Case Question – (a)
Background on the derivative product of your selection
Derivatives is the composite term used for an extensive class of financial instruments, which derive their value from the underlying financial assets, events or conditions. Thus, derivatives are financial assets whose value and characteristics rely upon the value and characteristics of an underlying asset, usually a commodity, equity, currency or bond. Examples of commonly used derivatives comprise forward, futures and options (Reilly et al., 2011). The given question emphasizes on the descriptive overview of the derivative product selected. Hence, the essay seeks in particular at the background details of the selected derivative. It not only describes the historic
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All these categories offer different types of derivatives such as forward, futures, options and spot markets. In order to evaluate the importance and contributions of the derivative trading to the Malaysian economy, different aspects of the economy in line with how derivatives assist in the growth and development of these aspects and the role of derivative trading in the improvement of general economy are discussed in the essay. Thus, it looks in particular at the role of derivative trading and its contributions to the well-being of the Malaysia economy. These analyses would then lead this essay to a reasonable …show more content…
Derivative markets are essential part of developed financial markets in some 40 economies but most emerging markets have commenced to evolve derivative markets for hedging purposes. According to Merton (1995), the risk allocation and price discovery functions derivative hedge securities in emerging or developing markets could assist in mitigating the price distortions by reducing agency and transactions costs and information asymmetry in spot market. This, in turn, results in efficient allocation of resources and thus economic growth. This is exactly the case of Malaysian derivatives market, where all these economic functions play a major role in the economic expansion. A crucial factor of developed financial markets (thus a developed economy) is that they all are operating wealthy derivative markets but this is not the case in emerging markets in global
When determining whether to merge or partnership with another hospital is a beneficial choice, one will need to review financial information to make an informed decision. According to Cleverly, Cleverly, and Song in order to make effective decision it requires adequate knowledge and interpretation of financial information. Understanding the accounting processes of business decisions results in effective operational decisions (2012). Some of the financial statements that are used to make these decisions are income, itemized, balance statements, net assets, and cash flow.
Growth of financial market in Brazil stimulated mainly through developed markets of coffee, soybeans, iron ore and other minerals. Because prices on those commodities are high, traders are making good profits. The Brazilian sugar industries attract a lot of domestic and international investors and are doing very well in IPOs. In addition, Brazil has a modern financial market; including a solid banking system, a state-of-the-art payment system and a reliable market infrastructure, with the capacity to process ten million trades per day. (Your Partner for Brazil) In 2002, the Brazilian Central Bank launched the Brazilian Payment System, which allows final and irrevocable real-time transfers. (Financial Sector and Capital Markets).
These financial instruments were originally used as products to insure the CDO’s they were based off of, however over time they were also used to speculate and bet against the health of the CDO’s. One of the largest suppliers of these products was AIG who faced severe issues as homeowners began to default. As many banks were left with these potentially worthless CDO’s backed by homes whose prices were collapsing, it was not long before these financial institutions were no longer at liberty of supplying credit to the public. Credit markets froze up, the financial system began to decline, and given the financial systems integration into the rest of the economy both domestically and abroad, much of the world economy began to
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
Flawed financial innovations: the implementation of innovations in investment instruments such as derivatives, securitization and auction-rate securities before markets. The indispensable fault in them is that it was difficult to determine their prices. “Originate to distribute securities” was substituted by securitization which facilitated the increase in ...
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
Saudi Arabia’s capital market is considered to be young compared to other financial markets in the region. Saudi financial markets have been developing slowly because most enterprises in the country are either government owned or family-owned, most of which was funded through state budget, and as a result reduced the need for financing. In the recent past, Saudi Arabia has focused on a careful measurement for structural developments and regulatory changes. However, different phases of historical development of the capital market which can be classified into three phases; pre-industrialization phase, post industrialization phase and growth phase that sparked changes and shaped the kingdom 's capital market on
Many factors have contributed to the impressive growth of Korean derivatives market. Some of the main contributing factors are:
Can anyone imagine what will happen to Malaysia after a few more decades? Debt crisis in Malaysia is getting more severe due to lack of management among individuals. Serious debt crisis might lead to bankruptcy to our country. Nation leaders should lead others away from debt. If this scenario continues, Malaysia might follow the footstep of Greece, Spain, Italy, and Portugal. Debt crisis can be avoided by providing trainings and courses to the employees, improve individual personal finance management and filtering candidates in hiring process.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.
Bonds have a number of characteristics that differentiate one issue from another. We are going to define and describe a number of characteristics in detail below.