You have been asked to provide analysis for and advice to an Australian-based, high net worth client, who is considering the purchase of a structured financial product (SFP) issued by a US-based large-cap firm. Your client wishes to be advised on the financial risks to which they would be exposed in association with investment in this SFP.
You have the following information on this SFP, as well as other information on key financial variables:
- The face value of the SFP is USD25,000
- The payoff is due in one year
- Payoff at maturity is min{USD25,000, [(SP500T/SP5000 )x USD25,000]}
- SP500T represents the value of the S&P 500 Index at maturity of the investment product and SP5000 the value of the S&P 500 Index at inception of the SFP (i.e., the end of June 2021)
- USD/AUD represents the US dollar/Australian dollar exchange rate (price of AUD 1 in USD)
- The yield/discount rate of this SFP is the yield on the comparable U.S. government bond plus 200 basis points
- You have been provided with time series data (as of the end of June 2021, the date you will assume as now/today for undertaking your calculations) in the form of the yield on U.S. government bonds (% p.a.), the USD/AUD exchange rate, and the value of the S&P 500 Index (see the spreadsheet provided with the Assignment BANK 3003 Risk Management Case Data.xlsx).
The Task
Prepare a brief (i.e., no more than 3 pages) report in which you address the following:
- Identifies the financial risks to which your client would have exposure if invested in this SFP. You should tabulate the different financial risks to which an investor would be exposed if they bought the SFP and the sources of each financial risk.
1-Jul-06 1-Aug-06 1-Sep-06 1-Oct-06 1-Nov-06 1-Dec-06 1-Jan-07 1-Feb-07 1-Mar-07 1-Apr-07 1-May-07 1-Jun-07 1-Jul-07 1-Aug-07 1-Sep-07 1-Oct-07 1-Nov-07 1-Dec-07 1-Jan-08 1-Feb-08 1-Mar-08 1-Apr-08 1-May-08 1-Jun-08 1-Jul-08 1-Aug-08 1-Sep-08 1-Oct-08 1-Nov-08 1-Dec-08 1-Jan-09 1-Feb-09 1-Mar-09 1-Apr-09 1-May-09 1-Jun-09 1-Jul-09 1-Aug-09 1-Sep-09 1-Oct-09 1-Nov-09 1-Dec-09 1-Jan-10 1-Feb-10 1-Mar-10 1-Apr-10 1-May-10 1-Jun-10 1-Jul-10 1-Aug-10 1-Sep-10 S&P500 Share Price Index 1276.66 1303.82 1335.85 1377.94 1400.63 1418.30 1438.24 1406.82 1420.86 1482.37 1530.62 1503.35 1455.27 1473.99 1526.75 1549.38 1481.14 1468.36 1378.55 1330.63 1322.70 1385.59 1400.38 1280.00 1267.38 1282.83 1166.36 968.75 896.24 903.25 825.88 735.09 797.87 872.81 919.14 919.32 987.48 1020.62 1057.08 1036.19 1095.63 1115.10 1073.87 1104.49 1169.43 1186.69 1089.41 1030.71 1101.60 1049.33 1141.20 US