...The Nikkei 225 Reconstitution The objective of this case is to understand the effects of demand on security prices, and to understand the role of price impact on trading decisions 1. As a portfolio manager for the UNIL Advisors Nikkei 225 Index fund, which has ¥100 billion of assets linked to Nikkei 225 index, what would you do when you hear the news of index reconstitution? 2. What would you do if, instead, you were at the proprietary trading desk of Goldman Sacs? Strategic Capital Management, LLC (SCM) The objective of this case is to develop an understanding of how arbitrage acts to enforce the law of one price. It also provides a venue to discuss the various real world imperfections that can prevent arbitrageurs from eliminating mispricing in the equity markets. 1. Is there an arbitrage opportunity based on market valuations of Creative Computers and Ubid as on December 9th, 1998. 2. If yes, how would you take advantage of it? 3. What are the potential risks of such a strategy? AXA MONY The objective of this case is to understand the pricing of convertible bond and how it may be utilized profitably in merger transactions (you may ignore the part of the case dealing with issues of corporate control) 1. How would you price the ORAN at issue? Is it fairly priced? How does the price of ORAN on Feb 9th, 2004, imply about the probability of deal succeeding? 2. What is the fair price of MONY stock? If this is different from the market price of $31...
Words: 325 - Pages: 2
...1) Suppose you are a portfolio manager for the MBA Advisor Nikkei 225 index fund, which has Y100 billion in assets linked to the Nikkei 225 index. What should you do when you hear news of the index redefinition? In your preparation, you should consider: a) The construction of the Nikkei index and the portfolio weights it gives rise to. In order to minimize risk, they would like to sell stocks to be deleted and buy stocks to be added to rebalance the portfolios and swap the deletions and additions at the closing price. Upon announcement of the composite change, they can go long the stocks newly adopted and short sell deletions. For short sales, they go the securities lending market and borrow the stocks. They have to act fast since borrowing demand in the securities lending market shoots up upon announcements. This long position in additions and short position in deletions will be held until one day prior to the change date. And then unwind the position as close as possible to the closing of the change date. For the price-weight average, since the index substituted 30 large capitalization stocks for 30 small capitalization stocks, down weighting the 195 stocks that remained in the index and most of the additions were technology companies which experienced high returns, the index divisor would be adjusted for this redefinition. The additions would drive the price up and have a higher weight in the portfolio. b) The effect of your trading on the prices of the index constituents...
Words: 576 - Pages: 3
...on the Nikkei 225 as the underlying. The Nikkei 225 was traded as a future on both the SIMEX and the Osaka markets. There were always known to be differences between the two markets which could be arbitraged. The idea was to exploit the differences between the 2 markets , and execute in the cheaper market on client orders. This would then allow Barings to net a profit as they execute in the cheaper market but quote the client the price in the more expensive market. The underlying idea was of course to always be long one and short the other. Leeson was long Nikkei 225 futures, short Japanese government bond futures, and short both put and call options on the Nikkei Index. He was betting that the Nikkei index would rise, but instead, it fell, causing him to lose $1.39 billion. 2. What went wrong that caused his strategy to fail? Nick Leeson’s strategy failed because the Nikkei 225 index kept falling while he continued to bet that it would rise. On the 17th of January 1995 a huge earthquake struck Kobe in Japan. The Nikkei plummeted putting Leeson’s positions under a lot of stress. The Nikkei plunged to 17950 by the end of that week and Leeson started recording big losses. Leeson’s solution was however to ask for extra funds from London to meet his margin calls and continue trading. His view was that the move down on the Nikkei was temporary and he could ride it out. In the weeks that followed he almost doubled his futures position to 55,000 contracts. However the Nikkei did not...
Words: 865 - Pages: 4
...established in the name of the bank. | |When it went into receivership on February 27, 1995, Barings, via Leeson, had outstanding notional futures positions on Japanese | |equities and interest rates of US$27 billion: US$7 billion on the Nikkei 225 equity contract and US$20 billion on Japanese | |government bond (JGB) and Euroyen contracts. Leeson also sold 70, 892 Nikkei put and call options with a nominal value of $6.68 | |billion. The nominal size of these positions is magnificent; their enormity is all the more astounding when compared with the | |banks reported capital of about $615 million. | |The size of the positions can also be underlined by the fact that in January and February 1995, Barings Tokyo and London | |transferred US$835 million to its Singapore office to enable the latter the meet its margin obligations on the Singapore | |International Monetary Exchange (SIMEX). | |Reported activities (Fantasy) | |The build-up of the Nikkei positions took off after the Kobe earthquake of January 17. This is...
