FIN358: Why Bond Investors are Willing to Bet on Money-losing Pemex After Oil Price Crash: Fixed Income and Derivative Securities Assignment, SUSS, Singapore

Question 1

Read the article: “Why bond investors are willing to bet on money-losing Pemex after oil price crash” CNA, 22 May 2020.

Link: https://www.channelnewsasia.com/news/business/why-bond-investors-are-willing-to bet-on-money-losing-pemex-after-oil-price-crash-12759154

• Assess and identify the risks faced by investors in Pemex bonds.
• Morgan Stanley is an investment bank.
• Discuss why Morgan Stanley bought the Pemex call.
• Discuss why Morgan Stanley used the credit default swap to hedge its long Pemex call position and also why it used that particular instrument.

Question 2

Supreme Fish is a company involved in fish farming in Vietnam. Its products are sold to supermarkets as well as restaurants throughout the world. Supreme Fish has a global market share of 40% for this type of fish.

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Supreme Fish has a US$150 million, a 15-year bond issued 2 years ago. The bond pays a premium of 500 basis points over the SOFR. The bond is not rated. However, based on its yield, an equivalent rating would be BB.

An institutional investor intends to sell its holdings of US$5 million of the bonds. As a buy-side bond analyst, you have been tasked to analyse the suitability of the bond for your fund.

Assess the credit risk issues related to the bond.

Question 3

• With the Covid-19 crisis and its impact on the economy, analysts have speculated about governments lowering their currently very low rates into negative territory.

Discuss possible reasons why investors would buy treasury bonds with negative rates.

• As negative interest rates are basically in uncharted territory, analyse and evaluate whether yield curve analysis is still valid.