Study On How Derivatives Can Reduce Risk Finance Essay - Free Essay Example

Sample details Pages: 6 Words: 1886 Downloads: 2 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Derivatives are based on the behaviour of the basic assets. Derivatives have a lot of purposes. It can be used to minimise risk. Don’t waste time! Our writers will create an original "Study On How Derivatives Can Reduce Risk Finance Essay" essay for you Create order For that it is need to allow the investor to hedge an investment or exposure, and hence it should be act as a function as a sort of insurance policy against adverse market movements. It can also be used to get extra leverage for specialized market speculation. These are a type of contracts which can be used as underlying the assets. It is merely a contract between two parties and its value can be derived from the variations that have occurred in underlying the assets. Mostly the common underlying assts include stocks, bonds, commodities, currencies interest rates and market indexes. Commonly derivatives are characterised by high leverage. The ways to how to use derivatives are to hedge risks, to reflect a view on the future direction of the markets, to put a lock in an arbitrage profit, to change the nature of a liability and to change the nature of an investment without incurring the costs of selling one portfolio and buying another. A derivative can also be regarded as a kind of asset, the ownership of which entitles the holder to receive from the seller a cash payment or possibly a series of cash payments at some point in the future, depending in some pre-speci ¬Ãƒâ€šÃ‚ ed way on the behaviour of the underlying assets over the relevant time interval. In some instances, instead of a cash payment another asset might be delivered instead. In general an option is a derivative with a speci ¬Ãƒâ€šÃ‚ ed pay off function that can depend on the prices of one or more underlying assets. It will have speci ¬Ãƒâ€šÃ‚ c dates when it can be exercised, that is, when the owner of the option can demand payment, based on the value of the pay off function. Derivatives are used for a variety of purposes. They can be used to reduce risk by allowing the investor to hedge an investment or exposure, and hence function as a sort of insurance policy against adverse market movements Derivatives can also be used to gain extra leverage for specialized market speculation. It is important to know the types of the derivatives which are used common and that are Forwards, Futures, Options and swaps. A forward contract is an agreement which is used to buy or sell an asset at a certain time in the future for a certain price that is called delivery price. It can be differentiated with a current agreement to buy or sell immediately. Que 1 : (1) what is swap ?* Types of swaps There are five types of swaps and that are interest rate swaps , currency swaps, credit swaps, commodity swaps   and  equity swaps. There are also many other types. Here , the GPL plc represents a very large portion of smith portfolio. Therefore the portfolio could be regarded as non-diversified and is exposed to very large level of specific risk. In order to reduce the specific risk elements in this portfolio entering into the swap has the consequence on effect of diversifying on smith portfolio. These will reduce its exposure through the performance of GPL stock with an equivalence of same exposure to the performance of the FTSE. (2) The strategy of hedging smiths exposure to GPL could be either buy- sell strategy of the underlying securities or the use of swap. However, the swap is potentially more superior than the alternative strategy. Some of the reasons that could be suggested for these kind of view are In order to avoid being taxed on the capital gains. The swap will reduce smiths expose to GPL stock The transaction cost of buying and selling of shares in the cash market will be avoided by using the swap strategy The swa p can be implemented quickly in the simple transactions, whereby avoiding any risk of being exposed to GPLs performance during the transactional period of buying and selling. (b) (1) In view of the fact that GPL has out performed the FTSE 100 index, smith has to pay the difference .Therefore smith is exposed to personal liquidity and cash flow risk. (2) The broker has to pay and there is a high tendency that the broker could diffort. This is a counterparty risk (3) Smith is not hedged until it is able to enter into new swap . The possibilities of having the previous swap terms at a reasonable cost may elude in Question : 2 (a) Calculate the outcome of each strategy if the CAC is equal to 3500, 4000, or 4500 at expiration of the contracts in June Value of CAC at expiration Initial portfolio (no futures or contracts) Portfolio hedged with futures Portfolio issued with puts 3900 Portfolio issued with puts 4000 3500 3,500,000 4,000,000 3,870,000 3,400,000 4000 4,000,000 4,000,000 3,970,000 3,900,000 4500 4,500,000 4,000,000 4,470,000 