Risk Management Consulting Report

Running Head: Risk management consulting report
Risk management consulting report
QGold Corporation
Student Name

Risk management consulting report
Contents
1) Executive Summary.......................................................................................................................1
2) Introduction...................................................................................................................................2
3) Financial Risk Management for QGold Corporation.....................................................................3
3.1. Hedging Strategyfor QGold........................................................................................................3
3.1.1. Use of gold futures to hedge QGold’s commodity price risk:..............................................3
3.1.2. Optimal hedge ratio of the gold futures contracts:...............................................................3
3.1.3. QGold’s risk exposure in terms of troy ounce of gold:........................................................4
3.1.4. Required number of gold futures contracts that should be traded by QGold to hedge its
commodity price risk:....................................................................................................................4
3.1.5. Total initial margin requirement for the gold futures contracts:...........................................4
3.1.6. Other major risks faced by QGold apart from the commodity price risk of gold:................4
3.2. Dangers of misusing of derivatives products to firms:................................................................6
3.3. Derivatives pose a danger to the whole financial systems- Systemic Risk:................................8
3.4. Whether QGold should use derivatives products to hedge its risk exposures:..........................10
4) Conclusion...................................................................................................................................11
5) References ..................................................................................................................................12
6) Appendices..................................................................................................................................15
6.1. Appendix 1: Excel screen-shots of the optimal hedge calculations in figure 1, based on the
monthly data for spot and futures prices in the past two years......................................................15

Risk management consulting report

Risk management consulting report
1) Executive Summary
This report is on the financial risk management of QGold Corporation. QGold is an
Australian gold mining company that faces risk from the uncertainties in the prices of gold.
The report recommends the use of CME gold futures contracts to hedge this commodity price
risk. QGold should take short position in 288 gold futures contracts to hedge its risk exposure
of 50,000 troy ounce of gold. The company should post initial margin of 9,79,200 USD as per
the contract specification of CME gold futures. The report also analyses other major risks
faced by QGold and it found that the company faces risks from fluctuations in foreign
exchange, technological disruptions and changing environmental and sustainability
regulations. The report discusses various misuses of the derivatives by the firms as they drift
away from the given mandate of managing risks into the speculative trading. The firms also
use derivatives for the price manipulations. The report also discusses the systematic risk of
the derivatives to the stability of financial markets. It is found that the increased volatility in
the underlying markets, use of excessive leverage and concentration of the credit risk are the
main factors due to which the derivatives pose a danger to the whole financial system.
Though there are inherent risky characteristics in the derivative trading but they also offer
benefits to the firm by helping them hedge their risks effectively. So, it is advised that QGold
should use gold futures contract to hedge its risk exposure but the company should be careful
about the misuses of the derivatives as that can have fatal effects. The company should make
its corporate internal controls stronger to stop potential frauds and misuses of these
derivatives.
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