Question 1 (20 marks) Assume Alphabet Inc. (i. e. Google NASDAQ: GOOGL) has borrowed US$15,460,000 at LIBOR + 0.5%. The next payment is due 6 months from now. Given the current economic environment in the US and globally, Alphabet Inc. fears that it will be adversely affected and wishes to hedge to reduce its risk related to interest rate changes. Based on this scenario, please answer the following questions: (a) Identify ONE financial risk faced by Alphabet Inc. given the above scenario. Systematically review and critically evaluate research from a variety of sources to explain why you have identified this as a risk, and whether you would consider hedging. Please discuss in your answer the outlook for the underlying variable and cite evidence of an adverse and/or favourable direction. NB: reference list will not be part of the word count. (300 words) (7 marks) (b) For the risk, you have mentioned in part (a) please recommend a hedging strategy that is consistent with the outlook discussed in part (a) and explain why you have chosen this strategy above all others (300 words) (7 marks) (c) Irrespective of your answer above, assume you are using an exchange-traded option 'combination' strategy to hedge your risk. Please use real data from the CME group and provide the total cost of the hedge (the net premium), the strike prices used, and the number of contracts required. Show all calculations and provide screenshots of the data obtained from the CME group. Please do not include screenshots in an appendix, all screenshots must be within part (c). Question 1 (20 marks) Assume Alphabet Inc. (i. e. Google NASDAQ: GOOGL) has borrowed US$15,460,000 at LIBOR + 0.5%. The next payment is due 6 months from now. Given the current economic environment in the US and globally, Alphabet Inc. fears that it will be adversely affected and wishes to hedge to reduce its risk related to interest rate changes. Based on this scenario, please answer the following questions: (a) Identify ONE financial risk faced by Alphabet Inc. given the above scenario. Systematically review and critically evaluate research from a variety of sources to explain why you have identified this as a risk, and whether you would consider hedging. Please discuss in your answer the outlook for the underlying variable and cite evidence of an adverse and/or favourable direction. NB: reference list will not be part of the word count. (300 words) (7 marks) (b) For the risk, you have mentioned in part (a) please recommend a hedging strategy that is consistent with the outlook discussed in part (a) and explain why you have chosen this strategy above all others (300 words) (7 marks) (c) Irrespective of your answer above, assume you are using an exchange-traded option 'combination' strategy to hedge your risk. Please use real data from the CME group and provide the total cost of the hedge (the net premium), the strike prices used, and the number of contracts required. Show all calculations and provide screenshots of the data obtained from the CME group. Please do not include screenshots in an appendix, all screenshots must be within part (c)
