...Why do companies use derivatives? How can these be beneficial to a company? How can they hurt a company? Derivatives are used by a company to hedge risk. Risk can come in different flavors and so can derivatives. There are three main risks, which are hedged using derivatives. The first is interest rate risk. Many seemingly good investments can suffer at the hands of the fluctuations in interest rates. There are a few ways to hedge interest rate risk, one being a long-term lock on the interest rate by purchasing a treasury future and another is to use an interest rate swap whereby the company literally swaps their payment obligations by “swapping” a variable rate payment for a fixed rate. A second risk is exchange rates. If a company bids on a contract to sell a product for a fixed price, 6 months in the future but be paid in a currency different from their own, they run the risk of the exchange rate between the two currencies changing to their detriment resulting in the company receiving a relatively lower fee in their home currency. To hedge against this risk, companies can buy foreign exchange futures AGAINST the change in the exchange rate, which would positively affect the outcome for them and thereby providing them with insurance against the negative change. The third risk example is that of a commodity risk. Many products have dependent input commodities such as fuel, raw material etc. whose prices are critical in the company’s final profit. A company that signs...
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...to continue to be profitable that the prices of crops are forecasted correctly. Hedging options will allow Thomas Foods to ensure they are able to purchase crops at a guaranteed price and quantity, hence protecting the cash flow and operating income of the business. I have come up with three hedging options that would be best suited for Thomas Foods, the pros and cons of each, and included information regarding the accounting for these options as well as the guidance given by FASB. Hedging options that Thomas Foods has to mitigate the risk of paying more for harvested crops include: -Future contracts which are contractual agreements, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. So we can negotiate price now with our farmers on the prices that we will pay for the crops in the future and that price will be locked in. ("Futures Contract Definition | Investopedia," n.d.) -Forward contracts which are contracts that are customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date. These are not as customizable as future contacts and even if the prices of crops...
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...multinational company and the impact on its financial statements (second half of 2011), and suggests various hedging strategies using FX options. Udi Sela - Vice President - Numerix - 27 Oct 2011 Since the sub-prime crisis, the markets have witnessed unprecedented levels of volatility across all asset classes. The impact of unpredicted volatility could be significant for the core businesses of corporations across the globe. In response, various hedging strategies were prepared towards the end of August 2011, and subsequently measured the performance of all strategies six weeks later (the beginning of October 2011). The FX Market: Facts and Figures The foreign exchange (FX) market is the most liquid market today, serving a crucial role in facilitating international trade. According to the latest Bank of International Settlements (BIS) survey, published in April 2010, the market’s daily volume is US$4 trillion. This represents a 20% growth rate, as compared to April 2007 when the previous survey was carried out. Over the same period, FX derivatives volume has increased by 9%. Interestingly, the market has become more global as the cross-border trading represents now 65% of all FX trading. Corporations Hedging A new survey shows that 94% of the world’s largest corporations report using derivatives to manage business and macroeconomic risks. Another study recently conducted amongst Fortune 500 corporations reveals that FX and interest rate derivatives are the most widely used instruments...
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...Introduction: Overview of the hedging techniques: In the financial market, almost all of companies need to face the currency risk. In order to manage the currency risk, companies will use different hedging techniques, such as financial and operational hedging techniques. For example, money market, futures contracts, options and forwards contracts are commonly used by firms, as well as operational hedging techniques. All of 4 types of financial hedging techniques are short-term hedge. Money market is a part of financial markets for assets involved in short-term borrowing,lending, buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts are future transaction for buying or selling, and made by Futures exchange. The date and place of the transaction have been provided. There are some features of futures contracts. Quantity, commodity and quality have been limited, excepting the price. Also, it cannot be done over-the-counter. Options is a financial tool, which based on futures. If purchaser hold the options, he/she will has a right, not the obligation, to buy from or sell to the seller of the provided commodity in the future as the same price as the price agreed now. The last financial hedging technique, forwards contracts, is a non-standardization contact between two parties to sell or buy in the future. Curb-exchange and cash transaction are the feathers of forward contact. This essay will focus on two operational hedging techniques...
