FIN30014 Financial Risk Management: Medusa Mining Ltd. Analysis

This report provides a comprehensive analysis of financial risk management strategies for Medusa Mining Ltd, focusing on hedging strategies involving gold, copper, and currency exposures. It recommends specific derivative instruments, such as futures and options, to mitigate risks associated with fluctuating commodity prices and exchange rates. The report includes a detailed evaluation of hedging 50% of November and December copper production, demonstrating the potential profit from hedging activities. Furthermore, the document identifies the types of contracts suitable for hedging Medusa Mining Ltd's exposures, utilizing futures contracts to fix prices and minimize the impact of currency volatility. This analysis aims to provide Medusa Mining Ltd with actionable recommendations to enhance its risk management practices and improve financial stability. Desklib offers a wide range of solved assignments and study resources for students.

Running head: FINANCIAL RISK MANAGEMENT
Financial Risk Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Section II:...................................................................................................................................2
c) Providing relevant recommendations on derivatives instruments for implementing the
hedges:........................................................................................................................................2
d) Providing relevant recommendation regarding the 50% hedge in November and December
production of copper:.................................................................................................................3
Reference and Bibliography:......................................................................................................6

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Section II:
c) Providing relevant recommendations on derivatives instruments for implementing
the hedges:
There are three different types of hedges, which needs to be conducted for Medusa
Mining Ltd, as it might help in minimising he loses, which is incurred due to the declining or
unfavourable price movement. The overall production of gold needs to be hedged by 70%,
which might help in minimising any kind of intense losses that could incur from price
movement. The remaining 30% of the gold production will be left for tapping into the
positive price movement of gold. The overall gold commonality will be hedged by using
futures contract, where Medusa Mining Ltd will sell gold futures for the production period.
The futures market is mainly used for hedging, as the commodity delivery can be conducted
in the relevant trades (Hilpisch 2015).
In addition, the second hedge will mainly be conducted in copper commodity, as the
company relevantly produces adequate copper from June to December. Moreover, the
continuous decline in copper prices will mainly force Medusa Mining Ltd to hedge the
copper production by 80%, as it might help in minimising the losses incurred from volatile
copper prices. The selling the copper futures will mainly help in minimising the losses
incurred from changing copper price. Ramirez (2015) stated that future contract relevantly
allows the investor to delivery and receive commodity after the completion of contract.
The third hedging will mainly be conducted on the changing Australian dollar, which
is needed for the training purpose of Medusa Mining Ltd. The hedging process relevantly
help in minimising the negative impact of changing Australian dollar, which helps in
improving the level of returns from hedging. The overall Australian dollar will be hedged by

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50%, as the revenues of Medusa Mining Ltd will be converted in USD. The hedging of USD
mainly helps in minimising the negative impact of changing currency value, which is
hampering the conversion value of AUD/USD. The 50% of the overall AUD value needs to
be hedged by using option contract, the put option can be used for hedging the financial
exposure of Medusa Mining Ltd. The option contract is mainly used in the hedging process to
minimise the negative impact of exchange rate and obtain benefits from the exchange
process. According to Crepey (2015), the use of different type of hedging instrument such as
futures, options and swaps could eventually allow the companies to hedge their products and
minimise the losses, which could incur from volatile changing prices.
d) Providing relevant recommendation regarding the 50% hedge in November and
December production of copper:
Month Nov-18 Dec-18
Copper (Pounds) 700,000 700,000
Current spot value 3.05 2.90
New spot value 2.90 2.75
Per contract pounds 25,000 25,000
Strike price 3 3
Number of contracts 14 14
Copper value unhedged 2,028,250.00 1,926,837.50
Copper value hedged 2,064,125.00 1,978,418.75
Profit from hedging 35,875.00 51,581.25
From the overall evaluation of the above table the hedging process and profit
generated from copper trading could be identified. The hedging process will mainly reduce

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the overall losses incurred from changing copper prices. In addition, the declining prices is
mainly adequately hedged by future contract, where the profit from hedging is detected,
which might allow Medusa Mining Ltd to increase the relevant returns from investment. In
this context, Kokholm (2016) stated that with the help of hedging process the overall
investors can minimise the negative impact from changing price, which could increase loses
from investment.
Type of Risk Price Change risk Price Change risk
Exposure to be hedged 700,000 700,000
Proportion of the
exposure to be hedged
350,000 350,000
Derivatives i.e.
Futures/or Options etc.
Futures Futures
Explain the choice of
derivative
instrument/strategy
Contract will fix the prices of
copper and minimise the
negative impact from currency
volatility
Contract will fix the prices of
copper and minimise the
negative impact from currency
volatility
No. of Contracts 350,000 / 25000 = 14 350,000 / 25000 = 14
Contract months Nov-18 Dec-18
Long/short/ Put/Call Short Short
Strike Prices,
premiums/Futures prices
etc.
3 3

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The overall table mainly helps in depicting the types of contract, which is used in
hedging the exposure of Medusa Mining Ltd. The use of future contract in hedging the
copper commodity is mainly adequate for the company, as it needs to be fix a relevant price
for the trades, while continuing the production process (Bouchard and Chassagneux 2016).
This process of hedging might help in minimising the negative impact of continuous decline
in copper price, which is evaluated from the case study.

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Reference and Bibliography:
Bouchard, B. and Chassagneux, J.F., 2016. Fundamentals and advanced techniques in
derivatives hedging. Springer.
Crépey, S., 2015. Bilateral counterparty risk under funding constraints—Part II:
CVA. Mathematical Finance, 25(1), pp.23-50.
Hilpisch, Y., 2015. Derivatives Analytics with Python: Data Analysis, Models, Simulation,
Calibration and Hedging. John Wiley & Sons.
Kokholm, T., 2016. Pricing and hedging of derivatives in contagious markets. Journal of
Banking & Finance, 66, pp.19-34.
Ramirez, J., 2015. Accounting for derivatives: Advanced hedging under IFRS 9. John Wiley
& Sons.
Theoptionsguide.com. (2018). Copper Futures Trading Basics | The Options & Futures
Guide . [online] Available at: http://www.theoptionsguide.com/copper-futures.aspx
[Accessed 26 Apr. 2018].