...1.) Explain how futures contracts could be used to hedge a bond portfolio against the risk of rising interest rates. Then explain how futures could be used by exporters and by importers to hedge against their foreign-exchange exposures. Someone with a large bond oprtfolio may want to hedge against future interest rate movements. When interest rates rise, bond prices decline. The use of futures can be used to hedge against the likelihood of rising interest rates. When the hedging is balanced, the gains/losses in the cash holdings will be offset by gains/losses in futures account. Hedging bond portfolios with futures contracts, will be done by holding short positions. Futures could be used to establish an offsetting currency position so that whatever is lost or gained on the original currency exposure is exactly offset corresponding foreign exchange gain or loss on the currency hedge. Regardless of what happens to the future exchange rate, therefore, hedging locks in a dollar value for the currency exposure. In this way, hedging can protect a firm from foreign exchange risk, which is the risk of valuation changes resulting from unforeseen currency movements. 2.) Explain how the manager of a bond portfolio could use options to hedge against the risk of rising interest rates. Then explain how exporters and importers could use options to hedge against their foreign-exchange exposures. 3.) Assume that Baker Adhesives, sold 2.6 million Brazilian reals of adhesives to...
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...work and needs to plan accordingly. One main question that is always a difficult one to answer is how long one needs to work before they can comfortably stop working and rely on their financial portfolio to take care of expenses after work. In order to analyze these questions, a deterministic model of an investment portfolio was created and stochastic modeling was used to determine the likelihood of being able to accumulate the necessary finances over the desired period of time. Quantitative Analysis: 1. Using the given deterministic model, the annual outflows were estimated from the retirement portfolio over the retirement years and the estimated return on the account was also calculated. It was determined that under these basic assumptions of salary and portfolio growth rate the portfolio could expect to grow to $452,900 within thirty years. However, this assumed a fixed salary growth rate of 5% as well as a 4% annual investment rate. Given the high rate of inflation and the projected expenses after retirement, it was calculated that if this money was to last for the retirement, then even pulling out $50,000 per year in expenses would cause the account to run out after just a few years. 2. Adjusting the annual rate to 8% from 4% had a major effect. Although the portfolio fell short of the one million dollar goal by only reaching $853,633, this was a major effect as it allows the individual the ability to pull $100,000 each year from this account and still sustain...
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...* Posted on: Wednesday, March 13, 2013 Apache Questions 1. What risks does Apache face? Do they differ by country of property type? Do the risks of the major integrated oil companies differ from those faced by Apache or other independents? How does Apache’s operating strategy affect its risk exposures? 2. What is Apache doing now to manage risk? What risks are they attempting to hedge? What are its competitors doing? 3. What are the potential hazards Apache faces if it manages risk? 4. As a member of Apache’s board, how would you recommend they proceed? If they decide to manage risk, what steps should they take? Which risks should they shed? Which risks should they retain/keep? Should they manage some types of risks but not others? Some types of investment decisions but not others? How should FAS 133 affect their strategy? Case Study Questions Each team is required to address the four questions posted above. You should view your case report as a report to senior management or the board of directors. It is to provide the decision makers with all relevant information of a particular case and your policy recommendation, using the assigned questions as a guide. There is no formal size limit for a case report, but you should keep in mind that conciseness and clarity make reports more convincing and will be rewarded accordingly. In particular, a summary of the facts from the case should not include the facts that are not relevant to your analysis...
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...By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM 2/21/2012 I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1 II. Case Analysis: Commodity Market Derivatives Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one particular strategy 2. What are the negatives to rolling a spread position? Ans: Negatives to rolling a spread position are: When rolling a spread position the investor expects the following months to which the contract was rolled over to be favourable and thus be able to unload its positions. But, if the market moves in a direction opposite to the one anticipated by the investor it can result in huge losses. Also, if the risk increases for a spread position with the increase in the leverage. In the case of Amaranth hedge fund, it had rolled its short positions prior to august into the next month, hoping that market conditions would change and enable it to unload its positions. There were now no more summer months into which it could roll these positions. By late August, with hurricane season...
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...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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...Question 1 a) Not clear, depends on the risks of firms’ stocks. The news is about the individual performance of firm A and firm B, and contains no information about the risks (e.g. volatility, beta), expected future performance, historical performance, market return, thus we have no benchmark to conclude if there is market efficiency. b) Support. Market reaction to new-hired CEO from another firm is used as accurate measure of events' impact on firm value. The 2.5% increase in stock price reflects market perception of underperformance of the current CEO/expected better performance of new CEO. c) Not clear. Small firms have outperformed the market over 30 years, it can be the case that the market is efficient but the asset pricing model is wrong. Or it can also be the case that the model is correct and the market is not efficient. d) Since CAPM doesn’t capture the risk of book-to market ratio, the model might not be appropriate. But inappropriate model doesn’t indicate that the market is certainly efficient. More examination needed. Thus, not clear in this case. e) Support. Microsoft stock price reflects all available information about dividend payment. f) Not clear. The firm’s future earnings are not given in this news and thus it is not possible to evaluate whether the $20 million really reflects 10% of future earnings. Also, we don’t know the movement of existing share price. g) Not clear, depends on the risk of each fund. The news is about the performance...