4,400,000 Working: Value of CAC at expiration is 3500, 4000 and 4500. Initial portfolio can be calculated by multiplying the amount into 100* 10 That is 3500*100*10 = 3,500,000 4000*100*10 = 4,000,000 4500*100*10 = 4,500,000 It is happened because the manager is buying 100 puts and options and futures have a multiple of ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ 10. The portfolio is hedged with futures is 4000 and that is multiplied into 100*10 (same as above). This is because the futures on the CAC in June trade at 4000. Portfolio issued with puts 3900 Here the strike price is 3900 and premium is 30 (ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ per unit of index) Ie, 3500- 30 = 3470*100*10= 3,470,000 4000-30 = 3970*100*10= 3,870,000 4500-30 = 4470 *100*10= 4,470,000 Portfolio issued with puts 4000 Here the strike price is 4000 a nd the premium is 100 (ÃÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ per unit of index) Ie, 3500-100 = 3400*100*10= 3,400,000 4000-100 = 3900*100*10 = 3,900,000 4500-100 = 4400 *100*10= 4,400,000 (b) Recommend and justify a strategy to the portfolio manager According to, above table, it is recommended that it is better to buy the 100 puts with a strike rate of 3900 or buy 100 puts with a strike of 4000. Here he can apply the strategy of hedging with futures. First of all, long term bilateral contracts are negotiated with the buyer and the seller. Such agreements have disadvantages. It can be say that, first, they used to expose each party to the risk that the other party may do and face failures in terms of the contract. Thus, while they cover up the companies from commodity price risk, they expose them to credit risk. Secondly, the lack of anonymity of the buyer and seller may strategic disadvantages. Finally the market value of the contract may not be easy to determine, that may making it difficult to track gains and losses. To avoid these disadvantages, as an alternative strategy hedge with futures can be used. A future contract is an agreement to trade an asset on some future date, at a price that is locked in today. Futures contracts are traded anonymously on an exchange at a publically observed market price. In this, both the buyer and seller can get out of the agreement by selling it to a third party at the current market price. These futures contracts are basically designed to eliminate the credit risk. It is determined by the market which is based on the supply and demand for each delivery date. Protection against a drop in the market is provided by hedging with futures, however the manager is deprived of profit potential. Buying puts also provides protection in case of a drop in the market while it is still to keep most of the upside potential although the put premium is deducted from the portfolio value. Therefore the portfolio manager is advis ed to buy 100 puts with a strike price of 4000. Question no: 3 Hedge fund These are collective investments which has a purpose to make the money whether the market goes up or down or sideways. These types of funds can make money when the share prices are falling. It can be done by using some techniques that is by going long or short on a share. How does the hedge fund works? Whenever an investor goes short, it is believed that the equity will fall in value. There are two main ways that hedge funds can do this. The first is by shorting the stock, where the investor borrows a stock to sell it, with the hope it will decrease in value so they can buy it back at a lower price and keep the difference. However the hedge funds are not only limited to equities. They will invest in anything that makes them a profit, including foreign currency, bonds or commodities. The hedge fund would aim at ensuring that at end of the day the beta value of its portfolio is equal to zero. I n order to achieve this goal it would meet to sell short -shares from list B, the proceeds of the actions would be used to buy shares from list A for an equal amount. The hedge funds could take long short positions for up to a sum of  £ 50 million. Other strategies in the same way as this could be to borrow  £25 m worth of shares in the list B and the sell them short. Use the sale profit to buy  £25 m shares in list A. Deposit  £9m as maintenance margin. This is 18% that the hedge fund is required as a deposit. From this question, it can be seen that the paying margin is 18% of the value of the stock. We can see that hedge fund makes a lot of money in all aspects. It is advised him to sell shares from the list B as this list of shares are considered as overvalued and also it is expected that shares from list B will underperform the British index by 5 percent over the year . also it is better to buy the shares from the list A as this list of shares are considered as und ervalued and also it is expected that shares from list A will outperform the British index by 5 percent over the year. These buying and selling shares are for equal amount in such a way that the overall value of the portfolio with respect to the market will be equal to zero. It is advised him to keep  £1 million in cash and take  £9 million and deposit in the margin account. It is asked him to hedge fund to take long positions of  £50 million.  £9 M / 0.18= £50M It is say that good to borrow  £25 m of shares in list B from a broker and go short on these shares. Also advised to buy shares of worth £25 m from the list A. by doing these type of buying and selling the position in list A B will well established and portfolio will be zero. When looking at the invested amount  £50 m=  £9 m / 0.18 this is why  £9m is invested in the margin market. It enables him to go short or long with  £25 m. Abitrage pricing Arbitrage is the key to unders tanding the mathematics of derivative pricing. No arbitrage means that it is not possible to construct a strategy that on average makes a pro ¬Ãƒâ€šÃ‚ t higher than the risk free rate without taking some risks. This also imples that is not possible to construct a strategy that requires no cash input but has some positive probability of making pro ¬Ãƒâ€šÃ‚ ts without any risk of a loss. No arbitrage also implies that given two strategies with the same initial position, and guaranteed  ¬Ãƒâ€šÃ‚ nal positions, then these  ¬Ãƒâ€šÃ‚ nal positions must be equal. Otherwise, by going long the strategy with the higher  ¬Ãƒâ€šÃ‚ nal value and short the other we would generate an arbitrage. Similarly if two strategies have the same  ¬Ãƒâ€šÃ‚ nal value and involve the same risk they need to have the same initial value.

The Gentle Lena Essay - 1231 Words

Lena’s gentle, sweet, servant-like behavior was a commentary on the way on the way society saw and treated women in the early 20th century. Lena did not have an opinion of her own, she did not know how to make decisions on her own; she was told what to think, where to work, what to do with her money, her free time and her future; her life was designed by someone else because she was a women and unable to make decisions for herself. In the early 20th century society treated women as though they were not important, their duties were to have children, cook and clean for their husbands and much like children of this timeperiod, women were to be were to be seen but their voices not heard with regards to anything outside of the family. It†¦show more content†¦Upon arrival in America Lena was made to work as a servant, while her Aunt searched for a good husband for her. 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Professional Practice in Information Technology †Free Samples

Questions: 1.Describe and discuss what cultural issues may impact on you as an ICT professional if your organisation merges with another? 2.You are faced with a situation you feel may be unethical. How would you set about analysing the situation? Answers: In todays world, the most competitive of all the business strategies is mergers and acquisitions. However, studies have shown that almost 80 percent of the mergers do not live up to the expectations of the organizational committee (Kroon, Cornelissen Vaara, (2015). One of the main factors that deviates a merger from reaching its market reach is the cultural difference. The countries having high population have a possibility to possess large cultural variations. These differences in linguistics and cultures always have trouble in knowledge transfer, especially when a new technological strategy is about to set in the company. The merger occurring between two or more companies may have huge differences in work culture and ethics, belonging to different countries or areas, thus making it even more difficult a situation for seamless communication. In a career path, the most important skill is to maintain a soaring moral intellect. If a situation is seemingly unethical, a person is required to analyse the situation based on the utility, rights and justice. Being right or wrong is relative, but if a situation does not synchronize with the moral values of a person, there is a possibility of it being wrong. Therefore, it is necessary to critically analyse a situation. According to Simon Priest, Whites three-step methods could form a strong framework in analysing any ethical dilemma (Priest Gass, 2017). These methods are mentioned as follows: Knowing the ICT ethical values Selecting either of the consequential theories or deontological theories Using a process to solve the problems These steps help a person to know the difference between ethical and unethical. However, it mostly depends on the persons own intellect in figuring out and solving the issue. It is to be remembered that good behaviour provides results in the longer run. References Kroon, D. P., Cornelissen, J. P., Vaara, E. (2015). Explaining employees reactions towards a cross-border merger: The role of English language fluency.Management International Review,55(6), 775-800. Priest, S., Gass, M. (2017).Effective Leadership in Adventure Programming, 3E. Human Kinetics.

