Financial Risk Analysis

 

You have been asked to provide advice on potential risk exposures to an investment client who is
considering an investment in the form of a structured investment product issued by an Australianbased
gold mining company.
You have the following information on this structured investment product, as well as other
information on key financial variables:
 Face value of structured investment product AUD100,000
 Coupon rate 2.95 per cent per annum, with semi-annual payment, paid in AUD
 Term to maturity of three years
 Payoff at maturity is max{AUD100,000, [(P
AU
T/ P
AU
0 x USD100,000)/(USD/AUD)]}
 P
AU
T represents the price of gold (USD per fine ounce) at maturity of the investment product
and P
AU
0 the price of gold (USD per fine ounce) at inception of the investment in the structured
product
 USD/AUD represents the US dollar/Australian dollar exchange rate (price of AUD 1 in USD)
 Three-year Commonwealth government bonds are currently trading at a yield-to-maturity of
1.95 per cent per annum
 The plain-vanilla three-year debt of the gold mining company is currently selling at a yield-tomaturity
of 3.85 per cent per annum
 You have been provided with time series data in the form of the yield on 3-year Australian
government bonds (% p.a.), yield on BBB-rated corporate bonds with 3 years maturity (% p.a.),
the USD/AUD exchange rate, and the price of gold

 

 

Prepare a brief (less than three-page) report in which you:
(a) Identify the financial risks to which your client would be exposed as a result of investment in
this structured product (Note: you should tabulate the different financial risks to which an
investor would be exposed if they bought the product and the sources of each).
(b) Quantitatively analyse the risk factors for which you have data. Giving consideration to the data
available to you, which risks do you think are likely to be of most concern to the investor? (Hint:
consider a portfolio approach in addition to individual analysis of each risk factor).

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