Words: 6854 - Pages: 28
...Barings Bank and Nick Leeson Introduction I would like to present the case of Barings Bank, one of the most famous histories in the world when one man led to the bankruptcy the oldest British bank. Barings collapsed on February 26, 1995, due to the activities of one trader, Nick Leeson, who lost almost $1.4 billion. The loss was caused by a large exposure to the Japanese stock market, which was achieved through the futures market. Leeson, the chief trader for Barings Futures in Singapore, had been accumulating positions in stock index futures on the Nikkei 225, a portfolio of Japanese stocks. As the market fell more than 15 percent in the first two months of 1995, Barings Futures suffered huge losses, which were made even higher due to the sale of options, which implied a bet on a stable market. As losses mounted, Leeson increased the size of the position, in a stubborn belief he was right. Finally, on 25 February 1995 he walked away, when he realized that bank was unable to make the cash payments required by the exchanges. Later, he sent a fax to his superiors, offering “sincere apologies for the predicament that I have left you in.” Nick Leeson had totally wiped out the venerable 233-year-old Baring Investment Bank, which proudly counted Queen Elizabeth as a client. He left behind huge liabilities totaling $1.4 billion, more than the entire capital and reserves of the British institution. This situation - and a similar scam at the New York branch of Japan's Daiwa Bank in October...
Words: 3328 - Pages: 14
...Topic: The biggest scams in the banking history Course: Banking Students: Nino Vepkhvadze, Gohar Trchunyan, Giorgi Menteshashvili & Giorgi Paksashvili Date: 04.06.2012 A fraud, by definition, is the act of deliberate deception of people to secure an unlawful gain. These are mainly for the purpose of defrauding money as well as prestige rather than immediate financial gain. A study by BBC has revealed that the average woman lies twice a day while a man tells three lies a day. However, the lies they tell differ from each other a lot, both in essence and the results yielded. This is why we decided that the frauds and scams of the banking industry as well as their influence on other financial institutions would be quite interesting and intriguing. Let us together investigate how far a human mind can go to earn as much money and glory as we desire. Jerome Kerviel’s case-Societe Generale on the edge In January 2008, A French court sentenced former Société Générale trader Jérôme Kerviel to three years in prison for his role in one of the world's biggest-ever trading scandals and ordered him to repay his former employer €4.9 billion—a sum it would take him 180,000 years to pay at his current salary. In convicting Mr. Kerviel of breach of trust, forgery, and unauthorized computer use, the judge also handed Mr. Kerviel a lifetime trading ban. The prison sentence handed to Mr Kerviel is for five years, of which two years were suspended. Throughout the trial, Mr. Kerviel and...
Words: 3438 - Pages: 14
...Question 1 What was the motivation to issue Nikkei-linked Eurobonds? The motivation for the European bank issuers of the Eurobonds, wasthe possibility to get U.S. dollar finance for a lower interest rate. Toachieve this, the issuer could sell the embedded put to Goldman Sachs. The profits from the put offset the difference between the 7%coupon they paid on the bonds and the desired LIBOR floating rate. The payment from the put covered the cost paid to the swapcounterparty for hedging the exposure to the Yen-Dollar exchangerate and swapping the LIBOR for a higher coupon rate. The European financial institution was left with a fully hedged U.S. dollar financing with a lower than normal coupon rate.Furthermore, due to some specific administrative regulation in Japan, the demand for these kind of coupons was high. In Japan,companies where not allowed to pay dividend out of capital gains. Moreover, dividend payments where an important factor in gaining an competitive advantage. Therefore, this bond construction allowed the Japanese life insurers (investors) to use the coupon rateto pay out dividend while still maintaining an exposure to the Nikkei. How are the puts embedded in the Nikkei-linked Eurobonds? A normal bond to Japanese institutions would pay a coupon rate lessthan 7%. The amount by which the 7% exceeded the normal couponrate can be seen as the put premium paid by the issuer. If, atmaturity, the Nikkei dropped below a pre-determined value (hencethe theoretical strike...
Words: 1719 - Pages: 7
...mer Budget carrier's rise shakes up Vietnam's airline market- Nikkei Asian Review Page 1 of 3 Log in | Subscribe | About Nikkei Asian Review Sort by Region | Home | Politics & Economy | Business | Markets | Tech & Science | Viewpoints | Photos | Magazine | Magazine > 20140417 Economic reboot > Business Editor's picks Print | China's media control spreads to Taiwan, Hong Kong Newer Asean members' revenues pinched by free trade zone Students spared the cramming life at elite South Korean schools Nuclear reactors on the rise in Asia April 17, 2014 12:00 am JST Budget carrier's rise shakes up Vietnam's airline market MANABU ITO, Nikkei staff writer Aggressive investors scoop up robotics ventures Most read North Korean drones send shock waves across South Vietnamese budget carrier VietJet is seeking to expand its international services. A VietJet aircraft is seen at Tan Son Nhat International Airport in Ho Chi Minh City. Missing flight makes Malaysia Airlines bailout more likely Philippines building up military as counter to China Japan fighters scrambled 415 times against Chinese aircraft in FY2013 Malaysia's AirAsia refuses to move airport HANOI -- Vietnam's rapidly growing air travel market has a young budget airline that is seriously giving the country's flag carrier, Vietnam Airlines, a run for its money. The low-cost carrier VietJet Air began flying in December 2011 and is aggressively expanding its operations and steadily increasing...
