...A Handbook on Derivatives © Rajkumar .S Adukia B.com (Hons.), L.L.B, AICWA, FCA radukia@vsnl.com/rajkumar@gmail.com 093230 61049/ 093221 39642 www.carajkumarradukia.com If interested in receiving similar technical updates subscribe to carajkumarradukia-subscribe@yahoogroups.com PREFACE Derivatives have changed the world of finance as pervasively as the Internet has changed communications .Well they are everywhere nowadays. The most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors who are most able and willing to take it -- a process that has undoubtedly improved national productivity, growth and standards of living. Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. All markets face various kinds of risks. This has induced the market par-ticipants to search for ways to manage risk. The derivatives are one ofthe categories of risk management tools. As this consciousness about risk management capacity of derivatives grew, the markets for derivatives...
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...Explain how the option pricing formula developed by black and scholes can be used for common stock and bond valuation. Include in your discussion the consequences of using variance applied over the option instead of actual variance. Its generally known that Black and Scholes model became a standard in option pricing methods , with almost everything from corporate liabilities and debt instruments can be viewed as option (except some complicated instruments), we can modify the fundamental formula in order to fit the specifications of the instrument that will be valued. An argument done by Black and Scholes which was based on the past proposition of Miller and Modigliani a well as assuming some ideal conditions, States that value of the firm is a sum of total value of debt plus the total value of common stock. As well as the fact that in the absence of taxes, the value of the firm is independent of its leverage and the change of debt has no effect on the firm value. V = E + Dm V: value of the firm. E: shareholders right (common stock values). Dm: market value of the debt. As the above equation impose that Equity (common stock values) can be viewed as a call option on the firm value (due to the shareholders limited liability and with consideration that firm debt can be represent as a zero-coupon bond), where exercising the option means that equity holders buy the firm at the face value of debt (which is in this case will be the exercise price of the option), on the liquidation...
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...I. Overview of the Hong Kong Capital Market Located in the heart of Asia, Hong Kong positioned itself to be a major international financial center of the continent. Its capital market is comprised of integrated network of institutions and markets which provide a wide range of products and services to local and international customers and investors. Hong Kong’s financial markets are characterized by a high degree of liquidity and operate under effective and transparent regulations, which meet international standards. The Government of the Hong Kong Special Administrative Region (HKSAR) abides by the principle of keeping intervention into the way in which the market operates to a minimum and has endeavoured to provide a favorable environment in which business operates. Its policy of low and simple taxation allows maximum room for business initiatives and innovation. There is a strong emphasis on the rule of law and fair market. There are no barriers of access to the market by foreign businesses and no restrictions on capital flows into and out of Hong Kong. Hong Kong’s privileged location in the Northeast Asia, on the other hand, makes it a gateway to China. Moreover, Hong Kong is situated at appropriate time zones that allow 24-hour continuous trading of foreign exchange and gold when the two markets in New York and London are closed. II. Financial Players and Intermediaries in Hong Kong Preview:A closer look at the financial markets As of July 2010, there were...
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...investor faces. Thus aids in the process of diversifying ones portfolio. The volatility in the equity markets over the past years has resulted in greater use of equity derivatives. The volume of the exchange traded equity futures and options in most of the mature markets have seen a significant growth. It goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. INTRODUCTION AND CONCEPT OF DERIVATIVES: Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. The International Monetary Fund defines derivatives as "financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of financial derivatives derives from the price of an underlying item, such as asset or index. Unlike debt securities, no principal is advanced to be repaid and no investment income accrues"...
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...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. C. is unrelated to the value of the related primitive security D. has been enhanced due the recent misuse and negative publicity regarding these instruments E. is worthless today 21. Money market funds were a financial innovation partly inspired to circumvent _______. A. Regulation B...
