satisfy the exchange that they are creditworthy to transact. The initial purpose of derivative contracts was to allow traders to hedge risk which they faced in the cash market. Two of the most popular derivative instruments are financial futures and options. Financial futures commit the parties to buy or sell underlying assets at set prices on an agreed future date. The benefit of financial futures in its most basic form can be exemplified by a poultry farmer who is worried about the risk of price fluctuations
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Investment Theory and Strategies A. Passive vs. Active Strategy i. Passive One of the most profound ideas affecting the investment decision process‚ and indeed all of finance‚ is the idea that the securities markets‚ particularly the equity markets‚ are efficient. In an efficient market‚ the prices of securities do not depart for any length of time from the justified economic values that investors calculate for them. Economic values for securities are determined by investor expectations about earnings
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sequel rights. 2. OBJECTIVE Our report aims to investigate the viability of the implementation of Arundel’s strategy in purchasing sequel rights to produce potential successful movie sequels. The discount cash flow (DCF) approach and the real option pricing approach were adopted in valuing the sequel rights purchased by Arundel respectively. The value of these sequel rights is then compared to the estimated $2M per film required in purchasing the rights to see if Arundel will gain by purchasing
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1. | Question : | (TCO C) Blease Inc. has a capital budget of $625‚000‚ and it wants to maintain a target capital structure of 60 percent debt and 40 percent equity. The company forecasts a net income of $475‚000. If it follows the residual dividend policy‚ what is its forecasted dividend payout ratio? (a) 40.61% (b) 42.75% (c) 45.00% (d) 47.37% (e) 49.74% | | | Student Answer: | | (d) 47.37 Equity required (Residual income) = $625‚000*40% = $250‚000 Dividend paid = $475‚000 - $250
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CH10 The government debt totaled 27% of total credit market debt although this number has risen since that time.Mortgages comprised 28%‚ Corporate and Foreign Bonds 22% and Municipal Bonds 5% of total credit market debt in the third quarter of 2008. The issuing company may choose to call the bond and require the bondholder to turn in the bond in exchange for receiving the bond’s call price. A callable bond gives the issuing company the right to call in the bond by paying the bondholder the call price
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Chapter 3 3. Discuss why international diversification reduces portfolio risk. Specifically‚ why would you expect low correlation in the rates of return for domestic and foreign securities? International diversification reduces portfolio risk because of the low correlation of returns among the securities from different countries. This is due to differing international trade patterns‚ economic growth‚ fiscal policies‚ and monetary policies among countries. 7. Some investors believe that
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EXC3613 Risk Management with derivatives Geir Høidal Bjønnes geir.bjonnes@bi.no 1 Introduction • Learning objectives: 1. 2. 3. 4. What is a derivative? What is the role of Derivatives and Derivatives Markets Firms’ risk exposures Hedging price risk with derivatives • McDonald: Chapter 1 2 Example • Consider a farmer that grows wheat and is expecting to yield 10‚000 bushels of crop in 3 months. He is afraid that the price of wheat might drop at the period
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Transaction Costs of Currency Futures Currency Call Options Factors Affecting Call Option Premiums How Firms Use Currency Call Options Speculating with Currency Call Options Currency Put Options Factors Affecting Currency Put Option Premiums Hedging with Currency Put Options Speculating with Currency Put Options Contingency Graphs for Currency Options Conditional Currency Options European Currency Options How the Use of Currency Futures and Options Contracts Affect an MNC’s Value Chapter Theme
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Bibliography: Books: David Cobham (1992)‚ Markets & Dealers Frank Fabozzi (1986)‚ Advances in Futures and options research‚ DC Gardner (1996)‚ Introduction to derivatives‚ workbook 4‚ level 1 Paul Wilmott (1998)‚ Derivatives‚ The Theory and Practice of Financial Engineering Articles: Financial WMD? (derivatives and risk) The Economist (US) Jan. 24‚ 2004 Are
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Equity – ‘Ownership in a firm’ – A stock is a ‘claim to funds after all debts have been paid’ Prof. Lasse H. Pedersen Important Financial Assets Derivatives – Definition: ‘securities whose payoff depends on values of other assets’ – Examples Options Futures Swaps Investment Companies – Mutual Funds Prof. Lasse H. Pedersen Treasury Bonds Types of Treasury bonds – Treasury Bills (less than 1 year maturity) – Treasury Notes (1-10 year maturity) – Treasury Bonds (10-30 year maturity)
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