Words: 1104 - Pages: 5
...Japan’s Nikkei 255 stock average Public launch depends on the price of NPWs (Nikkei put warrants) 1987, BS issued currency warrants by GECC, heavily subscribed. Selling echange-listed currency warrants made three important impressions on GS team. 1. while investors were interested in puts on the yen, puts on the Nikkei would be much more widely demanded. 2. Profits to be made from buying options (sourcing volatility) in institutional markets and resell to retail customers 3. New markets could quickly become satiated. The prices of the currency warrants fell quickly from the initial deal levels Exhibit 1 daily implied volatilities of exchange-listed yen currency warrants 1988, IFR reported the first of a series of recent Eurobonds whose redemption values at maturity were tied to the level of the Nikkei 225 stock average. Exhibit 2 Representative Nikkei-Linked Euro-Yen offerings, Dec 1989 Exhibit 3 Hypothetical Nikkei-Linked Euro-Yen Transactions Through a set of swaps, the issuer transformed its annual fixed-rate yen payments in to dollar-dominated LIBOR-based payments. At maturity, the issuer would redeem the bonds from the investor a price tied to the Nikkei. If Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds. Thus, it would be as if the issuer sold bonds with final principal payments at par but also bought a put option on the Nikkei maturing in the same years as the bond. If the Nikkei fell, the...
Words: 1019 - Pages: 5
...Dow Jones Industrial AverageTM Stated Objective To represent large and well-known U.S. companies. Covers all industries with the exception of Transportation and Utilities. Key Features — The index is maintained by the Averages Committee. — Components are added and deleted on an as-needed basis. For the sake of continuity, such changes are rare, and typically occur following corporate acquisitions or other significant changes in a component company's core business. When one component is replaced, all of them are reviewed. — While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process. — The index is price weighted. — The Dow Jones Industrial AverageTM was first calculated on May 26, 1896. Descriptive Statistics Market Capitalization (Billions) ComponentCurrency Number | Float-Full Adjusted Mean Median Largest Smallest | USD 30 | 5,016.6 4,769.7 159.0 137.8 412.4 34.2 | Data calculated as of end of October, 2014. Mean, median, largest component and smallest component values are based on float-adjusted market capitalization. Performance ...
Words: 3120 - Pages: 13
...ASSIGNMENT: CITIC TOWER II: The Real Option Executive Summary: Structure of Nikkei-Linked Euro-Yen Transactions: Role of Kingdom of Denmark: Risks exposure for Goldman Sachs: 1. Risk of bearing the unsold inventory of NPWs: If the investors find prices too high then much of the inventory would remain unsold and GS will have to bear the costs of unsold warrants. Risk Mitigation: GS would offset its risk through futures position in the Nikkei offered by the Singapore, Osaka & Tokyo stock exchanges 2. Exchange Rate Risks: Considering preference of U.S investors, GS would bear the exchange rate risks for its investors. This implies that GS has to sell NPWs in terms of dollars whereas the same has been purchased by it in terms of yen. Also, in the 1980s, the Nikkei and the yen/dollar exchange rate were moving in opposite direction which further increased its exposure to exchange rate risk. Risk Mitigation: This can be mitigated through Quantos, a product offered by its currency and commodity division. A complete hedge would cost GS about $1 per warrant whereas hedging 80% of its risk would cost it $0.50 per warrant only 3. Repute at risk: GS would not like to keep the prices very low. At the same time it cannot price them very high as there is a risk that competitors might copy the product and start selling it at lower prices. Also, if NPWs started trading at lower prices in the secondary market this would bring disrepute for the organization and...
