...with the times and the questions facing the financial future. As highlighted by the boom in the I.T sector towards the end of the last century that DFA missed out on completely, DFA on principle is always poised to miss out on new technology companies, as they intrinsically have low book to market value. Also my another objection to DFA’s selection of small cap stocks only is that these category of companies are among the worst hit companies during a financial crisis because of their limited access to credit and most of these companies don’t survive a major recession. Even some proponents of the efficient market hypothesis have argued that due to DFA and similar companies investing in this particular style, this style’s edge had been eroded. Lastly many prominent academicians and financial institutions have called into question the efficacy of the efficient market theory due the financial bubble created in the financial markets. That fact that market price of a stock represents the fair price has been called into question. Most of the big banks now act as quassi-exchanges and execute trades within themselves without needing to inform the stock exchange, in which case the market may not posses sufficient information. What do you think of DFA as a business? a. Does it add value for...
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...price will go up if the stock price goes up. The losses are limited by the option premium paid. (b) At what price will you breakeven if both put and call options are sold for the same premium of $5 Breakeven stock price $50+$5 = $55 (c) Assume that the risk free rate is 3% per annum. Also assume that the standard deviation of IBM’s stock return is 30% per year. What is the Black-Scholes value of the option you have identified in part a? Step 1: find d1 and d2 d_1=(ln(50/50)+(0.03+〖0.30〗^2/2)×8/12)/(0.30×√(8/12))=0.2041 d_2=0.2041-0.30×√(8/12)=-0.0408 Step 2: find N(d1) and N(d2) Using the cumulative normal table obtain N(d1) = N(0.20) = 0.5793 and N(d2) = N(-0.04) = 0.4841 Step 3: calculate the call option value c=$50×0.5793-$50×e^(-0.03×(8/12) )×0.4841=$5.2393 (d) What is the time value of the option you have identified in part a? Because the stock price equals the strike price ($50) the total value of the option would consist of time value only, therefore the time value of this option is $5.2393 Problem 2 You anticipate that the volatility of IBM stock will increase substantially over the course of next year, but you do not have a strong view about future direction of IBM stock price. Today you decide to enter a position in two at the money European IBM options maturing in one year. Today’s IBM stock price is $30 a share. The call option premium is $2 and the put option premium is $3. (a) What options will you invest in?...
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...should proceed with developing the family of 7E7 aircrafts in a post SARS and post 9-11 market. A major part of this decision lies in determining the profitability of such a major undertaking. Yet, apart from the project's stand-alone risk, the project's financial merit must be evaluated in terms of its overall portfolio impact as well. After studying this case and performing a detailed cash flow analysis, we recommend Boeing proceed with the production of the 7E7 planes based on the merit of the following pros and cons: Pros: 1) The NPV for this project is more than $7 billion. The baseline IRR of the 7E7 project is 15.7%. This is greater than the estimated WACC of 7.54%. (Detailed calculations are shown below). 2) Boeing has not introduced a new plane since the successful launch of B777 in 1994. A new offering is in order as customers look to replenish their fleet. 3) Many of the requirements for 7E7 are customer driven as the company looks for a plane with lower operating costs and lower fuel consumption. 4) Airbus, Boeing's main competitor, is catching up and even surpassing Boeing's commerical plane market share. To stay ahead of the competition, Boeing needs a new, efficient, cost-effective, and superior product. 5) With the improved manufacturing capability of lighter composite materials, producing a plane made of these materials in pursuit of improved fuel efficiency makes sense. 6) The success of the 7E7 would have a snowball effect in improving Boeing...
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...Northern Insurance Company Years | 2007 | 2008 | 2009 | 2010 | 2011 | Ratios | 1.59 | 1.66 | 1.89 | 1.72 | 1.91 | Interpretation: From the above table and graph we can see that the ratios and the curve were consistently increasing during the calculated year except 2010. From Balance sheet we can see that Current Asset in the calculated year is significantly increase than the Current Liability. So Current Ratio is increasing in a consistant basis and the ratio which indicates that NORTHERN INSURANCE CO. has few problem with liquidity but they are generating profit efficiently. Underwriting Ratios 2. Loss Ratio: A company’s loss ratio is calculated by dividing loss adjustments expenses by premiums earned. And los adjustment measured by dividing claim payment by net premium. Now this los ratio shows what percentage of payouts are being settled with recipients. It means lower the ratio better that is. If the ratio value is increase or higher that means the claim payment of that insurance increase and that indicates that, the management of that insurance is inefficient and ineffective. The equation is- Loss Ratio = Loss AdjustmentEarn Payment For Northern Insurance Company Years | 2007 | 2008 | 2009 | 2010 | 2011 | Ratios | 0.20 | 0.25 | 0.18 | 0.17 | 0.15 |...
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...Chapter 6. Risk, Return, and CAPM Dollar return: Amount to be received-Amount invested Rate of return: Amount received-Amount investedAmount invested Stand-alone risk is the risk an investor has in just holding the one asset Expected rate of return: r=i=1npiri Where P is probability of i outcome and r is the rate of return The more leptokurtic the distribution, the more likely the actual outcome will be closer to the expected return. Measuring Standalone Risk: Standard Deviation 1. Expected Rate of return 2. Deviationi= ri-r 3. Variance=σ2=i=1n( ri-r)2Pi 4. Standard Deviation=σ=Variance 5. Or use Excel of Financial calculator Using Historical Data to Measure Risk: Realized Rates of Return: rAvg=t=1nrtn Standard Deviation of the Sample Returns: σ=S=t=1n(rt-rAvg)n-1 In Excel use =Average and =STDEV functions Measuring Standalone Risk: Coefficient of Variation Coefficient of variation = CV=σr Risk Aversion and Required Rate of Return Assume risk aversion for investors Textbook Example: Basic Food’s Price up to $150 from $100 Sale.com Price down to $75 from 100. Difference in return, 20%-10%= Risk Premium Risk in Portfolio Context Expected return on portfolio=Weighted expected return=rp=i=1nwiri Portfolio Risk Stocks can be combined into portfolios which then become less risky to riskless depending on the correlation of the assets. Stocks with a ρ=-1 are perfectly negatively correlated. The inverse is positively correlated. Expected...
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...used by DFA, especially the value premium and the size premium where almost all of their funds are based upon. The company used for this report is Dimensional Fund Advisors, which is an investment fund company. The source of information that is used is from websites and some journals. The main finding in this report is that DFA focusing their investment in small cap stock, as small stock tends to outperform large stock. To conclude, this report will provide evidence on the usefulness of these theories to increase return of DFA’s funds as well as recommendations about changes in strategy that will enhance the performance of DFA overall. Introduction Dimensional Fund Advisors is an investment company that uses its strategy based on academic research as well as related theories. It is based in Santa Monica, California and founded in 1981 by Booth and Rex Sinquefield. They work together with advocate of the efficient market hypothesis, indicating a relatively strong belief in this theory and thus in efficient markets. DFA believe that skilled traders have the capability to pitch in to the fund’s profits, although the investments are inherently passive. Additionally, they also adjust their strategy to new findings in the field. This report will discuss the next step that DFA should implement in order to perform better compared to the other managed funds. DFA’s Business Strategy DFA’s business strategy is based on the core concept that markets are “efficient” which means that...
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...Product and Brand Management “Lenovo: Building a Global Brand” 1 What should Lenovo’s overall corporate brand positioning and corporate branding strategy be in global markets? Why is developing a global corporate brand important to Lenovo? The needs to be an international company: To survive and succeed in the global business environment, Lenovo has no choice but to become an international firm in the PC business. In the Lenovo’s financial report we can observe the big differences between fiscal year 2005 and projected 2006’s taxes requirement of 35 million US dollars to projected taxes of 632 US million dollars. With China joined the WTO, Lenovo surely would lose its advantage of government intervention (tariff or other restriction of other PC companies, ex. HP, IBM) to ensure its market share and profitability in Chinese Market. Lenovo’s market share of 30% in 2001 was number one in the Chinese market, but Dell computer, upstarts, as well as PC clones also posted strong challenges to its leading market share. To grow the company, Lenovo would have to expand to the worldwide market that it didn’t have. With the acquisition of IBM PC division announced in December 2004 gave Lenovo a great opportunity to expand its territory outside Asia. To leverage this great acquisition, Lenovo needed to establish itself as an international company that could convert itself from a PC brand was little known globally to a company that not only can succeed in innovation to carry the legendary...
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...Question 1: Samsung finds itself in an enviable position. Its competitive advantages in memory span all parts of the company and its production process. As seen in the graphs below, Samsung has a low Willingness to Supply (WTS) as measured by its raw materials cost of just $1.18, which is 36% lower than the competitors’ average. Its capital efficiency is superior by roughly 18% with a per unit depreciation cost of only $1.35. This efficiency largely stems from the high yield rates and productivity at Samsung, with average yields reaching 80% while competitors’ levels are in the mid 60% range. Additionally, Samsung’s quality and reliability allow it to achieve a price premium of at least 15% over its rivals. The graphs depict Samsung’s advantages in various components. To summarize, the significant price premium and the absolute advantages in terms of material sourcing and capital efficiency allow Samsung to enjoy operating margins of 24%(based on 256Mb equiv.) while other firms remain in loss territory. There are many activities at Samsung that give rise to such dominance in profitability. 1) Pricing: Samsung is able to charge higher prices mainly because of its superior quality and reliability. Typically, a faulty memory chip will cause huge losses for IT manufacturers. This makes them more willing to pay an extra dollar or two for Samsung chips compared with other memory chip makers 2) Depreciation: Samsung is able to cut down per unit depreciation costs by having...
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...The current issue and full text archive of this journal is available at www.emeraldinsight.com/1750-5933.htm An efficiency comparison of direct and indirect channels in Taiwan insurance marketing Chiang Ku Fan and Shu Wen Cheng Graduate Institute of Finance and Insurance, Shih Chien University, Taipei, Taiwan, Republic of China Abstract Purpose – The purpose of this paper is to compare the efficiency of bancassurance, an indirect marketing channel formed through the creation of subsidiaries, with an insurer’s own team, a direct marketing channel, in the Taiwan insurance sector. Design/methodology/approach – This paper uses the Charnes, Cooper, and Rhodes (CCR) model to measure the decision-making units’ (DMU) operating efficiency. Findings – The three major findings are: the efficiency score of a direct marketing channel is significantly higher than that of a comparable indirect marketing channel. The efficiency relationship between the indirect marketing channel and the direct marketing channel is independent. A marketing efficiency evaluation, when divided into different marketing channels for evaluation, provides meaningful results for marketing decision-makers. Originality/value – By comparing the efficiency between two different insurance marketing channels, managers in life insurance companies can make a more informed choice. Keywords Direct marketing, Marketing, Insurance, Taiwan Paper type Research paper Comparison of direct and indirect channels 343 Introduction Bancassurance...
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...Cum-interest or Ex-interest? If ex-interest If> 7 days to the next coupon payment-----> cum-interest Y IELD TO MATURITY The Yield to Maturity (YTM) of a bond is: Interest rate that makes the present value of the bond’s payments equal to its price. Determined by the market, reflecting annual rate of return required by market. The Relationship between YTM and Bond Price: YTM = Price AND Price Sensitivity YTM = Price AND Price Sensitivity When YTM = C = 10%, P = FV = $100 o C = YTM, P = FV – Par Bond o C < YTM, P < FV – Discount Bond o C > YTM, P > FV – Premium Bond N O ARBITRAGE PRINCIPLE An arbitrage is a set of trades that generate zero cash flows in the future, but a positive and risk free cash flow today. This is done through the violation of law of one price. An arbitrage trade is done by selling the real instrument, and buying a synthetic instrument (replicating strategies or portfolios). By constructing a synthetic bond and buy the under-priced real bond and selling 1 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 overpriced synthetic bond, an arbitrage opportunity exists, where people can earn money, whilst not incurring any risk. In Fins 2624, we employ the No Arbitrage Principle – i.e. same bonds will have the price. B OND PRICING...
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...Natural Disaster Insurance and The Equity-Efficiency Trade-Off This article written by Pierre Picard investigates the role of private insurance in the prevention and mitigation of natural disasters. it characterizes the equity-efficiency trade-off between policy makers under imperfect information about individual prevention costs Pierre Picard , with one simple model, illustrates how tax cuts on insurance contracts can improve incentives to prevention of natural disasters. ------------------------------------------------- and highlights complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdiction. ------------------------------------------------- INTRODUCTION As we know and have heard several times today, the last decades have witnessed the worldwide increasing frequency and intensity of weather-related catastrophes. Windstorms, typhoons, floods, landslides, and heathwaves were more and more frequent and we have experienced an increasing trend in economic losses due to weather disasters, and an even stronger increase in insured losses. According to preliminary estimates from Swiss Re’s sigma team, 2011 was a Year of highest ever economic losses ! In 2011, total economic losses to society (both insured and uninsured) due to disasters reached an estimated USD 350 billion. And insured losses for the global insurance industry reached USD 108 billion in 2011.which is more than double than in 2010. ...
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...The Analysis of Market Failure in the U.K and the U.S. Health Care System Contents Executive Summary 3 1. Introduction 3 2. Findings 3 2.1 The health care system in the U.S. 3 2.1.1 Adverse selection 4 2.1.2 Moral hazard 4 2.1.3 Market power (the pharmaceutical firm) 5 2.1.4 The Medicare-Medicaid 7 2.1.5 Suggestions and solsolutions...................................................8 2.2 The health care system (NHS) in the UK 9 2.2.1 Asymmetric informtion 9 2.2.2 Incentive problems 9 2.2.3 Market power of the health authority 10 2.24 Suggestions and solutions....................................................... 11 3. Conclusion 12 Reference List 12 Executive summary The main purpose of this report is to assess two approaches to health care, and briefly discuss market failures and the induced inefficiencies in them with the comprehension of applied microeconomics. This report will try to link the facts in health care provision with the essence of each health care system. Several practical proposals will be constructed. 1. Introduction Health care, as one of the most complicated public services, is an essential issue both in economic and social areas. The provision of health care is a matter of a whole nation’s welfare quality. In the contemporary world, there are two dominate but distinguishable health care systems. One is publicly provided...
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...goals of a corporation. Their main goal is to maximize the value of stock shares. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. Maximizing shareholder wealth is maximizing purchasing power or maximizing the flow of discounted cash flow to shareholders over a long term period. This is because under wealth maximization, more importance is given to cash flows rather than profitability. A basic principle is that ultimately wealth maximization should be discovered in increased net worth or value of business. So, to measure the same, value of business is said to be a function of two factors – earnings per share and capitalization rate. For a business, it is not necessary that profit maximization should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. Some factors in profit comparison does not allow for are: (a) Future prospects; (b) Risk; and (c) Accounting problems. Q2: A financial manager is expected to maximize the value of a firm to shareholders. The financial manager is an intermediary between capital markets and the firm’s operations, responsible for both financing decisions (decisions that involve raising money) and investment decisions (decisions that involve...
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...CMI’s approach to metal pads has significant efficiency advantages over currently used pads available in the market. However, CMI has to take into account several barriers to entry into this market. The primary barrier is that most companies viewed role of pads as a necessary accessory or tangent item instead of viewing them as a potentially value adding or cost reducing part of pile driving. In order to penetrate the market, CMI has to alter the point of view of pile driving pads for the opinion leaders, engineering firms, and contractors involved in the decision process. There is several stakeholders to consider, first CMI that need a new successful product to the continued success of the company. The decisions regarding pile cushions could greatly increase the company’s revenues and profits. There are also several secondary stakeholders in the pile driving industry. Secondary stakeholders include pile hammer manufacturers, architectural consulting engineers, soil consultants, pile hammer distributing/renting companies, engineering/construction contractors, and independent pile driving contractors. The workers who drive piles are also stakeholders since the current pads may be hazardous to their health due to heat related injuries and weight. The following table summarizes some of the stakeholders; their projected importance to CMI’s marketing decisions, and their projected attitudes to switching from current pads to higher efficiency metal cushions. Projected Attitude Importance...
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...Int. Fin. Markets, Inst. and Money 29 (2014) 13–32 Contents lists available at ScienceDirect Journal of International Financial Markets, Institutions & Money j o ur na l ho me pa ge : w w w . e l s e v i e r . c o m / l o c a t e / i n t f i n Unbiasedness and risk premiums in the Indian currency futures market Satish Kumar a, Stefan Trück b,∗ a b IBS Hyderabad (a Constituent of ICFAI Foundation for Higher Education), India Macquarie University, Sydney, Australia a r t i c l e i n f o a b s t r a c t This paper explores the relationship between currency futures and realised spot rates for the Indian rupee US dollar exchange rate. Using futures contracts with maturities of one, two and three months, we examine the unbiasedness of futures quotes as a predictor of the future spot exchange rate as well as the nature of time-varying risk premiums in this emerging market. Empirical estimates, obtained using monthly data, suggest the biasedness of futures quotes as a predictor of the future spot rate for contracts with maturities of two and three months. We also find significant time-varying risk premiums in the considered futures market, while the premium is of greater magnitude and more significant with increasing maturity of the contracts. We then examine the relationship between realised risk premiums and explanatory variables such as spot currency returns, the futures basis and realised volatility, skewness and kurtosis of spot currency returns. Our results...
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