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...in Debt? Term Paper for the Islamic Financial Contracts Course Dr. Monzer Kahf Student: Ihab Abdelrashid Galal Date : 13th May 2013 Content: 1- Introduction a. Definition of debts b. Is debt a real asset c. Does debt create value 2- Study d. Definition and process e. Advantages and disadvantages f. Trading debts and financial crisis g. Trading debts in the world h. Cases and applications: i. Sukuk ii. Options iii. Rescheduling of debt iv. Account receivable factoring 3- Conclusion 4- References Introduction: The recent financial crisis has proven that most of the economists and financial experts need to reconsider their views in relation to the proper financial system and also to the financial transactions. One of the major factors behind this crisis was the lack of realism in the capital market and financial transactions. However there were voices during and after the crisis claim such financial crisis would have been avoided, if asset-backed Islamic finance were adopted. It is well known that sale of debts is one of the area that have been criticized by many Islamic financial supporter since years. However, nobody...
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...IDENTITY CARD NO. : 3505543 NAME : GEORGE S. OGUTU CONTACT : P. O. BOX 11873-00400, NAIROBI. CELL PHONE : 0722 736 054 OCCUPATION : CIVIL SERVANT EMPLOYER : GOVERNMENT OF KENYA, MINISTRY OF ROADS DISTRICT : SIAYA LOCATION : USONGA SUB-LOCATION : USONGA VILLAGE : NYANDORERA RESIDENCE : RONGAI STATES: I am the above mentioned male adult Kenyan of the above given address, aged 52years. I am employed by the Government of Kenya, Ministry of Roads as a Technologist based in Nairobi’s Industrial Area. I am the owner and Policy Holder of Motor Vehicle Registration Number KAA 572R Nissan Sunny Saloon. I had insured the said Vehicle with M/S Gate-way Insurance Company ** policy Number 010/070/1/140134/2008/11. The cover which was on display as on 1st September, 2012 was valued from 14th November, 2009 to expire on 13th November, 2012. I wish to state as follows:- I do recall that on the 1st day of September, 2012, I gave my vehicle to Keziah Ogutu who is my young sister. She was to use the vehicle to go to her office. At about 8.00 am, she called me and informed me that she had been involved in an accident along Mombasa Road at Bellevue while driving to her office. She further told me that a Pedestrian ran on the road when she collided with the vehicle. She told me that the Pedestrian sustained injuries. I then rushed to the scene and found the Police at the scene. The victim had already been removed from the scene and taken to hospital by an ambulance. After Police...
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...A project report on STUDY OF DERIVATIVES IN INDIAN STOCK MARKET PERIOD (2009-2012) Submitted to _______________________________________________________ __________________________________________________________ Nashik In partial fulfillment of the Requirement of the award of the degree Of Master of Business Administration (MBA-Finance) By: __________________________________________________ Under The Guidance of Through The Coordinator Study Centre Code: _________ CERTIFICATE This is to certify that the project report entitled on “STUDY OF DERIVATIVES IN INDIAN STOCK MARKET PERIOD (2009-2012)” for the Academic Year 2010-2012 Submitted to the School of Commerce and Management, Yashwantrao Chavan Maharashtra Open University, Nashik in partial fulfillment of the requirement for the award of Degree of Master of Business Administration (MBA) is original work carried out by __________________________________________________ with PRN-2010017002887675 under my guidance. The matter embodied in this project is genuine work done by the student and has not been submitted to this University or any other University/Institute for the partial fulfillment of the required study. Date: Place: DECLARATION I, __________________________________________________, the student of MBA-Finance, completed project on “STUDY OF DERIVATIVES IN INDIAN STOCK MARKET” PERIOD (2009-2012), for the Academic Year 2010-2012. The information...
