Inancial Decisions and the Treasury Functions


Today s date is 1st December 2006

You are employed as the member of the finance team of IT Technical Departments, a firm that is involved in the design and manufacture of specialist technical hardware. The firm has been successful in recent years by continually updating and improving it s specialist hardware and the launching of new products by investing a great deal of money in research and development.

Over the last three years major research and development activity has been centered around the development of a new material which it is hoped will greatly improve the performance of many of the firms products. It has now been decided to roll out the incorporation of this material into the firms product range. However the investment needed will place a great deal of pressure on the short term cash position of the business. The finance team have carried out cash flow projections and believe that the business will need to borrow 35 million pounds in four months time for a period of six months to prevent any short term liquidity problems.

In discussions with the team a concern was raised that, based on current press comment (see appendix 1), short term interest rates could well be on the rise. Interest rates had risen twice in the last six months and there was considerable uncertainty in the market as to the timing and the direction of the next rate movement. You commented that it would be possible to develop a strategy to protect against such risk by using derivative products. Hence you were given the task of writing a briefing paper that would explain what products/derivatives were available, how these could be used and which one you would recommend. You start your task by immediately collecting the appropriate price data for the tools. (see appendix-2).


Part A
Prepare the report on hedging strategies.

The report should include:
” A brief explanation of each tool. (15 marks)

” Numerical illustrated of possible alternative strategies that you propose.
(25 marks)
” Each tool should be critically appraised.
(20 marks)
” A recommendation that should be justified.
(10 marks)
(State clearly any assumptions that you make.)
(Maximum 3000 words)
(Total 70 Marks)

Part B

Assume that your recommendation in part A was implemented.

Obtain relevant data for 30th March 2007.

I. Evaluate the outcome of your recommendation at this date.
(20 marks)

II. With hindsight, should you have chosen any other tool?
(Justify your answer) (5 marks)

(Maximum 1000 words)
(Total 25 Marks)

(Presentation 5 marks)

Total 100 marks

(Work will be penalised if it is over the word count)

Coursework Objectives

1. Critically appraise the use of different interest rate hedging tools.
2. Illustrate the operations of such tools.
3. Recommended appropriate hedging strategies.
4. evaluate the chose hedging strategy.

Note: I am also attaching appendixes for this coursework which should be consulted regarding to complete this report.Please make sure that all the references are properly referenced acording to harvard style. There is no limit of sources, but the total words of this report should not exceed more than 4000 words.