Analyse the difference between hedging and speculation in derivative applications and risk management. Your discussion should be supported by the relevant academic literature. In addition, choose one UK-based NON-BANK, NON-INSURANCE company from the FTSE

1. Analyse the difference between hedging and speculation in derivative applications and risk
management. Your discussion should be supported by the relevant academic literature. In
addition, choose one UK-based NON-BANK, NON-INSURANCE company from the FTSE 100.
You are required to analyse your chosen company’s foreign exchange risk exposure and how this
foreign exchange risk affects its business performance. 2. Assume your chosen company wants to expand its business and needs external debt financing
of around £30m in the UK for three months starting in 6 months’ time. Based on your market
insight, you are required to design a hedging strategy for this company to manage the potential
interest rate risk exposure in this case. Make clear suggestions on what specific derivative
product you will recommend to use and explain the reasons for selecting this specific derivative
product. You must be able to explain the contract specifications and the relevant price to your
chosen company. You are also required to provide the profit/loss analysis on the underlying assets
and the derivatives under your suggested strategy in the event that market interest rates either
fall or rise. 3. Demonstrate how an intermediary bank can design an interest rate SWAP product which
brings benefits to your selected company and other related SWAP parties. If necessary, you can
use a hypothetical situation (i.e., the hypothetical net profit margin this SWAP bank can earn
from this SWAP service and the hypothetical absolute advantages one related SWAP party may
have over the other related SWAP party). In addition you must also discuss the risk associated
with banks that act as an intermediary and provide interest rate SWAPs. Your discussion,
underpinned by academic literature, should highlight the role played by derivatives and financial
innovations in the banking sector’s failure in the financial crisis. 4. Assume your chosen company sets up an investment department, and asks you to start
monitoring one of the stock options from the London market. You are required to explain the
contract specification of your selected stock option, and construct a straddle trading strategy. You
can contract either a long or a short straddle strategy, but you need to explain why you have
constructed such a strategy, given your analysis on the corresponding market situation and your
expectation of future market movement. Your straddle trading strategy needs to be put into
action by the end of Week 11. You are required to present a profit/loss analysis for your straddle
trading strategy using a Table as well as a Graph. You are also required to report the profit/loss
outcome using the market updated information at the end of week 12.