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...A project report on STUDY OF DERIVATIVES IN INDIAN STOCK MARKET PERIOD (2009-2012) Submitted to _______________________________________________________ __________________________________________________________ Nashik In partial fulfillment of the Requirement of the award of the degree Of Master of Business Administration (MBA-Finance) By: __________________________________________________ Under The Guidance of Through The Coordinator Study Centre Code: _________ CERTIFICATE This is to certify that the project report entitled on “STUDY OF DERIVATIVES IN INDIAN STOCK MARKET PERIOD (2009-2012)” for the Academic Year 2010-2012 Submitted to the School of Commerce and Management, Yashwantrao Chavan Maharashtra Open University, Nashik in partial fulfillment of the requirement for the award of Degree of Master of Business Administration (MBA) is original work carried out by __________________________________________________ with PRN-2010017002887675 under my guidance. The matter embodied in this project is genuine work done by the student and has not been submitted to this University or any other University/Institute for the partial fulfillment of the required study. Date: Place: DECLARATION I, __________________________________________________, the student of MBA-Finance, completed project on “STUDY OF DERIVATIVES IN INDIAN STOCK MARKET” PERIOD (2009-2012), for the Academic Year 2010-2012. The information provided in this project...
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...Abstract Measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements, which could adversely affect profit margins and the value of assets. This paper reviews the traditional types of exchange rate risk faced by firms, namely transaction, translation and economic risks, presents the VaR approach as the currently predominant method of measuring a firm’s exchange rate risk exposure, and examines the main advantages and disadvantages of various exchange rate risk management strategies, including tactical vs. strategical and passive vs. active hedging. In addition, it outlines a set of widely-accepted best practices in managing currency risk and presents some of the main hedging instruments in the OTC and exchange-traded markets. The paper also provides some data on the use of financial derivatives instruments, and hedging practices by US firms. JEL Classification: F31, G13, G15, G32, M21 Keywords: Financial Risk, Financial Management, Foreign Exchange Hedging, Corporate Hedging Practices Corresponding address: 700 19th Street, N.W. Washington, DC 20431 e-mail: mpapaioannou@imf.org This paper draws heavily on various presentations on risk management while the author was the Director of Foreign Exchange Service of the WEFA Group. I thank Carlos Medeiros and a referee for helpful comments. As customary, the views expressed are those of the author and do not necessarily represent those of the I.M.F. ...
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...The article Wielding Derivatives as a Tool for Deceit by Floyd Norris, a writer for the New York Times, talks about how derivatives can be used as “weapons of mass deception”. Enron is a classic example of this. They used phony accounting methods, including derivatives, to make their financial statements seem stronger and less risky than they actually were. The banks, that were essentially giving them loans, were also involved in this scheme. The latest news of large-scale use of derivatives to deceive is the case of Italy and Greece entering into the Euro. The government received money, which was essentially a loan, but was able to keep it off the balance sheet because of its title. This made the financial statements look better so that the country could join the Euro. The article compared this to a student cheating on entrance exams to be accepted into a better college. This article brings into question the moral and ethical decisions businesses must make regarding their financial actions. Just because something is technically legal to do, does not mean it is ethical. Key individuals, who are in charge of what a business does, need to be involved and knowledgeable enough to understand when something like this is happening. If the business is doing something to deceive others, it is probably something they shouldn’t be doing. June 27, 2013 Wielding Derivatives as a Tool for Deceit By FLOYD NORRIS Derivatives are not always “financial weapons of mass destruction,” as...
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...Scenario 1 While looking at the Risk Corporation’s case and who is potentially liable we found some issues that may have contributed to damages done to the stockholders. Issues included: Breaking Wisconsin Disclosure Law, Shareholders filed a Derivative Action, and because of certain actions Risk Corp. lost money due to the data breach. There are several relevant laws & principles that pertain to Risk Corporation. The Business Judgement Rule could be used as a defense for Tom Lawless in response to the derivative action. The business judgement rule states that directors and officers are immune from personal liability if their actions are reasonable when made but prove to be detrimental to the corporation. Next, the Duty of Loyalty may have been broken when Lawless didn’t put the corporation's interest ahead of personal interests. This happened when the Risk Corp. didn’t disclose the potential conflict of interests regarding cyber break-ins. The Duty of Care is relevant because the directors and officers have a duty to exercise reasonable care in conducting corporate affairs. And lastly Shareholder litigation is seen here when the shareholders filed a derivative action after the discovery of the data breach and the decline of stock prices of the Risk Corporation. Scenario 2 A shareholder is part owner of a corporation based on the percentage of the corporation's stock the shareholder owns. Shareholders have the right to vote to approve any fundamental corporate changes...