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...2: "Which of the following is an agreement to buy or sell an asset at a fixed date in the future, for a fixed price? 1. Swaps 2. Futures 3. Forwards 4. Warrant 2: "_ Are derived by continuously computing the average of the most recent n day’s closing prices. 1. Moving Average 2. Quotes 3. Commodities plots 4. Plots 2: "What is the conversion factor of a US Treasury bond if securities coupon is 6 percent 1. 1 2. 2 3. 3 4. 6 2: "Which of the following are market instruments that are low risks, highly liquid, short term debt instruments issued by governments, financial institutions and corporations? 1. Derivatives 2. Financial Assets 3. Money Market Securities 4. None of the Above 2: "According to this theory, movement in financial markets depends on attitudes of investors on the business cycle. 1. Dow Theory 2. Cycle Theory 3. Elliot Wave Theory 4. None of the above 2: "Which of the following is a measure of the average change in prices of goods and represent inflation at the consumer level 1. Consumer price index 2. Implicit price deflator 3. Gross domestic product 4. None of the above 2: "What Happens when fiscal policy is paralyzed due to political statement of budget constraints 1. Revert to the economic policy established by the goverment 2. Monetary policy will be relied on 3. Opt to the financial policy 4. None of the above 2:...
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...Fin (IB) 3551: International Finance Homework Problem set #2 Problem Set 2 (problems only) – BOP, crisis, currency derivatives, corporate risk I BOP 1. According to popular opinion, U.S. trade deficits indicate any or all of the following: a lack of U.S. competitiveness owing to low productivity or low-quality products and/or lower wages, superior technology, and unfair trade practices by foreign countries. Which of these factors is likely to underlie the persistent U.S. trade deficits. Comment/Explain. Although popular opinion believes these factors are likely to underlie the trade deficits, none of these factors underlie the persistent U.S. trade deficits. These factors affect other countries more than the U.S. however run trade surplus. American trade deficits reflect the U.S. savings deficit. 2. Identify the correct BOP account for each of the following transactions. a. A German-based pension fund buys U.S. government 30-year bonds for its investment portfolio. Financial account: portfolio investment liabilities b. Scandinavian Airlines System...
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...Module Title |Fundamentals of Securities and Futures Regulation | | |Module Code |BAF2407 | |Module Year |2010-2011 | |Module Value |3 | |Module Hours |Lecture | |30 | | | |Tutorial |15 | | | |TOTAL | |45 | | | | | | | | |Pre-requisites |Nil | |Co-requisites |Nil | |Module Aims |To provide students with an understanding of the rules and regulations in regulated | | |activities in Hong Kong. | |Exemption Criteria ...
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...A PROJECT REPORT ON “Analysis of derivative segment (Future & Options Market) of capital market” SUBMITTED BY: RAVINDER SINGH NEGI NRS/011304 In the partial fulfillment of the requirement as per THE INSTITUTE OF COST AND WORKS ACCOUTANT OF INDIA Institute of Cost and Works accountant of India Delhi Office 3, Institutional Area Lodhi Road, New Delhi - 110003 Phones: 011-24622156, 24521492 Fax: 011-43583642, 24622156, 24618645 DECLARATION I hereby declare that the Project report has been prepared by me during the year 2011. In partial fulfillment of the requirement for the award of the degree of Institute of Cost and Works Accountant of India (NIRC). Ravinder Singh Negi Place:--New Delhi Date:--...
