撮要

CITIC Pacific Limited was a “red-chip” conglomerate based in Hong Kong, with businesses spanning across aviation, power generation, civil infrastructure, telecommunication and special steels manufacturing. Its special steels business was the largest in China. In 2006, it acquired iron ore mining rights in Australia in order to secure the sourcing of iron ore. The iron ore project required capital outlay in Australia Dollars over the next few years. To manage the Australia currency exchange rate risk, CITIC Pacific entered into various structured hedging transactions. On 20 October 2008, CITIC announced it had incurred over HKD15.5billion loss on its leveraged foreign exchange contracts, with total notional exposure of AUD9.5billion. The company stock price dropped 55% on the next day.

學習目標

The case teaches students how to analyze hedging instruments and identify the right hedging tools to cater to a company’s need in the midst of market exuberance.

To learn how to decompose and analyze a derivative structured product by applying theories learnt in a derivative course.
To learn how to apply Black-Scholes formula to price options in a real-life case.
To learn how to price forward contract in a real-life case.
To master what elements are needed to price options.
To learn the importance of volatility in pricing options.
To learn to measure the risk exposure of a structured product.
To learn how to manage their risk exposure in derivative structured products and/or hedging positions to avoid excessive leverage.
To learn how to select appropriate hedging tools and/or structured products to meet the company’s hedging needs.
For advanced derivatives course, the case can be used to learn how to price exotic options using binomial tree and Monte Carlo simulation in addition to the knock-out option pricing formula.