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...Part 2 - Homework Problem(s) - Complete the problem(s) below and submit to me in word, excel, or pdf format to be graded (worth 10 points per week). The homework problems should be submitted by Midnight CT on Sunday of Week 3. Problem 5.32. A trader owns a commodity as part of a long-term investment portfolio. The trader can buy the commodity for $950 per ounce and sell it for $949 per ounce. The trader can borrow funds at 6% per year and invest funds at 5.5% per year. (Both interest rates are expressed with annual compounding.) For what range of one-year forward prices does the trader have no arbitrage opportunities? Assume there is no bid–offer spread for forward prices. Utilizing the generalized equation Fo = Soe^rT I came up with a range of no arbitrage opportunities. If the Forward price was high, the trader could borrow $950 to buy 1 ounce of gold and then enter into a forward contract to sell the gold in one year. This would result in Fo = $950e(0.06)(1) = $1008. Therefore the profit would be Fo – $1008. So this venture would only be profitable if Fo is greater than $1008. If Fo is low, the trader could sell the asset, gold for $949 at 5.5% and then enter into a forward contract to repurchase the gold for Fo. The profit for this venture is just the reverse of the equation used above, where $949e(0.055)(1) – Fo = $1002. Therefore so this venture would only be profitable if Fo is less than $1002. Therefore our no arbitrage window is $1008 < Fo < $1002...
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...Stock Trak 3 Hedging, speculation, locking in arbitrage profits, liquidity and price discovery are some of the potential uses of futures and forwards. To hedge risk of volatile prices, interest rates and exchange rates. The basic function of the commodity futures market is to transfer risk to someone who is willing to bear it. The speculator assumes the risk because of the potential profit. Hedgers use futures and forwards to reduce the risk that they face from potential future movements in a market variable. Speculators use them to bet on the future direction of a market variable. The futures we invested in were mainly for speculation rather than portfolio insurance. The naked call strategy worked the best for our portfolio. This strategy worked better for us than a covered call because we did not use additional cash to purchase the underlying asset. Our riskiest position was buying puts on Apple and Bidu at the end of the trading period without purchasing a corresponding call option to cover additional losses. Some of the obstacles for investors to beat the market are the volatility of the market, regulations and transaction costs. Some of the most important investment principles investors should adhere to include diversification among asset classes, low transactions costs and rebalancing portfolio assets. In the future, we could concentrate more on long term growth rather than the short term gains. We would also employ more of a buy and hold strategy to realize...
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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...run. In 2000 Black and Decker Corporation was still reeling from the financial and strategic problems stemming from the company's acquisition of Emhart Corporation in 1989. In late 1998 Black & Decker management celebrated the completion of an almost decade-long effort to divest nonstrategic business gained through its 1989 acquisition of Emhart Corporation and expected the company to enter a long-awaited period of growth as its entire management refocused its attention on its core power tools, plumbing, and security hardware business. Archibald believed that "This portfolio restructuring will allow us to focus on core operations that can deliver dependable and superior operating and financial results." However the portfolio restructuring did little to improve the market performance of the company's securities. Yet Archibald and the management continued to express confidence that the company's streamline portfolio would allow Black & Decker to achieve revenue and earnings growth that the market would find impressive. So far the 1998 divestitures have not produced steady increases in the company's stock price, but look promising for the future due to the efforts to refocus efforts on the successful power tools line. Strategic planning team evaluation Over the years, Black & Decker has branched off into many different directions in order to gain as much market share as possible. The diversification program in the 1980s produced mixed results for shareholders, and later...
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...Kochman’s and Badarinathi’s mathematical case for upside deviation deals with portfolio upside deviations being divided by a market’s upside deviations to so show the resulting ratio and how it facilitates other tests for positive or negative skewness. The article discusses how CAPM is inappropriate for the evaluation of portfolios given that is not only assumed that the returns on distributions are symmetrical, but that the beta (performance and return-to-risk ratios) underestimates the risk of larger numbers of mutual funds. Kochman and Badarinathi needed to answer two questions; can upside deviation be the means for portfolio evaluations and can this be done by taking the upside deviation of portfolios and divide those figure by the upside deviation of the market? Kochman and Badarinathi believe that to make a case for upside deviation as a means for portfolio evaluations is to take the upside deviation of the portfolio(s) and dividing it by the market(s) upside deviation. This would result with a ratio that facilitates another test of positive or negative skewness. To test whether the ratio of portfolio-to-market upside deviations as a success, a test on fund returns would need to be conducted to ensure a meaningful difference between upside deviations, portfolios, and markets. The overall findings showed that the relationships between low betas and low upside volatility appeared to be weaker than the relationships between high betas and high upside volatility. In addition...