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...Petron Gains 11% on Speculation San Miguel Will Take Control By Francisco Alcuaz Jr. Dec. 15 (Bloomberg) -- Petron Corp. rose 11 percent to a 16-year high on speculation San Miguel Corp. will buy the refiner’s majority owner, helping Petron with sales and funding. Petron, the larger of the Philippines’ two refiners, rose 1.40 pesos to 14.22 pesos at the noon close in Manila as the benchmark stock index declined 1.4 percent. It’s gained 168 percent this year, compared with 34 percent for the benchmark index. Petron isn’t a member of the index. Today is the deadline for San Miguel to exercise its option to buy 60 percent of SEA Refinery Corp., which owns 50.1 percent of Petron, according to Bloomberg data. San Miguel, the nation’s biggest food and beverage company, already owned 38 percent of Petron, according to its third-quarter report. The shares may have gained “in anticipation of San Miguel’s exercise of its right,” said Jojo Gonzales, vice president at Philippine Equity Partners Inc. in Manila. “There’s some amount of synergy with San Miguel, which acquired a diesel power plant. San Miguel is moving to energy.” San Miguel in 2009 bought the government’s 620-megawatt plant in Limay, Bataan province, the same municipality where Petron’s refinery is located. San Miguel has bought other state power assets as part of its plan to invest in faster-growing businesses. “Petron has fairly significant expansion plans, like petrochemicals,” Gonzales said. “It needs a moneyed...
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...sellers etc. Financial markets may be classified on the basis of • • • • types of claims – debt and equity markets maturity – money market and capital market trade – spot market and delivery market deals in financial claims – primary market and secondary market Indian Financial Market consists of the following markets: • • • Capital Market/ Securities Market o Primary capital market o Secondary capital market Money Market Debt Market Primary capital market- A market where new securities are bought and sold for the first time Types of issues in Primary market • • • • • Initial public offer (IPO) (in case of an unlisted company), Follow-on public offer (FPO), Rights offer such that securities are offered to existing shareholders, Preferential issue/ bonus issue/ QIB placement Composite issue, that is, mixture of a rights and public offer, or offer for sale (offer of securities by existing shareholders to the public for subscription). Primary market Deals with new securities Provides additional companies capital Difference between Secondary market Market for existing securities, which are...
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...Case 41, MoGen, Inc. – Finance 675 David Biggs, Amanda McAllaster, Jake Unruh, Andy Rao Background Information MoGen is a leading company in the recently surging biotechnology industry that specializes in human therapeutic drugs that help offset the damaging effects of chemotherapy for cancer patients. The business model for all biotech companies is fairly similar: through extensive R&D, create new medical drugs, obtain FDA approval and product patents and launch them into the market. In order to achieve profitability and increase the likelihood of FDA approval for their various projects, MoGen must ensure a consistent supply of cash to fund R&D efforts and maintain financial flexibility in the face of the high levels of uncertainty that the industry as a whole faces. The biotech industry is truly what one would describe as a high-risk, high-reward venture. Because Mogen and the rest of the industry faces strict and rigorous standards set by the FDA, projects often fail or have extremely long lead-times, making investments riskier and additional compensation a must compared to most other industries. Many research efforts lead to failed projects due to FDA rejection and other projects face the threat of “biosimilars,” which are essentially copies of the drugs, once the product reaches the end of the patent-protection period. At the time, MoGen had several drugs that faced the threat of biosimilar competition in Europe, all due to patent expiration...
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.............. 8 2.1 FORWARDS...............................................................................................................................8 Settlement of forward contracts ............................................................................................................9 Default risk in forward contracts .........................................................................................................10 2.1.1 2.1.2 2.2 2.3 FUTURES................................................................................................................................11 O PTIONS................................................................................................................................12 Call option...
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.............. 8 2.1 FORWARDS...............................................................................................................................8 Settlement of forward contracts ............................................................................................................9 Default risk in forward contracts .........................................................................................................10 2.1.1 2.1.2 2.2 2.3 FUTURES................................................................................................................................11 O PTIONS................................................................................................................................12 Call option...
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...B 16 17 18 19 20 D D D B B D 9 5 A 10 Question 1 (60 points): 1. Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock 2. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities. 3. Active trading in markets and competition among securities analysts helps ensure that __________. I. security prices approach informational efficiency II. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and II only C. II and III only D. I, II and III 4. The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers, financial assets B. investment bankers, real assets C. productive capacity, financial assets D. productive capacity, real assets 5. Asset allocation refers to the _________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation 6. An investor in a T-bill earns interest by _________. A. receiving interest payments every...
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