THE GLOBAL FINANCIAL MARKET AND INVESTMENT A2.
Compare and analyze the recent utilization of derivatives (since 2000) with basic options and hedging strategy as undertaken in the 1990??™s. Much media criticism was directed towards investment banks (like Lehman Brothers) which were over-extended in terms of leverage, particularly with CDO??™s and Credit Default Swaps, why was there this criticism And develop the case for simplification of the markets to ensure that derivatives are kept within manageable control.INTRODUCTION:Hedging against various entrepreneurial risks has become one of the most important activities within various companies in last two decades. It is utilized by huge multinational corporations (MNCs) as well as by medium and small companies which are active on regional scale. We are witnessing risk management teams creations in companies all around the globe. (Adedeji, A., 2002) .
whether in Asia-pacific region, in US or in EU, boards of directors have become more familiar with the necessity of risk hedging in companies they are heads of. There are either whole risk management departments or at least some sections within financial department which carry out companys hedging policy (from one form to another). ANALYSIS:Companies should, by their nature, be risk averse. If these companies are strongly convinced that risks they are considering to hedge will turn up in their favor, they do not hedge them.
An opportunity for unexpected news to break out is than created. (Dawsan .C 2002).This is one of the reasons why there is certain level of risk hanging over almost every organization all the time. If all companies were rational there, theoretically, would not be any risk left to be exposed to. Even though, companies try to do their best to avoid risk, it has to be admitted that from time to time they are exposed to unnecessary risk by their own fault.
Other reasons which have emphasized need of hedging for companies are as follows: possible recession, price shocks and mainly future contracts. (El-Marsy, A., 2008)For example, credit crunch which has become more significant after Lehman brother crisis could have been prevented by using credit derivatives. Market for credit derivatives has been booming in recent years. Market for credit derivatives has been booming in recent years.
However, there is one significant disadvantage with credit derivatives. They lack marketability, standardization and therefore are less liquid. These disadvantages emerge from the fact that there is no exchange-organized market for credit derivatives. Hence the only way how to deal them is “over the counter”.
This is probably most important reason why corporate treasurers do not usually include credit derivatives into risk hedging instruments they use. See, for example, Freeman, Cox and Wright (Freeman.M.2008). Fact that credit derivatives are not commonly used by companies for hedging purposes,The G-20 summit and U.S.
Treasury outline for financial regulatory reform call for enhanced measures to promote systemic financial stability and to “monitor” risky product and practices. But they do not specify how such monitoring will take place. Indeed, they are especially vague on the issue of risky products, focusing instead on issues such as capital and liquidity cushions for institutions and trying to limit leverage of institutions as a whole (Bodnar, G 1996).
However Hayat, G To be sure, it is now increasingly recognized that lax standards, excessive leverage, high concentration of risks, complex interactions among products and institutions, and major maturity mismatches, were key factors in causing the crisis. But less recognized is that complex, risky and opaque financial products themselves were key transmission and enabling mechanism of a number of these problems themselves (Hayat, G.2006). For example, financial products such as CDOs and CDOs-squared embedded within their structures very high leverage. This leverage in products interacted with opaqueness which made it difficult for regulators, investors, or the issuing banks themselves to understand them. They were financed by short term borrowing even though they were long term products and became even longer term when they became illiquid in the crisis (Coghlan D 2001).
And they made it easy to obscure and avoid financial regulations that had been themselves a weak line of defence against crisis. They were thus key transporters of leverage, riskiness and opacity throughout the system. Hence, regulating these products, and not just the financial institutions, is important to protect overall financial stability. (Digital Look 2010)Risk attitudes of UK companies are, not surprisingly, negative in terms of risk taking. According to BeIk and Glaums empirical research majority of UK multinational corporations with subsidiaries overseas was “totally risk averse”. They add that substantial minority of researched companies do not hedge some of their foreign exchange risks, so could be called “risk averse”. Furthermore, BeIk and Glaum continue and make clear that only small minority of companies was “risk taking”. BeIk and Glaums evidence is not surprising these days.
Firstly, since the world has started becoming “smaller place” due to advanced technology in every imaginable way the global competition has increased rapidly. Every company and country around the globe is trying to harvest the most from its competitive advantage on world markets. Secondly, especially these days, in current possible global slowdown, companies are not willing to expose themselves to risks more than it is necessary and sound for their business growth. (BeIk and Glaum 2010)However, this empirical research by BeIk and Glaum demonstrate that even some big multinational corporations do participate in speculative trades. This is the case despite speculative trades are considered to be high risk deals.
Participation of companies in speculative trades is rather surprising fact resulting from their research. On the other hand, another research shows contradiction. Bodnar et al.
claim that in the USA, companies usually do not use derivatives for speculative purposes. This assumption was based on 530 responses obtained from 2000 companies. However, there was huge gap in derivatives usage between big and small companies (According to Bodnar et al.
65% of big firms used derivatives in oppose to only 13% of small companies involved in derivatives). (Bodnar et al 2010)CONCULSION: In order to be able to make some conclusions deriving from the size of the company, it is essential to understand how many companies actually use these exotic instruments. Main conclusion, drawn from this part of paper, is finding about utilization of derivatives (since 2000) with basic options and hedging strategy as undertaken in the 1990??™s. It has been clearly put forward that more than half of companies in the UK use derivatives. Numbers in various studies varied from 60 % to 90 %. Among reasons for not using derivatives, one very bewildering fact arose. More than one fourth of UK companies declared that they lack knowledge about derivative instruments. Among derivatives, swaps are most used ones in the UK followed by forwards.
Results about futures usage vary among different authors as well as about options usage.B1.Gold is said to be the forgotten commodity, it has little industrial use and pays no interest or revenue return. Yet it has provided returns in excess of 20% per annum for the past 3 years and is in a 10 year bull market. Analyze the reasons for gold popularity in the current investment climate explaining reasons for its increase and discuss critically whether gold is a commodity or currency.Introduction:During the last years the gold price has risen significantly. As 15 European central banks decided to limit their gold sales in 2004 for the next 5 years, this might be a significant change for the behaviour of the gold price.
At the same time, low returns of many asset classes force portfolio managers to look for new investment policies. Gold started to be an interesting add on to a portfolio. Early in 2007 a new investment vehicle was created. With Xetra ??“ Gold set by the Deutsche Borse gold can now be handled as a normal security, leading to considerable advantages compared to investments in physical gold or gold futures.
Analysis:Similar to every other market, the price determining mechanism in the gold market is driven by supply and demand. To be exact, the real supply and demand should be considered in the analysis without taking into account the Central Banks gold sales and purchases as well as the supply component in the form of old gold scrap which are a kind of ???recycling??? of the aboveground stocks especially the overcompensation of the supply deficit through sales of the Central Banks was the reason why the gold price has been tending downwards for many years till 2000 despite of demand excess for a long period of time in the global gold market. (Burton Gordon 2010)The ???use??? demand for gold is a negative function of the price of gold (price elasticity) and a positive function of the income (income elasticity).
Therefore, the demand for jewellery is affected by the price (volatility) and positively influenced by an increase of the available income.( Kavalis, N. 2006)The best example is the continuous growth of wealth in Asian countries in which gold jewellery has traditionally been very popular: India and China. The demand of the jewellery sector counted for 71% in 2005.
This number shows an increase by 12% in comparison to 2004. India counted for 22% of the global gold jewellery demand in 2005, an annual increase of 17%. India is thought to hold close to 15,000 tonnes or 10% of the world??™s entire aboveground gold stocks. China??™s demand also showed an upwards trend: the country??™s gold trading volume (together with net retail investment in form of coins and bars) increased by 36% in 2005.
(Marshall, A 2010)Besides those factors one should not disregard the potential of surging gold prices through purchases of physical gold by the Central Banks of the countries with high foreign exchange reserves for the purpose of diversification: e.g. China, Japan, Russia, India, etcJoseph, N.
