FIN30014 Financial Risk Management Group Assignment - Semester 2, 2020 Assessment Mark 20% (Assignment will be marked out of 100% and converted to a mark out of 20%%) DUE: on or before, 11:59 pm Friday 16" October 2020 Background American Airlines, Inc. (listed in NASDAQ under the code AAL) is a major American airlime headquartered in, Texas, USA, that offer an average of nearly 6,700 flights daily to 350 destinations in 50 countries. Assume American Airlines has the following cost, revenue, investment and liability structure. Jet fuel consumption Quantity Portfolio Beta Representative Index/underlying July - Dec 2020 (Forecast) 6,031,746 Crude oil barrels Revenue forecast from In millions Latin America for 2" half of 2020 Mexican Peso Feso 270.24 Brazilian Real Real 67.73 Investments Commercial Paper US$500 Euro dollar: Equity investments (US) US$25 1.15 54-F 500 Liabilities 2-year variable rate loan (next re-set date 31" Dec US$26,698 2020 Required: Assume that you are a recently appointed hedge strategist for American Airlines Inc. and that you have been requested to prepare a report on your recommendations of hedging strategies given the current environment related to COVID-19, for presentation to the board of directors at its next board meeting. You have been specifically requested to address the following issues:Section III (25%) (9) Propose ONE option combination strategy that involves more than one option contract for the Brazilian Real revenue (67.73) for the risk faced by this exposure. American Airline's management has expressed a desire to retain some of the upside benefits that hedging with options can permit but without paying a lot of money in option premiums. That is, your recommended strategies should provide a "reasonably effective" hedge but keep the option premium payment limited to a "reasonable amount" (it does not have to be zero!). As the strategist, it is up to you what you consider "reasonable" for this purpose. You must also describe the benefits and possible shortcomings of your proposed option strategies. You must use woww option data to illustrate your option strategies. Calculate the number of contracts required for the strategy and provide the strike prices and total premium costs. Assume there will be low volatility or relatively flat market in the SAP 500 over December 2020 and assume American Airlines wishes to take advantage of this low volatility but unsure in which direction it would be. Propose a speculative option combination strategy that American Airlines can use to profit from this market condition. You must also describe the benefits and possible shortcomings of your proposed option strategies. You must use aww option data to illustrate your option strategies Calculate the number of contracts required for the strategy and provide the strike prices and total premium costs. Breakdown of assignment marko - Refer assignment rubric on pages 4 - 5 Content and purpose of writing - Introduction = 5% Content (Relates to sections I- III including recommendations) = (25 + 25 + 25 = 75%%) Sources and evidence = 10%% Structure, presentation and attention to detail = 5% Grammar and expression = 5% Total = 100%