Government Exchange Rate Liabilities Spot (USD/AUD) Rates (% p.a.) 0.7659 3.6660 0.7633 3.9490 0.7465 3.9510 0.7750 4.1270 0.7886 4.3860 0.7888 4.3940 0.7757 4.3670 0.7871 4.5110 0.8089 4.7330 0.8299 4.8360 0.8284 4.9040 0.8482 4.9750 0.8520 5.1920 0.8165 4.9790 0.8881 4.8250 0.9318 4.6620 0.8855 4.7590 0.8743 4.6870 0.8954 4.8000 0.9297 4.9660 0.9138 4.6380 0.9438 4.5870 0.9556 4.6660 0.9580 4.8790 0.9406 4.9540 0.8572 4.5630 0.7926 4.1820 0.6690 3.9590 0.6518 3.8090 0.7055 3.0840 0.6385 3.2500 0.6425 2.1650 0.6918 1.7630 0.7267 1.6420 0.8010 2.3420 0.8062 2.6570 0.8356 2.3700 0.8429 2.3630 0.8838 2.2050 0.9010 1.5900 0.9176 1.4340 0.8983 0.9240 0.8863 0.3400 0.8988 0.4880 0.9156 0.7240 0.9248 0.5750 0.8466 0.5040 0.8413 0.4630 0.9052 0.4580 0.8918 0.2590 0.9694 0.2440 1-Oct-10 1-Nov-10 1-Dec-10 1-Jan-11 1-Feb-11 1-Mar-11 1-Apr-11 1-May-11 1-Jun-11 1-Jul-11 1-Aug-11 1-Sep-11 1-Oct-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Feb-12 1-Mar-12 1-Apr-12 1-May-12 1-Jun-12 1-Jul-12 1-Aug-12 1-Sep-12 1-Oct-12 1-Nov-12 1-Dec-12 1-Jan-13 1-Feb-13 1-Mar-13 1-Apr-13 1-May-13 1-Jun-13 1-Jul-13 1-Aug-13 1-Sep-13 1-Oct-13 1-Nov-13 1-Dec-13 1-Jan-14 1-Feb-14 1-Mar-14 1-Apr-14 1-May-14 1-Jun-14 1-Jul-14 1-Aug-14 1-Sep-14 1-Oct-14 1-Nov-14 1-Dec-14 1-Jan-15 1-Feb-15 1-Mar-15 1-Apr-15 1183.26 1180.55 1257.64 1286.12 1327.22 1325.83 1363.61 1345.20 1320.64 1292.28 1218.89 1131.42 1253.30 1246.96 1257.60 1312.41 1365.68 1408.47 1397.91 1310.33 1362.16 1379.32 1406.58 1440.67 1412.16 1416.18 1426.19 1498.11 1514.68 1569.19 1597.57 1630.74 1606.28 1685.73 1632.97 1681.55 1756.54 1805.81 1848.36 1782.59 1859.45 1872.34 1883.95 1923.57 1960.23 1930.67 2003.37 1972.29 2018.05 2067.56 2058.90 1994.99 2104.50 2067.89 2085.51 0.9728 0.9607 1.0158 0.9874 1.0145 1.0319 1.0939 1.0703 1.0693 1.1000 1.0676 0.9765 1.0674 1.0018 1.0141 1.0586 1.0800 1.0351 1.0456 0.9705 1.0241 1.0499 1.0281 1.0357 1.0366 1.0429 1.0392 1.0419 1.0232 1.0409 1.0344 0.9669 0.9128 0.9073 0.8902 0.9301 0.9470 0.9113 0.8920 0.8796 0.8962 0.9260 0.9275 0.9309 0.9417 0.9326 0.9334 0.8717 0.8825 0.8443 0.8184 0.7789 0.7819 0.7658 0.7995 0.1880 0.1780 0.2410 0.4190 0.2900 0.2970 0.3860 0.3840 0.3460 0.3200 0.2950 0.2490 0.2560 0.2210 0.2740 0.2770 0.2360 0.2440 0.2720 0.2010 0.1600 0.1910 0.2060 0.0920 0.1040 0.1170 0.1140 0.1070 0.1170 0.1629 0.1700 0.1750 0.1900 0.2080 0.1730 0.1730 0.1600 0.1750 0.1700 0.1450 0.1370 0.1520 0.1268 0.1090 0.1320 0.1520 0.1120 0.1200 0.0940 0.0990 0.1220 0.1190 0.1010 0.1040 0.1167 1-May-15 1-Jun-15 1-Jul-15 1-Aug-15 1-Sep-15 1-Oct-15 1-Nov-15 1-Dec-15 