I asked this before and didn't include the case study this is a question that is a
Question:
I asked this before and didn't include the case study
this is a question that is a part of my case study: Considerations of margin account (Margin requirements are provided within the contract specifications obtained from Bloomberg). Furthermore, your analysis should identify any instances whereby margin calls would be executed on Cairns Sugarcane.
What would this include? Do you think this requires me to do calculations or just identify the instances? I'm just really confused how to go about this and where to start, what information do I need? If this question is missing information can you let me know what it is?
The Case Study: Cairns Sugarcane Limited
Assume it is 30 May 2020. You, as the chief financial officer at Cairns Sugarcane Limited, need to give a presentation for the upcoming board of directors meeting. Your team is responsible for developing strategies to manage (hedge) the company's exposure to sugar prices for the next few months. Sugar is Australia's second largest export crop with a total annual revenue of almost $2 billion, which Queensland produces 95% of sugar. And sugar prices had always played a significant role in Cairns Sugarcane's profit, but management had not considered the risk important enough to merit action. Over the past 12 months, sugar prices were volatile. Meanwhile, Cairns Sugarcane has recorded a series of losses over the last five years. These financial results were largely driven by a decrease in sugar revenue due to lower raw sugar prices and reduced cane tonnages processed through the mills. Appendix 1 presents a financial snapshot for Cairns Sugarcane Limited for the past five years. For the last two years, management has been seeking a way to recapitalize the business, paving the way to future growth as Cairns is a great place to make sugar and supply Asia through local ports. So, the financial team you lead is going to support and assist the management to improve financial performance. Cairns Sugarcane's exposure to sugar prices during the next few months would be substantial. However, this exposure could be offset with the use of raw sugar futures contracts that are traded on the Intercontinental Exchange. The size of the tranche is measured as tonnes of sugar (tonne or ton is a unit mass used in the United Kingdom as part of the Imperial System. 1 long ton = 2240 pounds = 1,016.047 kg). The proposal you are going to present includes a strategy of taking some positions (long or short) in ICE #16 futures contracts in order to manage the firm's exposure to spot price volatility for raw sugar up until the due delivery date of a sugar tranche on 23/07/2020. Raw sugar is traded internationally on the basis of US dollar prices. Meanwhile, you will also consider the changes of Australian dollar over the next few months, which would therefore increase or decrease 6 | P a g e the value of the consigned sugar in Australian dollar terms. Accordingly, you decide to simultaneously manage foreign currency risk over the hedging period by using foreign currency futures to hedge the currency risk. Australian dollar futures are traded on CME.
https://www.theice.com/products/914/Sugar-No-16-Futures https://www.cmegroup.com/trading/fx/g10/australiandollar_contract_specifications.html Another useful resource regarding ICE futures contracts is available at the following online address: https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf Daily settlement (or last) price of both contracts for the period from 18/09/2019 to 23/07/2020 from Bloomberg have also been downloaded by your team members. (Refer to the Excel file for raw data downloaded). You may assume the nearest futures price to be the current spot price (i.e. 23/10/2019). This is the price at which you may acquire a position in both futures contract. Since the spot price and the futures price converge at the expiry date, this implies the hedge will remain in place until 23/07/2020.
Expert Answer:
