...the airplane. During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction. Following the World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry, therefore, certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote. Although fuel prices, and numerous external risks associated with the industry, scare many individuals out of airline stocks, the astute investor can still make money in the sector. That is, if they know what to look for. In this article, we'll give you a list of seven tips and recommendations for researching and selecting the best airline stocks to own. 1. Analyze Fuel Hedging Some airlines try to pass higher fuel costs on to their customers in the form of a fuel surcharge. But the most efficient way to mitigate fuel costs (particularly over time) is to purchase futures contracts that lock in a company's fuel supply for the coming year at a set price. (To read more about fuel prices, see Getting A Grip On The Cost Of Gas and Fueling Futures In The Energy Market.) To be clear, all airlines do some hedging. But some companies hedge more than others. As such, they...
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...American Barrick Resources Corporation Managing Gold Price Risk Gold Demand Supply 1. Jewelry (80%) 1. Expanding Production 2. Commercial and Soviet Union Industrial use South Africa 3. Back-up for currencies North America Australia 2. Central Banks Liquidation Factors that may increase gold price: 1. Large government deficits 2. Financial and economic crisis 3. Wars and doomsday scenarios 4. Increase in gold jewelry demand ? 5. Commercial and Industrial demand ? Factors that may decrease gold price: 1. Financial and economic stability 2. Trends towards democracy and free markets 3. Effective use of monetary policy by central banks 4. Liquidation by central banks Long-term trend? Should Gold Producers Hedge Gold Price Risk? Pros Cons 1. Protect downside 1. Sacrifice Upside 2. Share price premium? 2. Unsystematic risk? 3. Specialize in gold production 3.Share price penalty? not gold risk taking 4. High operating leverage and high sunk costs 5. Limited ability to adjust production 6. Lock-in the low total costs (see exhibit 3) Managing Gold Price Risk – The Evolution 1. Gold Financing Barrick-Cullaton Gold Trust Bullion loans (denominated in gold – e.g., to finance Goldstrike mine) Gold-indexed Eurobond offerings The main disadvantage Conservative financial...
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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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...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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...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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...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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...Industry Analysis of the Airline Industry S.no | Features | Rating | 1. | Threat of new entrant | Medium | 2. | Rivalry among existing firms | High | 3. | Bargaining power of buyer/distributors | Low | 4. | Bargaining power of suppliers | Low | 5. | Relative power of other stakeholders | High | The Airline success completely depends on the ability of the customers who are willing to spend more on last airfares to purchase extra amenities. It is famous because it focuses on time performance. It provides extra comfort from one coast to another and provides inflight Wi-Fi, ARINC satellite telephone and power outlets. It provides an international premium cabin dining facility with beverage selection and special ordered meals. Passengers can use portable devices on board. They only accept credit and debit cards for purchases of tickets and offer inflight shopping facility also. A strong employee- oriented culture is being followed by the company. The mission of the company focuses on this statement only. They have loyal employees that work hard to achieve the goal of the company. A strong leadership is built by the culture which the company is following a relaxed management style. The aim of the industries management and the employees is to fly large number of customers and being cost-effective. They are famous for their non-stop flights. The industry is experiencing strong growth in the market and is earning at a very profitable position (David, 2005)...
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...Donivan Tan Part A - Cash Flow Hedge of Foreign Currency Receivable 11/1/Y1 Accounts receivable (Pesos) [400,000 x $0.23] $92,000 Sales $92,000 No journal entry for the forward contract. Memo entry. 12/31/Y1 Foreign exchange loss $12,000 Accounts receivable (pesos) [400,000 x ($0.23-$0.20)] $12,000 Forward contract [400,000 x ($0.22-$0.18)] x .9610 $15,376 AOCI $15,376 AOCI $12,000 Gain on forward contract $12,000 Premium Expense [($0.22-$0.23) x 400,000]/3 $1,333.33 AOCI $1,333.33 Impact on Year 1 income: Foreign exchange loss (12,000.00) Gain on forward contract 12,000.00 Premium Expense (1,333.33) Impact on net income (1,333.33) 4/30/Y2 Cash – Foreign currency (pesos) (400,000 x $0.19) $76,000 Foreign exchange currency loss $4,000 Accounts receivable (pesos) [20,000 x ($1.12-$1.05)] $80,000 AOCI [400,000 x ($0.22-$0.19) = $12,000 – $15,376] $3,376 Forward contract $3,376 AOCI $4,000 Gain on forward contract $4,000 Premium Expense [($0.22-$0.23) x 400,000] x 2/3 $2,666.67 AOCI $2,666.67 Cash USD [400,000 x $0.22] $88,000 Forward contract $12,000 Cash - Foreign currency (pesos) $76,000 The impact on net income for Year 2 is: Foreign Exchange Loss $(4,000.00) Gain on Forward Contract $ 4,000.00 Premium Expense (2,666.67) Impact on net income (2,666.67) Notes: ...
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...“N” Day Breakout Model on Commodity Market: An Empirical Investigation Zhenyi Yang 12/12/2012 1. Introduction There are various strategies to make profits on the commodity markets. The “N” day breakout model is one of the easiest model. However, it is a very effective model and used by many traders. The article uses the “N” day breakout model, combined with the “fixed fractional” risk management scheme, to study the return of the commodity market. The article also compares the different outcomes with different data manipulation method and the potential reasons behind the difference. 2. The “N” Day Break Out Model The N day break out model utilizes the method that the futures are longed at N day high and shorted at M day low. The rational explanation of the method is that the futures usually continue to rise after a breakout its long-term high. Also, the futures continue to fall after it breaks its short-term low. To simplify the problem, in this article, it chooses the 100 day high as the buying point and the 10 day low as the selling point. The period of study ranges from Dec 2002 to Dec 2012. Moreover, the article also studies the maximum profit one million account balance would make with this strategy with each commodity does not exceed 1% risk. 3. Data Manipulation Because the commodity future expires after one or two years, for a longer period time, the charts of different futures contracts needs to be connected. Some methods are continuous, which...
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...What is the difference between forward and futures contracts? Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price. However, it is in the specific details that these contracts differ. First of all, futures contracts are exchangetraded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never. Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date. Lastly, because futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the...
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...680% D. Assume the firm actually takes 80 days to pay its bills and would continue to do so in the future if it did not take the cash discount. Should it take the cash discount? 1.5% / 98.5% * 360 / 70 1.52% * 5.14 = 7.813% E. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount. What would then be the effective rate on the loan with compensating balances? Convert the interest to dollars as the first step in your calculation. $500,000 * 10.25% = $51,250 Interest Effective rate is $51,250 / 400,000 = 12.813% F. In order to hedge against the possible rate increase described in part e,Midland decides to hedge its position in the futures market. Assume...
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...AFW3050 Tutorial 5 Solutions Chapter 15 15.1 AASB 132 Financial Instruments: Disclosure and Presentation defines a financial instrument as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Such a definition, in turn, generates a need to define a financial asset; a financial liability; and, an equity instrument. According to paragraph 11 of AASB 132, ‘financial asset’ means any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right: (i) to receive cash or another financial asset from another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or (d) a contract that will or may be settled in the entity’s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments. A financial liability, on the other hand, means any liability that is (a) a contractual obligation: (i) to deliver cash or another...
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...Insurance that we pay can be seen as the cost of risk. We pay insurance companies a premium so that they can assume certain risks for us. When we pay these premiums, insurance companies set aside funds to be used to cover risk. However, if risk was a fixed variable and never changing, then the premium would be a fixed cost; in other words, risk and cost would form a 1:1 relationship. However, in the business world this is unlikely; therefore, “our cost of risk is the minimum insurance premium plus the excess premium plus uninsured costs or losses" (Wood, 2003). In a proactive safety management program, one uses risk principles to identify, assess, and rank safety and health hazards, create a risk assessment matrix, and implement risk control actions. When people are proactive in minimizing risk, the cost of risk decreases. For example, cautious, proactive drivers who are constantly on the lookout for other cars are deemed less risky by insurance companies. Therefore, they have a lower premium then someone who has a history of not looking out and causing accidents (Sehn, 09). A reactive safety program relies on changes after an incident has happened. This does not directly impact the initial cost of risk, but reactive changes from previous incidents can minimize the increase to the cost of risk. For example, a child in a sports stadium falls from the upper deck because of the lack of proper railings. The child has already been hurt so the incident has already happened...
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...BUS 550 Homework S1 Note: - Please do the assignments at the infabc site - The homework is due on Sunday, 11/04, at 11:59pm. Problem #1 The sweetTooth Candy Company knows it will need 10 tons of sugar 6 months from now to implement its production plans. Jean Dobson, SweetTooth’s purchasing manager, has essentially two options for acquiring the needed sugar. She can either buy the sugar at the going market price when she needs it, 6 months from now, or she can buy a futures conntract now. The contract guarantees delivery of the sugar in 6 months but the cost of purchasing it will be based on today’s market price. Assume that possible sugar futures contracts available for purchase are for 5 tons or 10 tons only. No futures contracts can be purchased or sold in the intervening months. Thus, SweetTooth’s possible decisions are to (1) purchase a futures contract for 10 tons of sugar now, (2) purchase a futures contract for 5 tons of sugar now and purchase 5 tons of sugar in 6 months, or (3) purchase all 10 tons of needed sugar in 6 months. The price of sugar bought now for delivery in 6 months is $0.0851 per pound. The transation cost for 5-ton and 10-ton futures contracts are $65 and $110, respectively. Finally, Ms. Dobson has assessed the probability distribution for the possible prices of sugar 6 months from now (in dollars per pound) in the following table: |Price |$0.078 |$0.083 |$0.087 |$0.091 |$0.096 ...
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...WEATHER DERIVATIVE- A TOOL FOR WEATHER RISK HEDGING Most of the industries in the world are directly or indirectly affected by weather changes. Due to the adversity of global warming and the burning of fossil fuels, the weather has become quite unpredictable. Every now and then occurrence of drought, heavy and scanty rainfall is seen. As a result agriculture output becomes very irregular and this entails heavy losses not only to the farming community but also to the related industries. Although there is no way to control weather, there exists a new solution to the financial effect that weather can have on the incomes of economic agents of developed and emerging economies. There are number of instruments and tools available for management of weather risk. Weather risk management is a definitive guide to the rapidly expanding WRM market. It is the most dynamic sector of the financial arena and is drawing the interest of the companies that are seeking to protect against the financial impact of non catastrophic weather. So for hedging weather risk weather derivatives have been developed. DERIVATIVE TRADING Like any other derivatives weather derivatives are structured as Future, Option or swaps based on different weather indices. Usually most weather derivative transactions are done on over the SInternational Financial Future Option Exchange (LIFFE) offer standardized weather contracts. In India derivative instruments are traded both on OTC market and derivative exchanges...
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