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...10 Business Snapshot 1.1 Hedge Funds CHAPTER 1 Hedge funds have become major users of derivatives for hedging, speculation, and arbitrage. A hedge fund is similar to a mutual fund in that it invests funds on behalf of clients. However, unlike mutual funds hedge funds are not required to register under U.S. federal securities law. This is because they accept funds only from ®nancially sophisticated individuals and do not publicly oer their securities. Mutual funds are subject to regulations requiring that shares in the funds be fairly priced, that the shares be redeemable at any time, that investment policies be disclosed, that the use of leverage be limited, that no short positions be taken, and so on. Hedge funds are relatively free of these regulations. This gives them a great deal of freedom to develop sophisticated, unconventional, and proprietary investment strategies. The fees charged by hedge fund managers are dependent on the fund's performance and are relatively highÐtypically 1 to 2% of the amount invested plus 20% of the pro®ts. Hedge funds have grown in popularity with over $1 trillion being invested throughout the world. ``Funds of funds'' have been set up to invest in a portfolio of other hedge funds. The investment strategy followed by a hedge fund manager often involves using derivatives to set up a speculative or arbitrage position. Once the strategy has been de®ned, the hedge fund manager must: 1. Evaluate the risks to which the fund is exposed. 2. Decide...
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...Rock, Paper, Scissors, and Other Investment Techniques (UOP) FIS 240 Week 5 DQs (UOP) FIS 240 Week 6 CheckPoint: So Many Businesses, So Little Money PART 1 OF 2 (UOP) FIS 240 Week 6 CheckPoint: So Many Businesses, So Little Money PART 2 OF 2 (UOP) FIS 240 Week 6 Assignment: Analyze This (UOP) FIS 240 Week 7 DQs (UOP) FIS 240 Week 7 CheckPoint: Income that Sticks PART 1 OF 2 (UOP) FIS 240 Week 7 CheckPoint: Income that Sticks PART 2 OF 2 (UOP) FIS 240 Week 8 CheckPoint: Lifetime Investment Matrix PART 1 OF 2 (UOP) FIS 240 Week 8 CheckPoint: Lifetime Investment Matrix PART 2 OF 2 (UOP) FIS 240 Week 8 Assignment: Living the Easy Life (UOP) FIS 240 Capstone Discussion Question (UOP) FIS 240 Final Project: Investment Policy and Portfolio Evaluation (UOP) ____________________________________________________ FIS 240 Week 1 CheckPoint: Is Time on My Side (UOP) For more course tutorials visit www.tutorialrank.com Resources: Appendix D and the Time Value of Money multimedia (enter into the Axia College student webpage first then copy and paste the link into the open browser) TUhttps://ecampus.phoenix.edu/secure/aapd/UBAM/Libraries/Flash/TVM.swfUT. Due Date: Day 5 [post to the Individual forum] Complete your responses to this week’s CheckPoint in Appendix D. Post the completed...
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...other derivative instruments allow speculators to take positions in an asset with much less capital than would be required to achieve the same position in the cash market. Speculators add liquidity to the derivatives markets. Hedgers want to eliminate or reduce an exposure to movements in the price of an asset. Forward contracts, say, allow hedgers to reduce their exposure or eliminate it without an initial payment. Hedging using forwards or futures makes the outcome more certain but does not necessarily make it better relative to the unhedged position. Option strategies allow hedgers to insure (upside benefits only — for a premium) their positions against adverse market movements for the payment of an up-front premium. Hedger: A hedge is a position taken in order to offset the risk associated with some other position. A hedger is someone who faces risk associated with price movement of an asset and who uses derivatives as a means of reducing that risk. A hedger is a trader who enters the futures market to reduce a pre-existing risk. Speculators: While hedgers are interested in reducing or eliminating risk, speculators buy and sell derivatives to make profit and not to reduce risk. Speculators willingly take increased risks. Speculators wish to take a position in the market by betting on the future price movements of an asset. Futures and options contracts can increase both the potential gains and losses in a speculative venture. Speculators are important to derivatives...
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...JetBlue and Westjet: A Tale of Two IS Projects Week 8 Checkpoint Case Study Questions By: Cicely Sawin 3/21/2014 IT/205 Catherine Williams Over the past years, customers have been heavily relying on airline reservation systems to book their tickets, reserve seats, pay for the tickets and also check-in online. For customers, this has been a very convenient method and they are able to easily plan their trips. For the Airline companies, these systems have the whole flight inventory managed. They have all the flight information stored and records are maintained. It also provides a platform for communication between other airline companies for their “code-sharing plans” and agents or other ticketing offices can see real time information about the bookings and availability of seats. Since both parties rely on these systems they are of big importance to airline companies. For example, we see in the case of WestJet, the amount of chaos created after a delay of switch to another version of the system. Airline reservation systems have impacted operational activities and decision making. They have made it easier to maintain accounts with other airlines and internal processes between departments are more efficient since the “minus, plus” is done online. There has also been growth in faster service times which leads to increased customer satisfaction since customers can plan, book and pay online. Airline companies are able to make good strategic...
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