
Security code Fixed Floating
IRSDB12 Yes Pay/Receive 202175416
IRSDB14 Currency AUD
IRSDB19 Face value 50,000,000
CCSUS12 Coupon 3%
CCSUS19 Yield% 3.25%
CCSEUR14 Spot rate 202175416
AUD
proceeds 200674480
Office use only
Deal no Checked
Swap no Entered Signature __________________
Errors
CENTRAL TREASURY SWAP
MANAGEMENT
COURCE Transaction Advise
Transaction date
15-09-2009
dd/mm/yy
Security code Fixed Floating
IRSDB12 Pay/Receive 1,000,000,00
IRSDB14 Currency AUD
IRSDB19 Face value 1,000,000,000
CCSUS12 Coupon 3%
CCSUS19
Ye
s Yield% 3.00%
CCSEUR14 Spot rate 1,000,000,00
AUD
proceeds 200674480
Office use only
Deal no
Checke
d
Swap no Entered Signature
_________________
_
Errors

COMMERCIAL
PAPER
Transaction
Advise
CENTRAL TREASURY
MANAGEMENT
COURCE Transaction date
15-09-2009
dd/mm/yy
Security code Issue/Sell
Invest/
Buy
CP3M
Ye
s
Face
value 202,175,416
INVCP3M Yield % 3%
Robina Treasury
group
Proceed
s 200674480
First Broad beach
Bank
Coolongatta Trust
Bank
Surfers Paradise
corp ltd
Office use only
Deal no
Check
ed
Swap no
Entere
d Signature
_______________
___
Errors