L describes gold investment worldwide has grown dramatically, as gold is the proven, quality, long term wealth. In begin the early buyers were buying gold purely to protect their wealth and still the trend is similar. Gold is the ultimate safe haven against money and great way, if not the best way, of ensuring wealth preservation and for passing wealth from one generation to the next.
Gold is money so physical gold should be treated as part of a properly diversified portfolio. More and more peoples are investing in gold such as mining stocks and mutual funds. An overall increase in gold is seen these days. (Joseph, N. L 2010)? Gold is a universal finite currency, held by every central bank of note in the world and central banks become net buyers of gold in 2009 for the first time since 1988.
The Central Bank of India purchase of 200 tons of gold from the IMF in October 2009 and a further 200 tonnes is being acquired is the biggest single central bank purchase in such a short period of time at least known to the markets for at least 30 years. (Marshall, A 2010)? Gold is the most popular as an investment. This appeal remains compelling for modern investors, although there are also a number of other reasons that under pin the widespread renewal of investor interest in gold. Investors generally buy gold as a hedge or safe haven against any economic, political, social and currency risk (Zuctovacie vzfahy 2008). This including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest.
Empires and nations have sought to possess gold as a medium of international exchange, as a store of wealth and in order to increase and preserve power. (Hemscott Companies2009)? Gold investments are high because of low interest rates and falling of real estate asset price. Due to uncertain times and volatile situation investors seek to protect their capital. A certain gain in gold investment can be seen throughout the world. Similarly gold has attracted investors throughout the centuries, protecting their wealth and providing a safe haven in troubled or uncertain times (Kavalis, N.
2006).According to Cisar,R that Gold is handful financial assets and individuals have used gold as a store of wealth and as insurance against the fluctuations and depreciation of paper money and to protect against other macroeconomic and geopolitical risks Though the correct answer is all three, it is primarily a currency and a store of value and is a hedge against paper money and inflation: as a currency and a store of value, gold has stood the test of many centuries. As a commodity, gold has little intrinsic worth because of limited industrial use. ( Cisar,R 2008)CONCULSION:The utility of gold as a medium of exchange is a fairy tale. It is such a pain in the ass that we invented paper money. In the beginning, the paper represented gold and over time the gold backing of the paper disappeared, much the same way as gold and silver disappeared from coinage to be replaced by copper.
Gold is not to be trusted because it is too easy to counterfeit, sweat, file and clip. This brings us to modern times where money is a piece of paper that the government guarantees. This did not happen because government wants to screw us. It happened because it was necessary, just as the Banks was necessary to bring order out of chaos. (Kiyosaki2008).The sum up of money is: “Money is a contract.
” The rest that has been mention are descriptions of what money can be used for. So we have no argument here. What commodity best serves as a medium of exchange is not arbitrary – its determined objectively. It needs to be durable, divisible, ad relatively scarce, have high unit value and be portable. The second condition serves best in respect of gold.
C2Set out a 1,000 word business plan which incorporates your approach to the development of your family retail business including its launch as an IPO (Initial Public Offering) onto the alternative investment market (AIM) in the UK. What specific steps are required for a successful launch into this marketIntroduction:.We have explained the fundamentals of the proposed business process and how will it affect the retail business we will try to sort out that where and who will be the business customers .What will be the role of the business owners And try to find out some future plans to holds business it will be a enthusiastic, professional, complete, and concise. We will also consider, IPO and will describes that how many steps are involved in the successful launch into the market and it will depends how much you want, precisely how you are going to use it, and how the money will make your business more profitable.
Products and ServicesTo produce a perfect business plan for the retail business we need to consider the following step to analyse the potential of the business.Description of the business products and services.(Technical specifications, drawings, photos, sales brochures, and other bulky items.
What factors will give you competitive advantages or disadvantages Examples include level of quality or unique or proprietary features.What are the pricing structures of your products or servicesWhat percent share of the market will you have (This is important only if you think you will be a major factor in the market.) * Current demand in target market. * Trends in target market??”growth trends, trends in consumer preferences, and trends in product development. * Growth potential and opportunity for a business of your size.
