SCENARIO 2: FINANCIAL RISK MANAGEMENT

Qantas Airways Limited (QAN.AX), the world’s second-oldest airline, started its operations in 1920. It has grown remarkably to be Australia’s largest domestic and international airline, and widely regarded as the world’s leading long-distance airline. As of 30th June 2018, it carried more than 55 million passengers and employed over 30,000 staff globally. Qantas is an Australian public company that listed on the ASX under the code QAN.

As of 25th February 2020, Mr Noah Kennedy (your client)’s portfolio consists of 100,000 shares of Qantas (QAN.AX) stock and 70,000 shares of Afterpay Limited (APT.AX) stock. Their stock prices can be obtained from Yahoo Finance website: https://au.finance.yahoo.com/.

Task 2.1: Your task is to identify and discuss the primary financial risks that Qantas is exposed to. Since Qantas is listed on the Australian Securities Exchange (ASX), the company research can be accomplished through its financial reports and documents, which are publicly available on the company’s website.

Task 2.2: State and discuss the reasons why Qantas should hedge and why it shouldn’t hedge its fuel costs.

Task 2.3: Explain to your non-technical client how the practice of financial risk management is similar to hedging, and how is it different.

Task 2.4: Calculate 5% and 1% one-day VaR of Mr Noah’s portfolio using the historical method. Discuss the disadvantages of this method and interpret the value at risk results calculated so that your client would easily understand them. Assume that there is no change in the number of shares in the portfolio.