William Faulkner Essay Thesis Example For Students

William Faulkner Essay Thesis Biography on William Faulkner William Faulkner was born in New Albany, Mississippi on September 25, 1897 and then moved to Oxford, Mississippi with his family at the age of 5. Most of the novels written by William Faulkner take place in the area in which he himself was born and raised. He renames Oxford and calls this place Jefferson, Mississippi. Faulkner is a contemporary American author who has achieved greatness as an author. He is already considered to be one of the worlds greatest novelists and has been awarded with the Nobel Prize for literature in 1949. This is quite an achievement as it is the highest prize that can be awarded to an author. Of all of Faulkners achievements, The Sound and the Fury is considered to be one of his greatest novels. We will write a custom essay on William Faulkner Thesis specifically for you for only $16.38 $13.9/page Order now Faulkner was part of a distinguished family in Mississippi. His name was originally spelled Falkner. The u was added by mistake when his first novel was published and William Falkner decided to retain the spelling of Faulkner. The most distinguished member of William Faulkners family was his great-grandfather, Confederate Colonel William Cuthbert Falkner. The Colonel first moved to Mississippi in the early part of the 19th century from his home South Carolina. Faulkner uses Colonel Falkner as a character in his novels named Colonel John Sartoris. Colonel Falkner had a notable career as a soldier in the Civil War and the Mexican War. Colonel Falkner was also a writer like his great-grandson and published one of the nations best sellers called The White Rose of Memphis. Before being assassinated by a former partner in 1889, Colonel Falkner also took the time to build a railroad and run for public office. Faulkner received his initial education in Oxford, however he dropped out of high school in 1915. He attempted to join the U.S. Army but was rejected for pilot training so he joined the Canadian Royal Air Force in 1918 but the war ended before he spent any time in service. After the ending of the war, Faulkner took some classes at the University of Mississippi and spent a short time working at the university post office. The majority of his education was due to his promiscuous time he spent reading. Faulkner had started writing poetry as a young schoolboy. In 1924, he used his own financial resources and published a collection of poetry called The Marble Faunn. He met Sherwood Anderson who became a close friend and Anderson fueled his literary aspirations. Faulkner wrote three novels before finishing The Sound and the Fury and two more the year it was finished, 1929. The same year he married Estelle Oldham, who was a sweetheart ten years earlier in his life. Faulkner was unable to support himself financially by writing these novels so he became a screenwriter for MGM, Twentieth Century Fox, and Warner Brothers. During this time he formed a strong working relationship with director Howard Hawks, whom he worked on many films. Faulkner became a heavy drinker which caused some problems in his personal life. He had finished all of his novels except one at this point in 1944. During the war he was discovered in the French Literary world and in the postwar period his reputation rebounded and brought him newfound attention in America. Soon after he was held as a high literary figure throughout the entire world. Faulkner wrote seventeen books set in Yoknapatwapha County, which is a fictional setting formed in Faulkners imagination. This is the home of the Compson family in The Sound and the Fury. In later books, Faulkner continued to explore what he considered the problems of the human heart in conflict with itself, and he did this in Yoknapatawpha County as it increasingly connected to the modern world. William Faulkner is an esteemed writer of the 1900s and proves to be so as he received the Nobel Prize for literature. William Faulkner died of a heart attack on July 6, 1962.