1-Jan-16 1-Feb-16 1-Mar-16 1-Apr-16 1-May-16 1-Jun-16 1-Jul-16 1-Aug-16 1-Sep-16 1-Oct-16 1-Nov-16 1-Dec-16 1-Jan-17 1-Feb-17 1-Mar-17 1-Apr-17 1-May-17 1-Jun-17 1-Jul-17 1-Aug-17 1-Sep-17 1-Oct-17 1-Nov-17 1-Dec-17 1-Jan-18 1-Feb-18 1-Mar-18 1-Apr-18 1-May-18 1-Jun-18 1-Jul-18 1-Aug-18 1-Sep-18 1-Oct-18 1-Nov-18 1-Dec-18 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19 1-May-19 1-Jun-19 1-Jul-19 1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 2107.39 2063.11 2103.84 1972.18 1920.03 2079.36 2080.41 2043.94 1940.24 1932.23 2059.74 2065.30 2096.95 2098.86 2173.60 2170.95 2168.27 2126.15 2198.81 2238.83 2278.87 2363.64 2362.72 2384.20 2411.80 2423.41 2470.30 2471.65 2519.36 2575.26 2647.58 2673.61 2823.81 2713.83 2640.87 2648.05 2705.27 2718.37 2816.29 2901.52 2913.98 2711.74 2760.17 2506.85 2704.10 2784.49 2834.40 2945.83 2752.06 2941.76 2980.38 2926.46 2976.74 3037.56 3140.98 0.7658 0.7673 0.7294 0.7141 0.7004 0.7090 0.7184 0.7285 0.7069 0.7128 0.7661 0.7607 0.7196 0.7470 0.7588 0.7524 0.7628 0.7598 0.7484 0.7209 0.7565 0.7676 0.7655 0.7483 0.7459 0.7685 0.7986 0.7907 0.7846 0.7698 0.7567 0.7808 0.8101 0.7794 0.7678 0.7575 0.7571 0.7346 0.7407 0.7262 0.7225 0.7099 0.7322 0.7045 0.7255 0.7148 0.7087 0.7055 0.6906 0.7004 0.6875 0.6736 0.6761 0.6898 0.6765 0.1090 0.0960 0.1015 0.1140 0.0964 0.0964 0.1015 0.1269 0.1929 0.1522 0.2031 0.2495 0.2342 0.2546 0.2648 0.3465 0.3721 0.3210 0.3057 0.4795 0.6075 0.4487 0.5716 0.6162 0.5549 0.6776 0.4527 0.5139 0.5957 0.5803 0.6468 0.7697 0.8125 0.7798 0.7798 1.0319 1.0628 1.1554 1.2224 1.2172 1.2274 1.2997 1.4184 1.6047 1.7396 1.8816 2.0747 2.0901 2.2366 2.2101 2.3148 2.4140 2.4504 2.5765 2.6442 1-Mar-19 2834.40 1-Apr-19 2945.83 1-May-19 2752.06 1-Jun-19 2941.76 1-Jul-19 2980.38 1-Aug-19 2926.46 1-Sep-19 2976.74 1-Oct-19 3037.56 1-Nov-19 3140.98 1-Dec-19 3230.78 1-Jan-20 3225.52 1-Feb-20 2954.22 1-Mar-20 2584.59 1-Apr-20 2912.43 1-May-20 3044.31 1-Jun-20 3100.29 1-Jul-20 3271.12 1-Aug-20 3500.31 1-Sep-20 3363.00 1-Oct-20 3269.96 1-Nov-20 3621.63 1-Dec-20 3756.07 1-Jan-21 3714.24 1-Feb-21 3811.15 1-Mar-21 3972.89 1-Apr-21 4181.17 1-May-21 4204.11 1-Jun-21 4297.50 Souce: Thomson Reuters Datascope Select 0.7087 0.7055 0.6906 0.7004 0.6875 0.6736 0.6761 0.6898 0.6765 0.7001 0.6708 0.6580 0.6169 0.6555 0.6634 0.6872 0.7204 0.7373 0.7144 0.7038 0.7400 0.7689 0.7644 0.7870 0.7609 0.7778 0.7710 0.7514 2.0747 2.0901 2.2366 2.2101 2.3148 2.4140 2.4504 2.5765 2.6442 2.6808 2.5857 2.5838 2.5469 2.3956 2.4109 2.3054 1.9489 1.9851 1.7656 1.7730 1.5935 1.5935 1.5840 1.4801 1.1743 0.1421 0.1675 0.1777