Words: 592 - Pages: 3
...Econometric Analysis of the Daily Exchange Rate between the Dollar and the Yen By: Andrew Dupere Intro: The purpose of this model is to explain the variation in price of the USD/JPY currency pair by trying to understand how other financial markets such as stock indexes and other exchange rates affect the USD/JPY. I am personally interested in this study because I trade the USD/JPY along with many other individuals and institutions. An accurate model will provide insight how stock indexes affect the USD/JPY, opportunities to trade the USD/JPY and a foundation to do studies on other currency pairs. Literature Review: A similar study was done by a group of economists (Saeed, Ahmed; Rehmat Ullah Awan) from The University of Sargodha in Pakistan titled “An Econometric Analysis of Determinants of Exchange Rates in Pakistan”. For variables the study used the money supply in each country, the foreign exchange reserve of each country’s government, the government debt of each country and a dummy variable to account for news releases. To calculate each variable (without the coefficient) the respective United States value was subtracted from the Pakistani value and the variables represented the difference between the determinants in each country. Another study on exchange rates was done by A. D. Cohen, from The University of Witwatersrand called “An Econometric Model for Foreign Exchange Rate Forecasting”. For variables, Cohen used balance of payments, foreign exchange reserves...
Words: 988 - Pages: 4
...NIKKEI 225 RECONSTITUTION 1) As a portfolio manager for the HEC-UNIL Advisors Nikkei 225 Index Fund, which has ¥100 billion of assets linked to Nikkei 225 index, what would you do when you hear the news of index reconstitution? The Nikkei 225 is a price-weighted average of the stocks it incorporates. It simply adds the prices of the 225 stocks and divides this sum by a divisor. When the announcement about index change takes place, the index is calculated as the above-mentioned method until the new composition of stocks becomes effective. The announcement date and the date of “effectiveness” are different – there is a time period between them. After the effectiveness date the shares of new member companies are added and divided by the new divisor. The price sequence has to be maintained by the index. Therefore, the new divisor is calculated to guarantee the sequence before and after the effectiveness date. The equation below must be satisfied: Σ 225 stocks before changeDivisor before change= Σ 225 stocks after changeNew divisor From the point of view of one who does not like a lot of risk and wants to minimize it. So, I would like to sell stocks that will be deleted and then will be stocks that will be added one day before the effectiveness date. In this case, if I would be able to swap the deletions and additions at the date, I would bear no risk. 2) What would you do if, instead, you were at the proprietary trading desk of Goldman Sachs? There are two possible...
Words: 502 - Pages: 3
...Analisis financiero Rogue Trader. Nick Leeson entró a formar parte de la leyenda negra del mundo de las finanzas el jueves 23 de febrero de 1995 a las cinco de la tarde. En aquel preciso instante, a dos días de cumplir los 28 años, Leeson, un joven operador de bolsa británico, de origen humilde, encumbrado por sus superiores a la categoría de dios de las finanzas de la noche a la mañana, provocó la sonada quiebra de una de las más venerables instituciones financieras de Reino Unido, la banca Barings, con 223 años de historia a sus espaldas. La banca Barings, la misma que financió la compra de Luisiana por Estados Unidos, la que puso el dinero para la construcción del ferrocarril en la ruta de la seda, la que fue descrita por el cardenal Richelieu como la sexta potencia del mundo y que ayudó en la reparación de Francia tras Waterloo, terminó finalmente vendida por una libra al grupo holandés de servicios financieros Internationale Nederlanden Groep (ING), que prometió hacerse cargo de todas las deudas, devolver los depósitos y encargarse de los acreedores. Barings, todo un emblema del establishment británico, con clientes como Napoleón III o la mismísima reina de Inglaterra -quien al parecer perdió más de un millón de dólares tras la bancarrota-, estaba, para sorpresa de muchos, en las manos de un especulador de 28 años, que suspendió su examen de matemáticas para ingresar en la Universidad, y que dejó un agujero irreparable de 827 millones de libras (1.400 millones de dólares)...
Words: 1750 - Pages: 7
...The Japanese economy unexpectedly shrank last quarter as a hike in the sales tax in Q2 continued to weigh on economic activity. As we have stated on numerous occasions, the lack of activity at the ground level in Japan and the failure of a weakening yen to significantly boost exports is killing economic activity. The yen initially weakened on the back of Japan’s all-important GDP figures as the Nikkei rallied, before Japanese equities began to fall and the yen reversed its course. The numbers were so bad as to spook the market sufficiently to result in the aforementioned sell-off in equities. GDP fell a seasonally adjusted 0.5% q/q and an annualised 1.6% q/q in Q3, missing expected increases of 0.5% and 2.2% respectively. The numbers show that the hike of the VAT in April is having a far more detrimental impact on the economy that initially expected, thus it should be enough evidence to persuade Tokyo to delay increasing the sales tax for a second time. Last week we postulated that Prime Minister Abe may officially push back an expected hike in the VAT by 18 months if today’s data was significantly worse than expected. This was supported by rumours from the Japanese media and some cryptic comments from law makers. After today’s very disappointing numbers, we are almost certain that Abe will announce in the coming days that the planned October increase in the VAT will be postponed by at least six months. The market reaction The initial sell-off in the yen is a likely reaction...
Words: 445 - Pages: 2