What barriers to entry do you face in entering this market with your new company Some typical barriers are: * High capital costs * High production costs * High marketing costs * Consumer acceptance and brand recognitionAnd of course, how will you overcome the barriers * Change in technology * Change in government regulations * Change in the economy * Change in your business How could the following affect your company * Income level * Social class and occupation * Retail industry For business customers, the demographic factors might be: * Retail industry * LocationCompetitionWhat products and companies will compete with youList your major competitors:Will they compete with you across the board, or just for certain products, certain customers, or in certain locationsWill you have important indirect competitors (For example, video rental stores compete with theatres, although they are different types of businesses.)How will your products or services compare with the competitionUse the Competitive Analysis table below to compare your company with your two most important competitors. In the first column are key competitive factors. Since these vary from one industry to another, you may want to customize the list of factors.Operational PlanExplain the daily operation of the business, its location, equipment, people, processes, and surrounding environment.ProductionHow and where are your products or services producedExplain your methods of: * Production techniques and costs * Quality control * Customer service * Inventory control * Product developmentIs it important that your location be convenient to transportation or to suppliersDo you need easy walk?in access * Who does which tasks * Do you have schedules and written procedures prepared * Have you drafted job descriptions for employees If not, take time to write some.Inventory * What kind of inventory will you keep: raw materials, supplies, finished goods * Average value in stock (i.
e., what is your inventory investment) * Rate of turnover and how this compares to the industry averages * Seasonal build-ups * Lead?time for orderingSuppliersIdentify key suppliers: * Names and addresses * Type and amount of inventory furnished * Credit and delivery policies * History and reliabilityShould you have more than one supplier for critical items (as a backup)Credit Policies * Do you plan to sell on credit * Do you really need to sell on credit Is it customary in retail business and expected by your clients * If yes, what policies will you have about who gets credit and how much * How will you check the creditworthiness of new applicantsFive steps for raising capitalAppoint a financial advisor; replace auditorThe company must select a financial advisor who has been approved by the Securities and Exchange Commission (SEC) to help prepare the company for listing. The roles of a financial advisor are to: * Conduct due diligence; * Organize the structure(s) of the company, the business, its capital and its shareholders; * prepare the necessary company data and information for submission to the SEC for its approval for public offering and submit an application to be listed on the AIM; * Underwrite the securities or arrange for an underwriter; * Continue to oversee the company for a year after the company is listed on the Alternative Investment Market (AIM).Conversion into a public companyA company must convert into a public company before filing with the SEC for a licence to make a public offering of its shares. The conversion must be completed prior to filing for the SEC??™s licence through the Ministry of Commerce, which typically takes about one to two months. Legal advisors can provide recommendations on legal issues and other related regulationsFiling for licensed securities and applying for market listingAfter the financial advisor has analyzed the company??™s information and organized its structures and the company has been converted into a public company, the financial advisor represents the firm in filing for a licence from the Securities and Exchange Commission (SEC) that will allow it to offer shares to the public.
The financial advisor also represents the firm in applying for its Market for Alternative Investment (AIM) listing.At this stage, both the SEC and the AIM study the company??™s information and arrange for company visits to allow the enterprise to conduct its business presentations and answer additional questions. The SEC normally needs about 45 days to study the application and related documents. Once the company is granted a licence by the SEC, the AIM admits the firm as a listed company only after it completes a mandatory share allocation to minor shareholders in accordance with the AIM??™s prerequisites.
Distributing shares to the publicAfter the company is allowed to offer its shares to the public and be provisionally listed on the MAI, pending its compliance with the minor shareholding requirements, the firm appoints a securities distributor and an underwriter to facilitate the public share offering process.Listing on the AIMAfter the company distributes its shares to its minor shareholders, as required by the AIM, it should prepare for trading on the AIM by doing the following: Deposit the required number of securities as required by the AIM with the TSD. * Register its capital increase with the Ministry of Commerce. * Provide the AIM with the required additional documents, including the Certificate of Capital Increment issued by the Ministry of Commerce and a Report on Share Distribution, and then pay the required fees. * After the documents are fully furnished, the AIM will announce that the securities have been listed.
* Commence trading on the AIM