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...:INVESTMENT ALTERNATIVES * Types of assets that investors can invest in; financial assets and real assets * * Financial assets: are claims that organizations sell in order to finance their financial needs. Examples of financial assets are shares, bonds, certificate of deposits, unit trust. * Real assets: consists of tangible assets such as investment in real property, precious metal, gems, antiques, stamps, coins and work of arts. Real Asset vs Financial Assets Types | REAL ASSETS | FINANCIAL ASSET | Characteristics | Tangible asset/physical capital that generate income | Claims of organization sell in order to finance their financial needs t | Advantages | * It can be used to produce goods and service s * Owning a real tangible asset that has both investment and aesthetic value | * It has an efficient market for trading * High liquidity * Easy to transfer ownership | Disadvantage | * Lack of an efficient and limited market * Hard liquidate * High commission charged | * Must go through broker (middleman) to get access into the market | Example | * Real property ( house, land, machine, gold, antiques) | * Shares, bonds, certificate of deposit ,unit trust, commodity, derivative instruments | Savings * Form of fixed investment where principal amount and terminal amount is known. ADVANTAGES | DISADVANTAGES | * Provide security * Earn interest on savings * High liquidity | * Earn low income * Hard to...
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...that add value to their firm and also to forecast the funding requirements of their company, and devise strategies for acquiring those funds. B. d. Proprietorship is an unincorporated business owned by one individual. i. Advantages 1. Easy to set up 2. Few government regulations 3. Income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income ii. Disadvantages 4. May be difficult for a proprietorship to obtain the capital needed for growth 5. The proprietor has unlimited personal liability for the business’s debts which can result in losses that exceed the money invested in the company 6. The life of a proprietorship is limited to the life of the founder e. Partnership exists whenever two or more persons or entities associate to conduct a noncorporate business for profit. iii. Advantages 7. A partnership have the same advantages and disadvantages as a proprietorship f. Corporation is a a legal entity separate from its owners and managers iv. Advantages 8. Unlimited life 9. Easy transfer of...
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...Multiple Choice Questions 11. The material wealth of a society is equal to the sum of _________. A. all financial assets B. all real assets C. all financial and real assets D. all physical assets E. none of the above Financial assets do not directly contribute the productive capacity of the economy. 13. _______ are financial assets. A. Bonds B. Machines C. Stocks D. A and C E. A, B and C Machines are real assets; stocks and bonds are financial assets. Difficulty: Easy 14. An example of a derivative security is ______. A. a common share of General Motors B. a call option on Mobil stock C. a commodity futures contract D. B and C E. A and B The values of B and C are derived from that of an underlying financial asset; the value of A is based on the value of the firm only. 17. An example of a primitive security is __________. A. a common share of General Motors B. a call option on Mobil stock C. a call option on a stock of a firm based in a Third World country D. a U.S. government bond E. A and D A primitive security's return is based only upon the earning power of the issuing agency, such as stock in General Motors and the U.S. government. Difficulty: Easy 19. _________ financial asset(s). A. Buildings are B. Land is a C. Derivatives are D. U.S. Agency bonds are E. C and D A and B are real assets. Difficulty: Easy 20. The value of a derivative security _______. A. depends on the value of the related primitive security B. can only cause increased risk...
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...In recent months and years, there has been much debate about regulation of industries and markets. Especially in financial markets, this is an issue that has come up after the collapse of the housing, financial, and financial derivatives market last year. Take the financial industry and imagine being a manager of a bank, insurance company or investment fund. What are the main reasons in favor and against regulating this industry? What are the economic benefits and dis-benefits of either approach? What are the micro vs. the macro considerations of selecting an approach of governmental oversight and monitoring? How much regulation do you favor in this industry? What are your personal views on this matter? The importance of good regulation in the financial sector is necessary as 1. Companies can seek capital in the markets confidently to get on doing business without paying a significant market risk premium 2. The businesses of financial industry may operate profitably and efficiently and across the borders, while treating customers honestly and fairly. 3. All market participants can start understanding their obligations. 4. The consumers and investors participation can be in confident manner by taking use of trustworthy and reliable information to make decisions. The disadvantages of regulation would be 1. The customers would be affected negatively because of higher transaction costs due to requirements of clearing and reporting. 2. The competition...
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