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).